Report to the Ranking Minority 

Member, Committee on Commerce, 

Science, and Transportation, 

U.S. Senate 

United States General Accounting Office 

GAO 

March 2004 CONTRACT 

MANAGEMENT 

Coast Guard’s 

Deepwater Program 

Needs Increased 

Attention to 

Management and 

Contractor Oversight 

GAO-04-380 
www.gao.gov/cgi-bin/getrpt?GAO-04-380.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William T. 

Woods at (202) 512-4841 or 

woodsw@gao.gov. 

Highlights of GAO-04-380, a report to the 

Ranking Minority Member, Committee on 

Commerce, Science, and Transportation, 

U.S. Senate 

March 2004 

CONTRACT MANAGEMENT 

Coast Guard's Deepwater Program Needs 

Increased Attention to Management and 

Contractor Oversight 

Over a year and a half into the Deepwater contract, the key components 

needed to manage the program and oversee the system integrator’s 

performance have not been effectively implemented. Integrated product 

teams, the Coast Guard’s primary tool for overseeing the system integrator, 

have struggled to effectively collaborate and accomplish their missions. 

They have been hampered by changing membership, understaffing, 

insufficient training, and inadequate communication among members. In 

addition, the Coast Guard has not adequately addressed the frequent 

turnover of personnel in the program and the transition from existing to 

Deepwater assets. 

The Coast Guard’s assessment of the system integrator’s performance in the 

first year of the contract lacked rigor. For example, comments from the 

technical specialist responsible for monitoring the design and delivery of 

ships were not included in the evaluation scores. Further, the factors that 

formed the basis for the award fee determination were unsupported by 

quantifiable metrics. Despite documented problems in schedule, 

performance, cost control, and contract administration, ICGS received a 

rating of 87 percent, resulting in an award fee of $4.0 million of the 

maximum $4.6 million annual award fee. 

Further, the Coast Guard has not yet begun to measure the system 

integrator’s performance on the three overarching goals of the Deepwater 

program--operational effectiveness, total ownership cost, and customer 

satisfaction. Its original plan of measuring progress on an annual basis has 

slipped, and Coast Guard officials have not projected a time frame for when 

they will be able to hold the contractor accountable for progress against 

these goals. This information will be essential to the Coast Guard’s decision 

about whether to extend ICGS’s contract after the first 5 years. 

Competition is critical to controlling costs in the Deepwater program and a 

guiding principle of Department of Homeland Security acquisitions. 

Concerns about the Coast Guard’s ability to rely on competition as a means 

to control future costs contributed to GAO’s description of the Deepwater 

program in 2001 as “risky.” Three years later, the Coast Guard has neither 

measured the extent of competition among suppliers of Deepwater assets 

nor held the system integrator accountable for taking steps to achieve 

competition. Deepwater’s acquisition structure is such that the two first-tier 

subcontractors have sole responsibility for determining whether to hold 

competitions for assets or to provide these assets themselves. The Coast 

Guard has taken a hands-off approach to "make or buy" decisions made at 

the subcontractor level. As a result, questions remain about whether the 

government will be able to control costs. 

The Coast Guard’s Deepwater 

program, the largest acquisition 

program in its history, involves 

modernizing or replacing ships, 

aircraft, and communications 

equipment. The Coast Guard 

awarded the Deepwater contract to 

Integrated Coast Guard Systems 

(ICGS) in June 2002. The Coast 

Guard estimates the program will 

cost $17 billion over a 30-year 

period. ICGS is a system 

integrator, with responsibility for 

identifying and delivering an 

integrated system of assets to meet 

the Coast Guard’s missions. 

GAO was asked to assess whether 

the Coast Guard is effectively 

managing the Deepwater program 

and overseeing the contractor and 

to assess the implications of using 

the Deepwater contracting model 

on opportunities for competition. 

GAO recommends that the 

Secretary of Homeland Security 

direct the Commandant of the 

Coast Guard to take a number of 

actions to improve Deepwater 

management and contractor 

oversight. The Department of 

Homeland Security forwarded GAO 

the Coast Guard’s written 

comments on a draft of this report. 

The Coast Guard welcomed GAO’s 

observations and concurred with 

GAO’s recommendations. 
Page i GAO-04-380 Deepwater Program 

Letter 1

Results in Brief 3

Background 5

Key Components of Management and Oversight Have Not Been 

Effectively Implemented 8

Process for Assessing System Integrator’s Ongoing Performance 

Lacked Rigor 15

Coast Guard Has Not Begun to Measure Contractor Performance 

against Deepwater Program Goals 18

Control of Future Costs through Competition Remains a Risk 

because of Weak Oversight of Subcontractor Decisions 21

Conclusion 26

Recommendations for Executive Action 27

Agency Comments 29

Scope and Methodology 30

Appendix I Comments from the Coast Guard 32 

Appendix II Status of Selected Deepwater Contract Management 

and Oversight Plans 35 

Tables 

Table 1: Deepwater Program Appropriations 7

Table 2: Comments from Coast Guard Management Reports on IPT 

Performance 9

Table 3: Breakdown of Coast Guard Obligations to ICGS (Includes 

Planned Subcontracts to First Tier Subcontractors as of 

September 30, 2003) 22

Table 4: Breakdown of ICGS Obligations to Lockheed Martin 

(Planned Subcontracts and Second-Tier Obligations as of 

September 30, 2003) 23

Table 5: Breakdown of ICGS Obligations to Northrop Grumman 

(Planned Subcontracts and Second-Tier Obligations as of 

September 30, 2003) 23

Contents 
Page ii GAO-04-380 Deepwater Program 

Figure 

Figure 1: Contracting Relationship between Coast Guard, ICGS, 

and Subcontractors 2

Abbreviations 

COTR contracting officer’s technical representative 

C4ISR command, control, communications, computer, 

 intelligence, surveillance, and reconnaissance 

DHS Department of Homeland Security 

FAR Federal Acquisition Regulation 

GAO General Accounting Office 

ICGS Integrated Coast Guard Systems, LLC 

IPT integrated product team 

TOC total ownership cost 

VUAV vertical take-off and landing unmanned aerial vehicle 

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Page 1 GAO-04-380 Deepwater Program 

March 9, 2004 

The Honorable Ernest F. Hollings 

Ranking Minority Member 

Committee on Commerce, Science, and Transportation 

United States Senate 

Dear Senator Hollings: 

The Coast Guard is undergoing a major transformation through its 

Deepwater program, the largest acquisition project in its history. The 

program involves modernizing or replacing cutters, aircraft, and 

communications equipment used for missions that generally occur beyond 

50 miles from shore. These missions include drug interdiction, alien 

migrant interdiction, search and rescue, overseas port security and 

defense, and offshore inspection of foreign vessels bound for U.S. ports. 

The three goals of the Deepwater program are to maximize operational 

effectiveness, minimize total ownership cost (TOC), and satisfy the 

customer. On March 1, 2003, the Coast Guard became part of the 

Department of Homeland Security (DHS), and the Deepwater program, 

estimated to cost $17 billion over a 30-year period,1

 is one of the largest 

acquisitions in the department. 

In June 2002, the Coast Guard awarded a contract to Integrated Coast 

Guard Systems, LLC (ICGS) as the system integrator for Deepwater to 

develop and deliver an improved, integrated system of ships, aircraft, 

unmanned aerial vehicles, command, control, communications, computer, 

intelligence, surveillance and reconnaissance (C4ISR), and supporting 

logistics. The contract has a 5-year base period with five additional 5-year 

options. ICGS is a business entity jointly owned by Northrop Grumman 

Ship Systems (Northrop Grumman) and Lockheed Martin Corporation 

(Lockheed Martin). Northrop Grumman and Lockheed Martin are the two 

first-tier subcontractors for the Deepwater program. They, in turn, provide 

Deepwater assets or award second-tier subcontracts for the assets. Figure 

1 depicts the relationship of the various parties involved in executing the 

Deepwater program. 

 1

 The Deepwater assets are expected to be delivered within 20 years, and the contractor is 

to be retained an additional 10 years to continue implementing the program. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-380 Deepwater Program 

Figure 1: Contracting Relationship between Coast Guard, ICGS, and Subcontractors 

The Deepwater contract is performance-based, meaning that the Coast 

Guard has specified the outcomes it is seeking to achieve and has given 

the system integrator responsibility for identifying and delivering the 

assets needed to achieve these outcomes. In 2001, we described the 
Page 3 GAO-04-380 Deepwater Program 

Deepwater project as “risky,” due to the unique, untried acquisition 

strategy for a project of this magnitude within the Coast Guard.2

 We 

highlighted concerns about the Coast Guard’s ability to ensure that 

procedures and personnel would be in place to manage and oversee the 

system integrator and raised concerns about the agency’s ability to keep 

costs under control in future program years by ensuring adequate 

competition for Deepwater assets. Now that the Deepwater program is 

underway, you asked us to assess whether the Coast Guard is effectively 

managing the acquisition program and overseeing the contractor and to 

assess the implications of using the Deepwater contracting model on 

opportunities for competition. Specifically, we assessed whether the 

Coast Guard (1) has a structure in place to effectively manage the program 

and oversee the system integrator, (2) has established adequate criteria by 

which to assess and reward the system integrator’s performance, (3) has 

the information needed to make a decision about extending the contract 

after the first 5 years, and (4) is addressing the role and extent of 

competition for Deepwater assets. 

More than a year and a half into the Deepwater contract, the key 

components needed to manage the program and oversee the system 

integrator’s performance have not been effectively implemented. 

Integrated product teams, comprised of Coast Guard, ICGS, and 

subcontractor employees, are the Coast Guard’s primary tool for managing 

the program and overseeing the contractor. However, the effectiveness of 

the teams has been weakened due to changing membership, understaffing, 

insufficient training, lack of authority for decision making, and inadequate 

communication among members. In addition, while the Coast Guard has a 

Deepwater human capital plan in place to address turnover, in practice the 

plan is not being followed and vacancies exist for key Deepwater 

personnel. Finally, although delivery of some of the first assets is 

imminent, the Coast Guard has not effectively communicated to its 

operational personnel decisions on how new and old assets will be 

integrated and how maintenance responsibilities will be divided between 

government and contractor personnel. Some of these initial assets have 

already experienced schedule delays. 

 2 Coast Guard: Progress Being Made on Deepwater Project, but Risks Remain, 

GAO-01-564 (Washington, D.C.: May 2, 2001).

Results in Brief 
Page 4 GAO-04-380 Deepwater Program 

The Coast Guard has not developed quantifiable metrics or adhered to 

effective procedures for holding the system integrator accountable for its 

ongoing performance. The process by which the Coast Guard assessed 

performance after the first year of the contract lacked rigor. The factors 

on which ICGS was rated lacked objective measures on which to assess 

performance, and the first annual award fee determination was based 

largely on unsupported calculations because the Coast Guard did not fully 

adhere to its award fee process. For example, comments from the 

technical specialist responsible for monitoring the contractor’s 

performance in designing and delivering ships were not included in the 

evaluation scores, and it was unclear how numerical scores were assigned 

to the comments made by another Coast Guard performance monitor. 

Despite documented problems in schedule, performance, cost control, and 

contract administration throughout the first year of the contract, the 

program executive officer awarded the system integrator an overall rating 

of 87 percent, which falls in the “very good” range. This rating resulted in 

an award fee of $4.0 million of the maximum $4.6 million annual award 

fee. 

The Coast Guard has not begun to measure the system integrator’s 

performance on the three overarching goals of the Deepwater 

program—maximizing operational effectiveness, minimizing total 

ownership cost, and satisfying the customers. This information is essential 

for determining whether to extend ICGS’s contract. In 2001, the Coast 

Guard planned to develop appropriate metrics and to assess the system 

integrator’s performance on an annual basis so that, in the fourth year of 

the contract, information would be available to determine whether to 

award the first 5-year option. Coast Guard officials stated that because it is 

early in the Deepwater program and the metrics have not yet been 

finalized, they cannot accurately assess the contractor’s progress against 

the three goals. More troubling is that the Coast Guard has not projected a 

time frame for when it will be able to measure progress. In addition, the 

baseline for measuring total ownership cost has been fundamentally 

changed from the original plan. At present, the Coast Guard is using as a 

baseline ICGS’s proposed cost for Deepwater plus an additional 10 

percent, rather than using the originally planned baseline of what the total 

ownership cost would have been under a traditional procurement 

approach.3

 The Coast Guard is now working with ICGS to develop a 

 3

 Total ownership cost is the sum of all costs associated with the research, development, 

procurement, personnel, training, operation, logistical support, and disposal of the entire 

Deepwater system. 
Page 5 GAO-04-380 Deepwater Program 

contingency strategy in the event that the system integrator needs to be 

replaced after 5 years. Coast Guard officials indicated, however, that since 

ICGS proposed the specific assets that comprise the Deepwater program, 

it is unrealistic to believe that the contract could be terminated without 

revising the entire Deepwater acquisition strategy. 

Although competition among subcontractors is a key vehicle for 

controlling costs, the Coast Guard has neither measured the extent of 

competition among the suppliers of Deepwater assets nor held the system 

integrator accountable for taking steps to achieve competition. Although 

the competition that resulted in the initial award of this contract may be 

viewed as sufficient for the base period, Deepwater’s acquisition structure 

provides little protection against cost growth during the option periods. 

The two first-tier subcontractors, Lockheed Martin and Northrop 

Grumman, have sole responsibility for determining whether to hold 

competitions for Deepwater assets or to provide these assets themselves. 

ICGS has stated that its use of sourcing guidance, termed the open 

business model, guides the subcontractors’ decisions about whether to 

“make or buy” the Deepwater assets. However, this guidance is a 

philosophy—not a formal process with clear criteria and specific decision 

points—that encourages, but does not require, competition. In some cases, 

teaming agreements formed with second-tier subcontractors during the 

initial proposal phase of Deepwater have carried over as sole-source 

arrangements. The Coast Guard’s hands-off approach to make or buy 

decisions and its failure to assess the extent of competition raise questions 

about whether the government will be able to control costs in the 

Deepwater program. 

We are recommending that the Secretary of Homeland Security direct the 

Commandant of the Coast Guard to take actions to (1) improve program 

management, (2) improve contractor accountability, and (3) facilitate cost 

control through competition for Deepwater assets. We received written 

comments on a draft of this report from the Coast Guard, forwarded by 

DHS. The Coast Guard welcomed our observations and, in a subsequent email, concurred with the recommendations. The Coast Guard’s letter is 

reproduced in appendix I. 

Deepwater is the largest and most complex procurement project in the 

Coast Guard’s history. The acquisition is scheduled to occur over a 30-year 

period at a projected cost of $17 billion. It includes the modernization and 

replacement of an aging fleet of over 90 cutters and 200 aircraft used for 

missions that generally occur beyond 50 miles from shore. Deepwater 

Background 
Page 6 GAO-04-380 Deepwater Program 

currently accounts for almost one-third of the Coast Guard’s acquisition 

staff and one-third of support personnel funding. 

Rather than using the traditional approach of replacing classes of ships or 

aircraft through a series of individual acquisitions, the Coast Guard chose 

to employ a “system-of-systems” acquisition strategy that would replace its 

aging deepwater assets with a single, integrated package of new or 

modernized assets. The primary objectives of the Deepwater program are 

to maximize operational effectiveness and to minimize TOC while 

satisfying the needs of the customer—the operational commanders, 

aircraft pilots, cutter crews, maintenance personnel, and others who will 

use the assets. 

The Deepwater program has been in development for a number of years. 

Between 1998 and 2001, three industry teams competed to identify and 

provide the assets—aircraft, helicopters, cutters, logistics, and 

C4ISR—needed to transform the Coast Guard. In June 2002, the Coast 

Guard awarded a contract to ICGS as the system integrator for Deepwater. 

Under a 5-year base contract with five additional 5-year options, ICGS is 

responsible for designing, constructing, deploying, supporting, and 

integrating the Deepwater assets to meet Coast Guard requirements. ICGS, 

a business entity comprised of a nine-member Board of Directors, is jointly 

owned by Northrop Grumman and Lockheed Martin. Northrop Grumman 

and Lockheed Martin are the two first-tier subcontractors for the 

Deepwater program. They, in turn, provide Deepwater assets themselves 

or award second-tier subcontracts for the assets. 

In our 2001 report, we identified several areas of risk for Deepwater. First, 

the Coast Guard faced potential risk in the overall management and dayto-day administration of the contract. We reported on the major challenges 

in developing and implementing plans for establishing effective human 

capital practices, having key management and oversight processes and 

procedures in place, and tracking data to measure system integrator 

performance. In addition, we, as well as the Office of Management and 

Budget, expressed concerns about the potential lack of competition during 

the program’s later years and the reliance on a single system integrator for 

procuring the Deepwater equipment. We also reported there was little 

evidence that the Coast Guard had analyzed whether the approach carried 

any inherent risks for ensuring the best value to the government and, if so, 

what to do about them. 

Since fiscal year 2002, Congress has appropriated almost $1.5 billion for 

the Deepwater program (see table 1), and as of September 2003, the Coast 
Page 7 GAO-04-380 Deepwater Program 

Guard had obligated $596 million to ICGS and $120.4 million for 

government program management, legacy asset sustainment, and facilities 

design work. 

Table 1: Deepwater Program Appropriations 

Dollars in millions 

Fiscal year Appropriation 

2002 $320

2003 478

2004 668

Total $1,466

Source: Coast Guard. 

In response to congressional direction to assess the feasibility of 

accelerating the Deepwater program,4

 the Coast Guard reported in March 

2003 that it could accelerate the implementation schedule from 20 years to 

10 years and that this acceleration would provide increased operational 

capability sooner to support maritime homeland security. 

On March 1, 2003, the Coast Guard became part of DHS. A December 22, 

2003, acquisition decision memorandum from the DHS Investment Review 

Board’s (the Board) acting chairperson to the Coast Guard Commandant 

stated that the Deepwater program has been designated as a level 1 

investment, meaning that it will be reviewed at the highest levels within 

the department.5

 Further, because Deepwater interoperability within DHS 

and with the Department of Defense will be a major program challenge, 

the DHS Joint Requirements Council6

 will be kept informed of Deepwater 

developments. While decisions as to specific assets or capabilities have 

been deferred to the Coast Guard acquisition executive, the Board will 

meet to discuss actual or projected changes to the program that affect 

 4

 Homeland Security Act of 2002, Pub. L. No. 107-296, sec.888(i), 116 Stat. 2135, 2250 (2002). 

5

 The Investment Review Board was established to provide visibility, oversight, and 

accountability for significant, high-cost investments. It conducts systematic reviews of 

investment proposals and approves key decisions. 

6

 The DHS Joint Requirements Council will conduct program reviews annually and prior to 

key decision points to oversee the requirements generation process, validate mission needs 

statements, review cross-functional needs and requirements, and make programmatic 

recommendations to the Board. 
Page 8 GAO-04-380 Deepwater Program 

cost, schedule, or performance. Noting that the Coast Guard has proposed 

accelerating the Deepwater program in fiscal year 2005, the Board directed 

the Coast Guard to ensure that risk management planning receives 

appropriate attention, that TOC is kept current, and that cost, schedule, 

and performance are monitored by measuring actual data against the 

baseline and projections to completion. 

Complex, performance-based contracts such as Deepwater require 

effective government oversight to ensure that the intended results are 

achieved and that taxpayer dollars are not wasted. Both Coast Guard and 

ICGS officials have acknowledged that an unusually large degree of 

collaboration and partnership between the government and the system 

integrator must be in place for the Deepwater acquisition to be successful. 

However, a year and a half into the program, the key management and 

oversight components needed to make the program effective have not 

been effectively implemented. Integrated product teams (IPT) are the 

Coast Guard’s primary tool for managing the program and overseeing the 

contractor, but these teams have struggled to collaborate effectively and 

accomplish their missions. While the Coast Guard has a Deepwater human 

capital plan in place to guide strategic planning for turnover among 

Deepwater personnel, the plan is not being followed and vacancies exist in 

key positions. Further, while it is still early in the program, the transition 

from existing Coast Guard assets to the new Deepwater assets has not 

been effectively communicated, a particular concern in light of schedule 

delays for some of the first assets to be delivered. Finally, a number of 

plans integral to the organization and management of the Deepwater 

program were finalized much later than anticipated. Appendix II contains 

additional information on these plans. 

IPTs are the Coast Guard’s primary tool for managing the Deepwater 

program and overseeing the system integrator. More than 30 of these 

teams, comprised of Coast Guard, ICGS, and subcontractor employees 

from Lockheed Martin and Northrop Grumman, are responsible for overall 

program planning and management, asset integration, and overseeing the 

delivery of specific Deepwater assets. However, the teams have struggled 

to effectively carry out their missions. Our prior work at the Department 

of Defense has shown that effective IPTs have (1) expertise to master 

different facets of product development, (2) responsibility for day-to-day 

decisions and product delivery, (3) key members who are either physically 

collocated or connected through virtual means to facilitate team cohesion 

and the ability to share information, and (4) control over their 

Key Components of 

Management and 

Oversight Have Not 

Been Effectively 

Implemented 

IPTs Have Had Difficulty 

Fulfilling Their Critical 

Management Function 
Page 9 GAO-04-380 Deepwater Program 

membership, with membership changes driven by each team’s need for 

different knowledge.7

The Deepwater program manager reported IPT performance shortcomings 

as an issue in 14 of the 16 monthly program assessment reports provided 

to us. The following comments, made in Deepwater management reports 

by Coast Guard officials involved on a number of different IPTs, convey 

the difficulties faced by the teams in the first year and a half of the 

program. Though the comments in table 2 are not exhaustive, they 

demonstrate that the Deepwater IPTs have not been effective. 

Table 2: Comments from Coast Guard Management Reports on IPT Performance 

June 2002 through Dec. 2002

• Teams are still forming but are hindered with unfamiliarity of Web-based data environment, integrated design and management 

processes immaturity, and geographic separation. 

• Because of aggressiveness of schedule, team development and collaboration have been negatively affected. 

• Team is making progress, but most other teams are not yet productive. Team leaders are challenged by intense pace of work 

needed to keep up with asset implementation plan. 

Jan. 2003 through June 2003

• High demands and limited resources inhibit commitment to collaboration. 

• Team progress is slowed by ineffective collaboration, resulting in missed milestones. 

• Limited collaboration in addressing design and production issues. Team has been unable to resolve some comments in a timely 

fashion. 

July 2003 through Dec. 2003

• Demands on limited personnel resources have restricted collaboration in addressing some items in contract data requirements 

list in a timely fashion for the 123-foot cutter. 

• Team meetings for one asset have been canceled due to workload associated with another. Team lead has been vacant for 

several months, requiring the duties to be assumed by the Aviation Technical Director and/or Aviation Program Manger. Task 

order performance has suffered, and issues have not been resolved in a timely manner. 

• Team has been unable to resolve some comments in a timely fashion. Human resources within the team are taxed due to multitasking. 

• There has been a lack of participation by some of the team members. Meeting minutes, decisions, and such have not been 

documented as outlined in the IPT charters. Important action items and risk mitigation plans are not being consistently 

addressed, tracked, and resolved in a timely manner. 

• Team disconnects have contributed to delay in delivery of Coast Guard cutter Matagorda. 

Source: Coast Guard. 

 7 Best Practices: DOD Teaming Practices Not Achieving Potential Results, GAO-01-510

(Washington, D.C.: Apr. 10, 2001). The Department of Defense has used IPTs on major 

programs such as the Advanced Amphibious Assault Vehicle program, a high-speed 

amphibious armored personnel carrier. 
Page 10 GAO-04-380 Deepwater Program 

Based on our review of program reports, we identified four major issues 

that have impeded the effective performance of the IPTs. 

• Lack of timely charters to vest IPTs with authority for decision 

making. Authority for day-to-day decisions—required for program 

success in meeting cost, schedule, and performance objectives—is 

vested in IPTs through charters; yet charters for most of the Deepwater 

IPTs were not developed in a timely manner. In fact, 27 of the 31 IPT 

charters were not approved until after the first year of the contract. 

More than merely a paperwork exercise, sound IPT charters are critical 

because they detail each team’s purpose, membership, performance 

goals, authority, responsibility, accountability, and relationships with 

other groups, resources, and schedules. Between June 2002 and June 

2003, 20 delivery task orders,8

 authorized for issuance by the 

contracting officer, were executed by IPTs that did not have charters in 

place. Similarly, we found that some sub-IPTs, which address specific 

issues at a subasset or component level, were operating on an ad hoc 

basis without charters. For example, a November 2002 management 

report states that sub-IPTs addressed numerous issues concerning 

requirements for the national security cutter, even though their 

charters were not approved until a year later. In addition, two other 

sub-IPTs were not chartered.9

• Inadequate communication among members. The Coast Guard’s 

Deepwater program management plan has identified collocation of IPT 

members as a key program success factor, along with effective 

communications within and among teams. Face-to-face informal 

communication enhances information flow, cohesion, and 

understanding of other members’ roles—all of which help foster team 

unity and performance. Yet only 3 of the 31 operating IPTs are entirely 

collocated, meaning that every IPT member is in the same building. The 

IPTs responsible for assets frequently have members in multiple 

locations. For example, the logistics process and policy development 

IPT has members in 6 different locations. As noted in table 2, Coast 

Guard IPT members have raised geographic separation as an issue of 

concern. ICGS developed a Web-based system for government and 

contractor employees to regularly access and update technical 

 8

 Delivery task orders are orders for supplies or services placed against an existing 

contract. In the context of the Deepwater contract, these would be orders placed by the 

Coast Guard with ICGS for the delivery of specific assets or for other work. 

9

 These were for Deepwater’s integrated logistics system and C4ISR. 
Page 11 GAO-04-380 Deepwater Program 

information, training materials, and other program information, in part 

to mitigate the challenges of having team members in multiple 

locations. However, Coast Guard documents indicate that the system is 

not being updated or used effectively by IPTs. In fact, the Deepwater 

program executive officer reported that, while the system has great 

potential, it is a long way from becoming the virtual enterprise and 

collaborative environment required by the contractor’s statement of 

work. 

• High turnover of IPT membership and understaffing. Most of the 

Deepwater IPTs have experienced membership turnover and staffing 

difficulties, resulting in a loss of team knowledge, overbooked 

schedules, and crisis management. In a few instances, such as the 

national security cutter and maritime patrol aircraft, even the IPT 

leadership has changed. Also, key system integrator officials serving on 

the management IPTs have left the company. Both the Chief Financial 

Officer and the President of ICGS left their positions during the latter 

half of 2003, and an additional six of the nine ICGS Board members 

have changed. In addition, Coast Guard and system integrator 

representatives have also been staffed on multiple IPTs, and, in many 

cases meetings were attended by fewer than 50 percent of IPT 

members. A December 2002 Coast Guard document summarizing 

various programmatic recommendations cited a contractor study that 

recommended individuals be assigned to IPTs on a full-time basis and 

that they not serve on more than two teams. However, as of December 

2003, 15 individuals were serving on three or more IPTs. 

• Insufficient training. The system integrator has had difficulty 

training IPT members in time to ensure that they could effectively carry 

out their duties, and program officials have referred to IPT training as 

deficient. IPT charters state that members must complete initial 

training before beginning team deliberations regarding execution of 

new contracts for Deepwater assets. IPT training is to address, among 

other issues, developing team goals and objectives, key processes, use 

of the Web-based system, and team rules of behavior. According to a 

Coast Guard evaluation report, IPT training was implemented late, 

which has contributed to a lack of effective collaboration among team 

members. 

The Coast Guard hired a consultant to survey IPT members concerning 

teams’ performance from July 2002 to September 2003. Three surveys 

consisted of questions about mission, team member cooperation, 
Page 12 GAO-04-380 Deepwater Program 

performance, communication, and integrated product and process 

development.10 The final report on the survey results highlighted the need 

for improved communications both within and among teams. Respondents 

were also concerned that workloads were too high. 11

In our 2001 report,12 we noted that as the Deepwater program got off the 

ground, tough human capital challenges would need to be addressed. A 

critical challenge we raised was the need to recruit and train enough staff 

to manage and oversee the contract. To date, the Coast Guard has not 

funded the number of staff requested by the Deepwater program and has 

not adhered to the processes outlined in its human capital plan for 

addressing turnover of Deepwater officials. These staffing shortfalls have 

contributed to the problems IPT members have identified—such as the 

struggle to keep pace with the workload and the difficulties in making 

decisions due to inconsistent attendance at IPT meetings. 

Although the Deepwater program has identified the need for a total of 264 

staff in fiscal year 2004, only 224 positions have been funded, and only 209 

have been assigned to the program. The Coast Guard’s fiscal year 2004 

funding for personnel was increased to $70 million; however, the Coast 

Guard did not request sufficient funds to fill the 40 positions that the 

Deepwater program identified as necessary. According to Coast Guard 

officials, $70 million is insufficient to fund their fiscal year 2004 personnel 

plan because they need $67 million of this amount just to fund current 

personnel levels. The assistant commandant has imposed a temporary 

hiring freeze and plans to monitor expenditures throughout the year to 

identify any available funding for additional positions. Although we asked, 

Coast Guard officials did not explain why they did not request sufficient 

funds to adequately staff the program. 

 10 Integrated product and process development is a management technique that integrates 

all essential acquisition activities through the use of multidisciplinary teams to optimize the 

design, manufacturing, and supportability processes. One of the key integrated product and 

process development tenets is that IPTs facilitate meeting cost and performance 

objectives. 

11 Due to concerns about low response rates, an analysis was done only on those IPTs with 

response rates greater than 30 percent. Only 14 of the 27 teams contacted as part of the 

latest survey, conducted in September 2003, had a response rate that allowed their results 

to be analyzed. 

12 GAO-01-564. 

Human Capital Issues 

Pose a Challenge 
Page 13 GAO-04-380 Deepwater Program 

In addition, the Coast Guard has not adequately addressed the imminent 

departure of Coast Guard officials from the Deepwater program. Coast 

Guard officials will leave each year due to the normal rotational cycle of 

military members (every 3 to 4 years) and retirements. The Deepwater 

human capital plan sets a goal of a 95 percent or higher “fill rate” annually 

for both military and civilian positions and proposes using a “floating” 

training position that can be filled by replacement personnel reporting for 

duty a year before the departure of the military incumbents. This position 

is meant to ensure that incoming personnel receive acquisition training 

and on-the-job training with experienced Deepwater personnel. However, 

the 2004 request for this training position was not funded, nor was funding 

provided for additional new positions identified as critical. In December 

2003, the Director of Resources and Metrics and the Chief Contracting 

Officer left the Deepwater program, and the program manager is slated to 

leave in March 2004. In addition, by July 1, 2004, five key Coast Guard 

officials who oversee the work of the asset IPTs are scheduled to leave. 

Coast Guard officials told us that they have identified the military 

replacements that will join the program in the summer of 2004. 

Although Deepwater is still in the early stages, assets will start to be 

delivered incrementally to operating units soon. The first Deepwater 

assets—the 123-foot cutter and short range prosecutor13—are scheduled to 

be delivered to operating divisions in 2004. Operating units will receive 

additional ships, aircraft, or C4ISR every year thereafter until the 

Deepwater program ends. However, the Coast Guard has not 

communicated decisions on how the new and old assets are to be 

integrated during the transition and whether Coast Guard or contractor 

personnel—or both—will be responsible for maintenance. Coast Guard 

field personnel, including senior-level operators and naval engineering 

support command officials, told us that they have not received information 

about how they will be able to continue meeting their missions using 

current assets while being trained on the new assets. They are also unclear 

as to whether the system integrator or Coast Guard personnel will be 

responsible for maintenance of the new assets. For example, although 

Deepwater officials have stated that maintenance on the new assets will 

 13 The short range prosecutor is a new rigid-hull inflatable small-boat being introduced for 

the Deepwater cutters. This boat is 7.7 meters long, may carry up to 10 personnel and 150 

pounds of cargo, and may travel at speeds up to 33 knots. Each modernized 123-foot cutter 

and the fast response cutter will carry one short range prosecutor. The national security 

cutter and the offshore patrol cutter will also be able to carry the short range prosecutor. 

Transition Planning for 

New Assets Needs 

Attention 
Page 14 GAO-04-380 Deepwater Program 

be a joint responsibility, naval engineering support command staff had 

received no instruction on how this joint responsibility is to be carried out. 

Coast Guard officials told us that guidance on joint maintenance 

responsibility has not been completely disseminated throughout the Coast 

Guard, but said that ICGS has recently added representatives at the key 

maintenance and logistics sites to coordinate maintenance issues. 

One of the first Deepwater assets to be delivered is the 123-foot cutter. The 

Coast Guard is modifying its 110-foot cutter by adding 13 feet of deck and 

hull, a stern ramp, a superstructure, and communication equipment. The 

123-foot cutter is an example of the transition challenges facing the Coast 

Guard. First, there is confusion over which of the cutters will be modified 

and when. The contract with ICGS calls for all 49 cutters to be modified; 

however, Deepwater officials are considering curtailing the modification 

efforts and accelerating the development of the fast response cutter 

instead. (The fast response cutter was originally planned to be delivered in 

2018 as a replacement for the 123-foot cutter). In addition, the Coast Guard 

identified 22 of the 110-foot cutters that, due to unexpectedly severe hull 

corrosion, required additional inspection and repair separate from the 

Deepwater modification plans. To date, $14.7 million in non-Deepwater 

funds has been made available to repair 8 of these cutters. Further, Coast 

Guard officials note that there are 4 cutters in operation in the Persian 

Gulf, which makes them unavailable for modification at this time. System 

integrator and Coast Guard officials expressed confusion about the status 

of the cutter modifications, hull repair program, and fast response cutter 

schedule. For example, ICGS officials indicated that they did not know 

what the Coast Guard plans for the 123-foot cutter modification. The Coast 

Guard is considering several options and has not made a final decision on 

the cutter modification effort. 

Transitioning the staffing and operations of current Coast Guard assets to 

Deepwater assets may be further complicated by schedule delays. Reliable 

information on the delivery of Deepwater assets is important to the 

planning and budgeting efforts of Coast Guard operators and maintenance 

personnel to ensure that current missions are met and existing assets are 

maintained. Delivery of the first 123-foot cutter and short range prosecutor 

is scheduled for March 2004, slipping from the original delivery date of 

November 2003, and the rescheduled date of December 2003. This delay is 

affecting the schedules for the remaining cutters under contract, according 

to the most recent program manager assessment. Program management 

reports also indicate that schedule milestones have slipped for the 

maritime patrol aircraft. The first two aircraft are currently scheduled to 

be delivered to operating divisions in late 2006 or early 2007, compared 
Page 15 GAO-04-380 Deepwater Program 

with the original plan of 2005. The IPT is working toward design of the 

aircraft, even though Coast Guard approval to proceed has not been set 

forth in the form of a definitized contract for this asset.14 The target date 

for definitizing the contract is now April 2004. 

According to Office of Federal Procurement Policy guidance, a 

performance-based contract such as Deepwater should have measurable 

performance standards and incentives to motivate contractor 

performance. Contractors should be rewarded for good performance 

based on measurement against predetermined performance standards. In 

general, the contractor is to meet the government’s performance 

objectives, at appropriate performance quality levels, and be rewarded for 

outstanding work. Further, sound internal controls are important to 

ensure that plans, methods, and procedures are in place to support 

performance-based management. Relevant information should be 

recorded and communicated to management and others in a form and a 

time frame that enables them to carry out their responsibilities.15

The Coast Guard’s process and procedures for evaluating the system 

integrator’s performance during the first year of the contract lacked rigor 

in terms of applying quantifiable metrics to assess performance, gathering 

input from government performance monitors, and communicating with 

and documenting information for the decision makers. The process used 

to hold the system integrator accountable for results was not transparent 

and, in fact, contained several inconsistencies that raise questions as to 

whether the Coast Guard’s decision to give the contractor 87 percent of 

the award fee16 was based on accurate information. 

 14 The Federal Acquisition Regulation (FAR) states that a contract is to be definitized 

within 180 days after the date of the letter contract or before completion of 40 percent of 

the work to be performed, whichever occurs first. FAR 16.603-2(c). 

15 A Guide to Best Practices for Performance-Based Service Contracting, Office of Federal 

Procurement Policy, Office of Management and Budget, Executive Office of the President, 

Final Edition, October 1998, and Internal Control: Standards for Internal Control in the 

Federal Government (GAO/AIMD-00-21.3.1), U.S. General Accounting Office, November

1999. 

16 An award fee is an amount a contractor may earn, either in whole or in part, based on the 

contracting agency’s judgmental evaluation of the contractor’s performance against 

established criteria (FAR 16.404, 16.405-2). 

Process for Assessing 

System Integrator’s 

Ongoing Performance 

Lacked Rigor 
Page 16 GAO-04-380 Deepwater Program 

The Coast Guard measures the system integrator’s ongoing performance 

based on periodic assessments using weighted evaluation factors. The 

award fee for the first year of performance of the overall integration and 

management of the Deepwater program was based on an evaluation of the 

following five factors:17

• overall program management, 

• cost monitoring and control, 

• quality, 

• innovation, and 

• flexibility. 

These evaluation factors are further defined in the contract’s award fee 

plan. For example, innovation is the “extent to which innovation, designs, 

processes, and concepts have been introduced that result in operational 

performance improvements and/or total ownership cost reductions.” 

While there will inevitably be a degree of subjectivity in award fee 

decisions, the Coast Guard lacks quantifiable metrics to make an 

assessment of the contractor’s performance. Given the lack of specificity 

of the metrics, it is not clear how they could be used to make such an 

assessment, particularly on a program as complex as Deepwater. Coast 

Guard officials acknowledged that the factors need to be better-defined, 

with supporting metrics that would provide a more objective basis for 

future award fee assessments. 

In the meantime, a May 31, 2003, Coast Guard memorandum to ICGS 

indicates that the contractor will be rated based on three factors for the 

second year of performance rather than five. However, the factors are 

vague and undefined: quality, program management, and system 

engineering. Further, supporting metrics to measure these performance 

factors have not been developed. 

 17 In a document provided to a congressional committee entitled “DHS Procurement Policy 

Impacts on Deepwater,” the Coast Guard stated that “the annual award fee is based on the 

accomplishments of the small business subcontracting plan.” However, Coast Guard 

officials subsequently confirmed that small business subcontracting is not an award fee 

evaluation factor. 

Quantifiable Award Fee 

Metrics Are Still Being 

Developed 
Page 17 GAO-04-380 Deepwater Program 

Under the Deepwater contract’s award fee plan18 and the program 

management plan, technical specialists, known as contracting officers’ 

technical representatives (COTR), are to provide their observations to a 

program evaluation board comprised of the contracting officer, the 

program manager, and two COTRs. The Deepwater program executive 

officer then makes the final award fee determination based on the board’s 

recommendations. The Coast Guard’s award fee evaluation of the first 

year of ICGS’s performance was based on unsupported calculations and 

relied heavily on subjective considerations. As a result, the basis for the 

final decision to provide the contractor an award fee rating of 87 percent, 

which falls in the “very good” range, was not well-supported. 19

For example, while all COTRs submitted comments, the assessment did 

not include numerical and adjectival ratings from all COTRs. Input from 

the COTR responsible for gauging the system integrator’s performance for 

all efforts related to the design and delivery of ships was not included in 

the calculation at all. Prior to speaking with us, the COTR did not know his 

input was absent from final performance monitor calculations, which 

resulted in a recommended rating of 82.5 percent. Input from two other 

COTRs was provided for some but not all of the five evaluation factors. A 

fourth COTR provided only adjectival ratings, whereas others provided 

numerical scores. Subsequently, and unbeknownst to the COTR, a 

program evaluation board member calculated a numerical score for this 

COTR’s observations. While an adjectival rating of “good,” for example, 

could range from a score of 71 to 80, the board member scored each of the 

factors in the midrange. Scoring this COTR’s adjectival ratings in the low 

or high end of the range would have produced a different outcome. 

Program evaluation board officials were not aware of the inconsistencies 

in the calculations until we informed them. 

One program evaluation board member raised concerns that the board’s 

subsequent award fee recommendation of 90 percent was too high and 

that the assessment focused disproportionately on the system integrator’s 

performance in the last part of the year rather than its performance over 

the entire year. In addition, the program manager’s assessment stated that 

“overall program management...needs substantial improvement.” Further, 

 18 Coast Guard contract number DTCG23-02-C-2DW001, section J, attachment J-14, Award 

fee plan, awarded June 25, 2002, amended November 8, 2002. The plan indicates that 

changes to the award fee plan will be made through a bilateral contract modification. 

19 An adjectival rating of “very good” ranged from a score of 81 to 90. 

Information Was Not 

Gathered and 

Communicated Accurately 
Page 18 GAO-04-380 Deepwater Program 

Coast Guard management reports throughout the first year of the contract 

cited various schedule, performance, cost control, and contract 

administration problems that required attention. Among the assets cited as 

needing attention were the maritime patrol aircraft, the short range 

prosecutor, the 123-foot cutter, and the logistics integration management 

system. Ultimately, the program executive officer awarded the system 

integrator a rating of 87 percent, resulting in an award fee of $4.0 million 

of the maximum $4.6 million annual award fee. 

Coast Guard officials told us that they will now assess ICGS’s performance 

every 6 months, rather than annually. However, the contract has not been 

modified to reflect either the changes to the evaluation factors, discussed 

previously, or the new assessment period. The first 6-month assessment 

was scheduled for completion in December 2003, but as of March 2004, 

Coast Guard officials told us it is currently ongoing. 

The contractor was eligible for a second award fee of up to $1.5 million in 

August 2003 for performance related to the continuous improvement of 

elements common to C4ISR and life cycle and logistics engineering for all 

assets. Coast Guard officials said that they awarded the system integrator 

79 percent of the maximum award fee; however, they did not provide us 

with supporting documentation of the award fee determination process. 

The Coast Guard is scheduled to decide on extending ICGS’s contract by 

June 2006, 1 year prior to the end of the first 5-year contract term. In 2001, 

the Coast Guard set a goal of developing measures, within a year after 

contract award, to conduct annual assessments of the system integrator’s 

progress toward achieving the three overarching goals of the Deepwater 

program: increased operational effectiveness, lower TOC, and customer 

satisfaction. However, the Coast Guard’s time frame for implementing 

metrics to gauge progress against these goals has slipped. Further, the 

baseline the Coast Guard is using to assess TOC will not provide the 

government with critical information it needs about the efficiencies of 

using the Deepwater approach. Therefore, the Coast Guard is not in a 

position to begin the decision-making process about whether or not to 

extend the contract past the 5-year base period. 

The time frame for the first review of the contractor’s performance against 

the Deepwater goals has slipped. It was originally rescheduled for 18 

months after contract award (December 2003), 6 months later than 

planned. Deepwater officials told us that the performance review is 

currently ongoing and is expected to be completed in March 2004. While 

Coast Guard Has Not 

Begun to Measure 

Contractor 

Performance against 

Deepwater Program 

Goals 
Page 19 GAO-04-380 Deepwater Program 

the Coast Guard has begun to develop models to measure the extent to 

which Deepwater is achieving increased operational effectiveness and 

reduced TOC, a decision has not yet been made as to which specific suite 

of models will be used. The former Deepwater chief contracting officer 

told us he anticipates that the metrics will be in place in year 4 of the 

contract, the same year the decision needs to be made to extend the 

contract. Other officials acknowledged that it is difficult to hold the 

contractor accountable for progress toward the goals this early in the 

program, but could not offer a projection as to when the operational 

effectiveness and TOC results would be forthcoming. 

Coast Guard officials noted the large degree of complexity involved in 

attempting to measure the system integrator’s progress toward the 

Deepwater goals. In previous work, we found that assessing improvements 

in operational effectiveness and TOC may be difficult because 

performance data may reflect factors that did not result from the 

contractor’s actions. Because the Deepwater program includes legacy 

assets, modified assets, and new assets, the line of accountability between 

the government and the system integrator is blurred. It is not always clear 

who is responsible between Coast Guard and ICGS for the change in 

performance or costs of Deepwater assets. Measuring the 123-foot cutter’s 

performance, for example, is complicated by the fact that ICGS is 

responsible for the new 13 feet of deck and hull and other modifications, 

while the engine and the other 110 feet of the deck and hull are the Coast 

Guard’s responsibility. 

Coast Guard officials said that they are measuring “operational 

performance,” such as the number of search and rescue, drug interdiction, 

and migrant interdiction missions carried out by the current assets. 

However, they could not explain how these measures will be used to 

assess ICGS’s progress toward improving operational effectiveness with 

Deepwater assets. The officials stated that the models they are using to 

measure operational performance for the various Coast Guard missions 

lack the fidelity to capture whether improvements may be due to Coast 

Guard or contractor actions, the capability of specific Deepwater assets, 

or even outside factors such as improved intelligence on drug smugglers. 

Program officials noted that it is difficult to hold the contractor 

accountable for operational effectiveness at this point, before Deepwater 

assets are delivered. 

Establishing a solid baseline against which to measure progress in 

lowering TOC is critical to holding the contractor accountable. However, 

the Coast Guard is using as the baseline ICGS’s own projected cost of 
Page 20 GAO-04-380 Deepwater Program 

$70.97 billion plus 10 percent (in fiscal year 2002 dollars). Therefore, the 

government will not have the TOC information it needs to make a contract 

extension decision. Measurement of ICGS’s cost as compared to its own 

cost proposal will tell the Coast Guard nothing about the efficiencies it 

may be getting using the Deepwater performance-based approach. 

Further, the baseline the Coast Guard is using has been significantly 

changed from that originally envisioned. The Deepwater program 

management plan, approved in December 2003, states that the estimated 

cost to replace individual Coast Guard assets under a traditional approach, 

(i.e., without the ICGS Deepwater “system of systems” solution), is to be 

the “upper limit for TOC” that the contractor should not exceed. The 

officials could not explain why the program management plan, which sets 

forth the overall framework for managing Deepwater, contains a different 

TOC baseline than the one they are using. 

Further, changes in such variables as fuel costs or cutters’ operating 

tempo could result in additional changes being made to the TOC baseline. 

Coast Guard officials explained that proposed changes to the baseline 

would be approved by the program executive officer on a case-by-case 

basis. However, the Coast Guard has not developed criteria for potential 

upward or downward adjustments to the baseline. 

The Coast Guard has only recently begun to address the contractor’s 

progress in meeting the third overall goal of Deepwater, customer 

satisfaction. A January 9, 2004, report indicates that the Coast Guard had 

not yet identified the metrics needed to measure this goal. As a start, on 

January 12, 2004, a survey was sent to 25 senior leaders and program 

managers. 

The Coast Guard decided to use the system integrator approach 6 years 

ago. In our previous work,20 we found that given the Coast Guard’s reliance 

on a single system integrator for the Deepwater program, the agency 

would be at serious risk if it decides not to extend the contract. Because 

ICGS proposed the specific assets that became the Deepwater solution, a 

decision not to extend the current contract would require a new 

Deepwater acquisition strategy to be developed. Exit strategies and other 

means to deal with potential poor performance by the system integrator 

are important to mitigate these program risks. However, the Coast Guard 

is just beginning an internal review of the system integrator’s plan to 

 20 GAO-01-564. 
Page 21 GAO-04-380 Deepwater Program 

transition out of the program in the event such action would be necessary. 

Further, Deepwater program officials indicated that it is not realistic to 

believe the Coast Guard would switch system integrators at this point in 

the program. They stated that they viewed their relationship with the 

contractor as a partnership and are committed to making it work. 

Competition is a key component for controlling costs in the Deepwater 

program and a guiding principle for DHS’s major acquisitions. The benefits 

of competition may be viewed as sufficient in the contract’s early years 

because, for the initial 5-year contract period, prices proposed by ICGS for 

equipment and software were based on competitions held among various 

subcontractors. However, beyond the first 5-year term, the Coast Guard 

has no way to ensure competition is occurring because it does not have 

mechanisms in place to measure the extent of competition or to hold the 

system integrator accountable for steps taken to achieve competition. 

The acquisition structure of the Deepwater program is such that the two 

first-tier subcontractors, Lockheed Martin and Northrop Grumman—the 

companies that formed ICGS and that developed the Deepwater 

solution—have sole responsibility for determining whether to hold 

competitions for Deepwater assets or to provide these assets themselves. 

Over 40 percent of the funds obligated to Lockheed Martin and Northrop 

Grumman have either remained with those companies or been awarded to 

their subsidiaries. Further, the system integrator uses a Lockheed Martin 

sourcing document, termed the open business model, to guide competition 

decisions made by the subcontractors. However, this guidance is a 

philosophy—not a formal process involving specific actions—that 

encourages competition but does not require it. The lack of transparency 

into competition and the government’s lack of a mechanism to hold the 

contractor accountable raise questions about whether the Coast Guard 

will be able to control costs. 

Neither the Coast Guard nor the system integrator determines how 

suppliers for Deepwater assets are chosen. A Coast Guard official told us 

that the system integrator was hired to make these decisions because the 

agency lacked the expertise to do so. However, Lockheed Martin and 

Northrop Grumman, as the subcontractors, are solely responsible for 

deciding whether to hold competitions for Deepwater assets or provide 

them to the Coast Guard themselves (often referred to as “make or buy” 

decisions). 

Control of Future 

Costs through 

Competition Remains 

a Risk because of 

Weak Oversight of 

Subcontractor 

Decisions 

Coast Guard Lacks 

Visibility into 

Subcontractors’ Make or 

Buy Decisions 
Page 22 GAO-04-380 Deepwater Program 

Moreover, the Coast Guard has no contractual requirements with ICGS 

that provide transparency into significant make or buy decisions. 

Although the Coast Guard has decided to include achieving competition as 

one of the factors to be considered in decisions about extending the 

contract for future option terms, this review will occur after such 

subcontracting decisions are made. The subcontractors are not required to 

notify the Coast Guard prior to making a decision to provide Deepwater 

assets themselves rather than holding a competition. The Coast Guard’s 

review of competition included in its award term plan21 will not address 

Lockheed Martin or Northrop Grumman decisions—increasingly 

important in subsequent years—of whether significant equipment should 

be procured from outside sources or built in-house. 

As of September 30, 2003, the Coast Guard had awarded $596 million in 

orders to the system integrator, ICGS. Table 3 shows that over 98 percent 

of this amount was then passed through to the two first-tier 

subcontractors. 

Table 3: Breakdown of Coast Guard Obligations to ICGS (Includes Planned 

Subcontracts to First Tier Subcontractors as of September 30, 2003) 

Dollars in millions 

 Dollar value Percentage 

ICGSa $9 1.5 

Subcontracts to Lockheed Martin 393 65.9 

Subcontracts to Northrop Grumman 194 32.6 

Total $596 100 

Source: Coast Guard. 

a

Obligations to ICGS consist of general and administrative charges exclusively. 

To date, the subcontractors managing the acquisition have frequently 

performed the work themselves. Based on their respective work scopes, 

the two companies either issue orders to second-tier subcontractors or 

 21 The Deepwater award term plan establishes the criteria for awarding contract options 

and the evaluation process and periods. 
Page 23 GAO-04-380 Deepwater Program 

retain the work for themselves.22 Table 4 shows that, as of September 30, 

2003, Lockheed Martin planned to retain 42 percent of its obligated dollars 

and to award 58 percent to second-tier subcontractors. Most of these 

second-tier dollars will go to major subcontractors, i.e., those with 

obligations greater than $5 million. 

Table 4: Breakdown of ICGS Obligations to Lockheed Martin (Planned Subcontracts 

and Second-Tier Obligations as of September 30, 2003) 

Dollars in millions 

Subcontractor Dollar value Percentage 

Lockheed Martin in-house work $121 31 

Subcontracts to Lockheed Martin subsidiaries 42 11 

Other second-tier subcontractors 

Major second-tier subcontractorsa 206 52 

Other suppliers 24 6 

Total $393 100 

Source: Coast Guard. 

a

Lockheed Martin defines major subcontractors as those with obligations of more than $5 million. 

As shown in table 5, Northrop Grumman planned to retain 51 percent of its 

obligated dollars. 

Table 5: Breakdown of ICGS Obligations to Northrop Grumman (Planned 

Subcontracts and Second-Tier Obligations as of September 30, 2003) 

Dollars in millions 

Subcontractor Dollar value Percentage 

Northrop Grumman in-house work $96 49 

Subcontracts to Northrop Grumman 

subsidiaries 3 2 

Other second-tier subcontractors 95 49 

Total $194 100 

Source: Coast Guard. 

 22 ICGS’s limited liability company agreement articulates each member’s work scope. 

Lockheed Martin “shall be responsible for program management; systems design; C4ISR 

assets and capabilities; aviation assets; and logistics assets and capabilities...” Northrop 

Grumman (Ingalls) shall be responsible for program management and logistics for surface 

assets...” 
Page 24 GAO-04-380 Deepwater Program 

The open business model, meant to guide the supplier sourcing process in 

the Deepwater program, has been characterized by the system integrator 

as a means of ensuring competition for Deepwater assets throughout the 

life of the program, thereby keeping costs under control. In October 2003, 

ICGS issued a policy statement on the open business model. The stated 

business approach of the guidance is to encourage second-tier suppliers to 

remain innovative and competitive by directing Lockheed Martin and 

Northrop Grumman, as the first-tier subcontractors, to (1) generally avoid 

the use of teaming agreements with suppliers and prohibit teaming 

agreements based on guaranteed work share,23 (2) defer second-tier 

supplier decisions as long as practicable so that changes in the 

marketplace can be considered, and (3) actively solicit market information 

and new suppliers. However, this guidance is a philosophy—not a formal 

process involving specific decision points—that does not ensure that 

competition will be considered. The December 2003 Deepwater 

performance measurement plan requests that the contractor prepare selfassessments of its efforts to promote competition. However, the Coast 

Guard has no means of obtaining insight into the basis for the contractor’s 

self-assessments. Moreover, the government still lacks a mechanism to 

hold the contractor accountable for ensuring that competition occurs. 

To date, there have been varying degrees of competition for the secondtier subcontracting relationships Lockheed Martin and Northrop Grumman 

have in place for the design, development, or production of Deepwater 

assets. Lockheed Martin and Northrop Grumman follow their own 

procurement procedures and guidance for determining whether 

competition will occur and selecting the suppliers who will be invited to 

compete for Deepwater assets. The competitions are not “full and open”24

in the way a typical government procurement would be, nor are they 

required to be. The federal procurement system requires “full and open” 

competition except in cases where certain statutory exceptions are met. 

“Full and open” competition means that all responsible sources are 

permitted to compete. 

 23 Teaming agreements are defined in FAR 9.601 as an arrangement between two or more 

companies to form a partnership or joint venture to act as a potential prime contractor or a 

potential prime contractor agrees with one or more companies to have them act as its 

subcontractor. Under guaranteed work shares, a subcontractor is guaranteed a certain 

percentage of the work. 

24 10 U.S.C. sec. 2302(3)(D); 41 U.S.C. sec. 403(b). 

The System Integrator’s 

Open Business Model Does 

Not Ensure Competition Is 

Considered 
Page 25 GAO-04-380 Deepwater Program 

ICGS officials identified four specific assets for which they believe the 

open business model philosophy was effective: the conversion of 110-foot 

to 123-foot cutters, the national security cutter, the maritime patrol 

aircraft, and the vertical take-off and landing unmanned aerial vehicle 

(VUAV). We found that, in some cases, teaming agreements were 

implemented in the proposal phase of Deepwater and were carried over 

when ICGS won the contract. In other cases, some degree of competition 

had occurred. 

• In December 1998, Lockheed Martin Corporation, Ingalls Shipbuilding, 

Inc.,25 and Halter-Bollinger Joint Venture, L.L.C entered into a teaming 

agreement that included the 123-foot cutter modification. The 

agreement was established to make the capabilities of both Halter and 

Bollinger available to Lockheed Martin for all phases of the Deepwater 

program. Despite the open business model’s prohibition of work share 

agreements, such an agreement is in place between Lockheed Martin 

and Halter-Bollinger. Halter-Bollinger will be responsible for the design 

and construction of all vessels equal to or less than 200 feet in overall 

length, with the exception of the national security cutter. For those 

ships greater than 200 feet and less than 241 feet, the company’s work 

share is 25 percent of the total effort. 

• The national security cutters are being designed and constructed by 

Northrop Grumman. Northrop Grumman awarded a contract to M. 

Rosenblatt & Son, Inc. for the cutters’ preliminary design, but Northrop 

Grumman is responsible for the detailed design and construction. 

Lockheed Martin is responsible for the electronics. However, Northrop 

Grumman plans to hold competitions for the long-lead materials—such 

as the gas turbine, bulkhead seals, stern tubes,26 and rudder—for the 

cutters and has solicited pricing proposals from a number of 

subcontractors. 

• Prior to the contract award to ICGS, Lockheed Martin solicited 

information from a number of companies for the maritime patrol 

aircraft, evaluating 16 aircraft proposals. In October 2000, Lockheed 

Martin signed a memorandum of understanding with CASA Aircraft 

USA, Inc. to provide an airframe for Deepwater and to help develop 

and market ICGS’s Deepwater proposal. After some Coast Guard 

 25 Ingalls Shipbuilding, Inc. was subsequently acquired by Northrop Grumman. 

26 A stern tube is a tube through which the tail shaft passes to the propeller. 
Page 26 GAO-04-380 Deepwater Program 

officials expressed concern about the aircraft model that had been 

selected for Deepwater, ICGS was awarded a task order to pay for an 

evaluation of alternative aircraft. As a result of the evaluation, 

Lockheed Martin identified an alternative CASA aircraft to meet the 

Coast Guard’s maritime patrol aircraft mission. 

• For the VUAV, Lockheed Martin conducted a competition between six 

models. Bell Helicopter, Inc. was initially identified as the solution. 

After ICGS submitted its Deepwater proposal to the Coast Guard, 

Lockheed Martin identified a potential Northrop Grumman product 

based on market research. However, after evaluation of this alternative, 

Lockheed Martin selected one of the Bell products. 

The Coast Guard has embarked on a major transformational effort using 

an acquisition strategy that allows a system integrator to identify the 

Deepwater assets and to manage the acquisition process, with 

subcontractors retaining authority for all make or buy decisions. Such a 

strategy carries inherent risks that must be mitigated by effective 

government oversight of the contractor. The Coast Guard faces a tough 

challenge in holding ICGS accountable for results, while facing the 

daunting prospect of starting over with a new approach should the 

contractor fail. Nevertheless, the integrity of the contractor oversight 

process must be enforced through such mechanisms as effective IPTs and 

a rigorous and transparent award fee determination process. 

Further, the Coast Guard must determine how to hold the contractor 

accountable for achieving the basic goals of the Deepwater program in 

order to position itself to make a contract extension decision. While there 

is no question that the success of Deepwater depends on an effective 

partnership between the government and the contractor, the Coast Guard 

must preserve its ability to change course if necessary. Solid baselines 

need to be developed so actual costs and operational effectiveness of the 

Deepwater assets can be accurately measured and reported. The current 

use of the contractor’s proposed costs, plus 10 percent, as the TOC 

baseline—rather than the estimated cost to replace the assets via a 

traditional procurement approach—is troublesome. Further, because the 

program management plan does not reflect the change to the TOC 

baseline, we question whether this decision was well thought-out and in 

the government’s best interest. 

In addition to contractor oversight, the Coast Guard has not invested the 

resources needed to ensure that its own personnel are trained and staffed 

Conclusion 
Page 27 GAO-04-380 Deepwater Program 

in sufficient numbers to carry out their duties. The disconnect between the 

process outlined in the human capital plan for ensuring a smooth 

transition as military personnel rotate out of Deepwater and the current 

situation—where key Deepwater officials are leaving the program without 

a chance to adequately train their replacements—is cause for concern as 

the Deepwater program moves forward. It is unclear why the Coast Guard 

has not devoted adequate attention to human capital needs. In addition, 

although the first Deepwater assets are just starting to be delivered, the 

lack of a solid and well-developed transition plan from legacy to 

Deepwater assets is already causing problems, as evidenced by the 123-

foot cutter modification difficulties. The schedule delays for several of the 

assets further highlight the need for more focus on the transition to 

Deepwater assets. 

The concerns we raised in 2001 about the Coast Guard’s ability to control 

costs in future years remain valid today. Without a mechanism to hold the 

system integrator accountable for ensuring adequate competition, the 

Coast Guard cannot be sure that competition will be used to guard against 

cost increases that could jeopardize the program. This situation is 

especially risky given the acquisition structure of Deepwater, whereby the 

subcontractors, not the system integrator or the Coast Guard, are 

responsible for determining whether competition will occur for Deepwater 

assets. 

We recommend that the Secretary of Homeland Security direct the 

Commandant of the Coast Guard to take the following three actions to 

address Deepwater program management: 

• In collaboration with the system integrator, take the necessary steps to 

make IPTs effective, including 

• training IPT members in a timely manner, 

• chartering the sub-IPTs, and 

• making improvements to the electronic information system that 

would result in better information sharing among IPT members who 

are geographically dispersed. 

• Follow the procedures outlined in the human capital plan to ensure 

that adequate staffing is in place and turnover among Deepwater 

personnel is proactively addressed. 

• As Deepwater assets begin to be delivered to operational units, ensure 

that field operators and maintenance personnel are provided with 

Recommendations for 

Executive Action 
Page 28 GAO-04-380 Deepwater Program 

timely information and training on how the transition will occur and 

how maintenance responsibilities are to be divided between system 

integrator and Coast Guard personnel. 

Further, we recommend that the Secretary direct the Commandant to take 

the following six actions to improve contractor accountability: 

• Develop and adhere to measurable award fee criteria consistent with 

the Office of Federal Procurement Policy’s guidance. 

• In all future award fee assessments, ensure that the input of COTRs is 

considered and set forth in a more rigorous manner. 

• Hold the system integrator accountable in future award fee 

determinations for improving the effectiveness of IPTs. 

• Based on the current schedule for delivery of Deepwater assets, 

establish a time frame for when the models and metrics will be in place 

with the appropriate degree of fidelity to be able to measure the 

contractor’s progress toward improving operational effectiveness. 

• Establish a TOC baseline that can be used to measure whether the 

Deepwater acquisition approach is providing the government with 

increased efficiencies compared to what it would have cost without 

this approach. 

• Establish criteria to determine when the TOC baseline should be 

adjusted and ensure that the reasons for any changes are documented. 

To facilitate controlling future costs through competition, we also 

recommend that the Secretary direct the Commandant to take the 

following two actions: 

• Develop a comprehensive plan for holding the system integrator 

accountable for ensuring an adequate degree of competition among 

second-tier suppliers in future program years. This plan should include 

metrics to measure outcomes and consideration of how these 

outcomes will be taken into account in future award fee decisions. 

• For subcontracts over $5 million awarded by ICGS to Lockheed Martin 

and Northrop Grumman, require Lockheed Martin and Northrop 

Grumman to notify the Coast Guard of a decision to perform the work 

themselves rather than contracting it out. The documentation should 

include an evaluation of the alternatives considered. 
Page 29 GAO-04-380 Deepwater Program 

DHS forwarded us the Coast Guard’s written comments on a draft of this 

report, which are reproduced in appendix I. The Coast Guard provided us 

with additional technical comments, which we incorporated as 

appropriate. In an e-mail sent subsequent to the written comments, the 

Coast Guard stated that it agreed with our recommendations. 

The Coast Guard noted that the agency is learning and evolving as the 

Deepwater program matures and pointed out that many aspects of the 

Deepwater program—working with a system integrator, employing IPTs 

across multiple acquisition domains, and using a performance-based 

strategy for such a long-term undertaking—are new to the Coast Guard. 

The agency agreed that, because the IPT structure is new to the Coast 

Guard, many adjustments must be made to improve the teams’ 

effectiveness. The Coast Guard clarified that the IPTs are, for the most 

part, contractor-led and that Coast Guard IPT members provide support 

and oversight. The focus of this report, however, is on the government’s 

ability to oversee and manage the contractor. Deepwater management 

documents assert, as we point out in our report, that IPTs are the Coast 

Guard’s primary tool for managing and overseeing the contractor. 

Regarding the award fee process, the Coast Guard stated that it has taken 

action to assimilate objective factors into future evaluations but expressed 

concern that our draft report may not have completely reflected the rigor 

that was applied in the first award fee decision. The Coast Guard states 

that “no input from any of the monitors was left out of the evaluation 

process.” While we revised our report to state that all COTRs submitted 

comments, the input from the COTR responsible for ships was not 

included in the numerical scores, which were then passed on to the fee 

determining official. Further, the Coast Guard said that the score of 87 

percent is “much lower than industry averages.” In our view, however, the 

relevant consideration in determining the award fee amount is not 

industry averages, but rather the purpose an award fee is intended to 

serve. The rationale for offering award fees is to motivate superior effort 

on specific task and delivery orders, assets, or system performance 

attributes. Of importance here, the narrative description in the Deepwater 

award fee plan associated with a score of 87 percent (“very good”) is “very 

effective performance, fully responsive to contract requirements . . . only 

minor deficiencies.” As we state in our report, program management 

reports throughout the first year of the contract cited various schedule, 

performance, cost control, and contract administration problems that 

required attention. 

Agency Comments 
Page 30 GAO-04-380 Deepwater Program 

The Coast Guard agreed that competition is critical to controlling costs 

and indicated that it is planning efforts that will result in greater visibility 

and increased accountability to ensure competitive practices are being 

used to manage costs. 

To determine the steps taken by the Coast Guard to manage the 

Deepwater program and oversee system integrator performance, we 

examined the Deepwater contract, the program management plan, the 

human capital plan, briefings, budget justifications, and monthly and 

quarterly management reports. We analyzed IPT charters, membership 

lists, survey data, and staffing data, and we observed IPT and working 

group meetings. We interviewed various Deepwater program officials 

representing the Coast Guard, the system integrator, and the 

subcontractors, including program and asset-level program managers, 

contracting officers, and ICGS representatives in Arlington, Virginia, and 

Washington, D.C.. We visited the First and Seventh Coast Guard Districts 

in Boston, Massachusetts, and Miami, Florida, and interviewed operators 

and systems specialists for Coast Guard cutters, aircraft, and helicopters 

at those locations. We also met with Lockheed Martin and Northrop 

Grumman employees in Avondale, Louisiana, and Moorestown, New 

Jersey. We reviewed our prior reports and testimonies on the Deepwater 

project and integrated product teams. 

To assess Coast Guard efforts to establish effective criteria to assess and 

reward the system integrator’s performance after the first year of the 

contract, we reviewed the award fee plan, the performance incentives 

plan, the interim and final award fee reports for the first year of contract 

performance, and other management documents. We interviewed Coast 

Guard and ICGS officials. Our analysis of this issue was hindered by the 

Coast Guard’s failure to provide us with two additional award fee 

determinations, despite our repeated requests. 

To assess whether the Coast Guard has put in place measures to assess 

the contractor’s progress in meeting the three overarching goals of 

Deepwater, we reviewed the performance measurement plan, the award 

term plan, and other performance measurement documents. Additionally, 

we interviewed the Deepwater program’s Resources and Metrics staff, 

Coast Guard operations personnel, and program managers. We also 

reviewed our prior report on performance-based contracting attributes. 

To determine whether the Coast Guard is addressing the role and extent of 

competition for Deepwater assets, we examined ICGS’s open business 

Scope and 

Methodology 
Page 31 GAO-04-380 Deepwater Program 

model policy statement and excerpts from Lockheed Martin’s procurement 

manual and Northrop Grumman’s acquisition policy manual. We discussed 

the open business model with officials from the Coast Guard, ICGS, 

Lockheed Martin, and Northrop Grumman. In addition, we reviewed 

financial data, including contract orders and ICGS spreadsheets. The 

Coast Guard provided us with the obligations to ICGS, Lockheed Martin, 

and Northrop Grumman. We did not independently verify the financial 

data. 

We performed our work from May 2003 through February 2004 in 

accordance with generally accepted government auditing standards. 

We are sending copies of this report to other interested congressional 

committees, the Secretary of Homeland Security, and the Commandant of 

the Coast Guard. We will make copies available to others upon request. In 

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

http://www.gao.gov. 

If you or your staff have any questions regarding this report, please 

contact me at (202) 512-4841 or Michele Mackin, Assistant Director, at 

(202) 512-4309. Other major contributors to this report were Penny 

Berrier, Ramona L. Burton, Christopher Galvin, Lucia DeMaio, Gary 

Middleton, and Ralph O. White Jr. 

Sincerely yours, 

William T. Woods 

Director, Acquisition 

 and Sourcing Management 
Appendix I: Comments from the Coast Guard 

Page 32 GAO-04-380 Deepwater Program 

Appendix I: Comments from the Coast Guard 
Appendix I: Comments from the Coast Guard 

Page 33 GAO-04-380 Deepwater Program 
Appendix I: Comments from the Coast Guard 

Page 34 GAO-04-380 Deepwater Program 
Appendix II: Status of Selected Deepwater 

Contract Management and Oversight Plans 

Page 35 GAO-04-380 Deepwater Program 

Plan Purpose 

Planned 

completion date Approved 

Scheduled life of 

plan 

Award fee plan Establishes criteria and procedures used to 

evaluate Integrated Coast Guard Systems’ (ICGS) 

management performance, and to determine the 

amount of award fee earned 

Contract award, 

June 2002 

June 2002 Updated annuallya 

Program 

management 

plan 

Provides the management framework, 

organizational structure, schedule, activities/events, 

tasking, and process guidelines required to 

implement phase 2 of the program; includes 

additional plans as noted below 

December 2002 December 2003 Dynamic 

document, 

periodically 

updated 

Contract 

management 

support plan 

Details responsibilities and processes to implement 

the contract 

December 2002 December 2003 

Financial 

management 

plan 

Describes activities and processes to ensure 

funding is available to execute the program 

December 2002 December 2003 

Risk 

management 

plan 

Establishes structure and method for identifying and 

managing risks, and developing and selecting 

options to mitigate risks 

“Soon after 

contract award” 

December 2003 

Performance 

measurement 

plan 

Links the program budget to performance and 

provides strategic focus linking performance 

measures to program mission, vision, and guiding 

principles 

December 2002 December 2003 Updated on a 

semiannual basis 

Quality 

assurance plan 

Outlines the processes and procedures used to 

implement the program’s quality assurance process 

90 days after 

contract award 

(September 2002) 

September 2002 

Performance 

incentives plan 

Establishes a team to evaluate ICGS’s efforts to 

exceed performance standards set by the contract 

and performance measurement plan 

Not applicable March 2003 Remains in effect 

until terminated, 

changed, or 

amended 

Award term plan Establishes criteria for contract term incentives, and 

evaluation process and periods 

June 2002 December 2003 Duration of 

contract, with 

procedures for 

changes 

Source: GAO analysis of Deepwater documents. 

a

An updated award fee plan was not available as of December 31, 2003. 

Appendix II: Status of Selected Deepwater 

Contract Management and Oversight Plans 

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