text: Background The ACV is being developed as a partial or full replacement for the AAV, which is a tracked (non-wheeled) vehicle with capability to launch from ships to reach the shore carrying up to 21 Marines at a speed of up to approximately 6 knots. This speed effectively limits its range for traveling from ship to shore to no farther than 7.4 nautical miles. In order to upgrade the AAV to meet current threats and establish a path toward an enhanced platform, DOD and the Marine Corps implemented an incremental approach. The first step was to improve the AAVs’ protection from threats such as improvised explosive devices by installing enhanced armor and other equipment—referred to as survivability upgrades—efforts which are currently underway. The second step was to establish a plan to replace the AAV with a new vehicle, the ACV, which would develop and enhance capabilities in three incremental steps: ACV 1.1 would be a wheeled vehicle that provides improved protected land mobility but limited amphibious capability. In operations, it is expected to be part of an amphibious assault through the use of a surface connector craft to travel from ship to shore. This increment would leverage prototypes, demonstration testing, and other study results from the previously suspended Marine Personnel Carrier program. ACV 1.2 would have improved amphibious capability, including the ability to self-deploy and swim to shore. The development phase of the second ACV increment (ACV 1.2) is scheduled to begin in February 2019. ACV 2.0 would focus on exploring technologies to attain higher water speed capability. The ACV 1.1 program was initiated in 2014 and development of ACV 1.1 vehicles started in November 2015. The remainder of this report is focused on development and acquisition of the ACV 1.1, which we will refer to as ACV. The Marine Corps acquisition of the ACV employs a two- phase strategy for selecting a contractor to produce the ACV fleet. In the first phase, the program issued a solicitation for offerors to submit proposals and provided for award of multiple contracts for each contractor to design and develop 16 prototypes for performance assessment. In the second phase, referred to as the down-select process, after testing the prototypes, the Marine Corps intends to select a single contractor to continue into the start of production. The Marine Corps received five initial proposals and ultimately awarded contracts to BAE and SAIC to develop the ACV prototypes. The Marine Corps considered the ACV to be a substantially non-developmental item because both contractors’ designs were based on vehicles that were already in production and deployed by other militaries. Figure 1 depicts the BAE and SAIC prototype vehicles. After testing the prototypes, the Marine Corps plans to select a single contractor to continue into the production phase. The first prototypes were delivered in January 2017 and have since been undergoing developmental, operational, and live fire testing. Developmental testing assesses whether the system meets all technical requirements and is used to: verify the status of technical progress, determine that design risks are minimized, substantiate achievement of contract technical performance, and certify readiness for initial operational testing. ACV developmental testing includes testing for sustainability, system survivability, and water and land mobility. Operational testing (assessment) is the field test, under realistic conditions, for the purpose of determining effectiveness and suitability of the weapons for use in combat by typical military users. Live fire testing is used to demonstrate vehicle capability against a range of ballistic and non-ballistic threats expected to be encountered in the modern battlefield, such as improvised explosive devices among others. In January 2018 the Marine Corps started an operational assessment, which was scheduled to be completed in March 2018. The assessments consist of field tests, under realistic conditions, to inform the decision to enter production. Ongoing test results, including the operational assessment, will be used to inform the ACV June 2018 production decision. Figure 2 is a timeline of the ACV program’s progress and plans to full capability. The ACV program plans to produce at least 208 vehicles after exercising contract options for 2 years of low-rate production of 30 vehicles each year starting in 2018 and then exercise options for 2 years of full-rate production for the remaining 148 or more vehicles starting in 2020. In addition to testing the prototype vehicles, the program is holding a production readiness review that started in November 2017 and according to program officials, they will keep the review open until April 2018. During this review, the program will determine whether the designs are ready for production and whether the contractors have accomplished adequate production planning to enter production. Officials from DCMA, which conducts contract performance oversight, have provided support in assessing production readiness. After receiving the proposals for the production down-select, the program will hold a system verification review in April 2018 to verify that the performance of the ACV prototypes meets capability requirements and performance specifications. This report represents the last in the series of reports we are to issue in response to the fiscal year 2014 National Defense Authorization Act, which contains a provision that we review and report annually on the ACV program until 2018. Previously, In October 2015 we found that the Marine Corps made efforts to adopt best practices and minimize acquisition risk, including: adopting an incremental approach to update capabilities, using proven technologies, increasing competition, and awarding fixed-price incentive contracts for much of the development work. In April 2017, we found that DOD’s life cycle cost estimate for ACV 1.1 of about $6.2 billion, fully or substantially met the criteria for the four characteristics of a high-quality reliable cost estimate. However, we also found that changes the Marine Corps made to the acquisition schedule — partly in response to a stop work order following a bid protest that was denied by GAO in March 2016 — raised acquisition risk by increasing the overlap between development activities, such as testing of the vehicles, with production. This is a risk we had identified in a previous report. As a result, we recommended that the Marine Corps delay the production decision until 2019. DOD did not concur with that recommendation. ACV Program Is on Track to Meet Development Cost Goals with No Additional Schedule Delays Costs for the development phase of ACV are on track to meet cost goals established at the start of development, based on a recent Navy estimate, the ACV program office, and reporting from the contractors. In September 2017, the ACV program’s Defense Acquisition Executive Summary Report for ACV provided a Navy cost estimate for development of $750.7 million, less than the $810.5 million baseline established at the start of development in November 2015. Program officials also indicated that the ACV program was on track to meet cost goals. They noted that the contractors have not contacted the government to negotiate an increase in billing prices, as of December 2017. Since both of the contractors have delivered all 16 of their required prototypes and the manufacturing of the prototypes is the largest anticipated portion of ACV development contract costs, most of the costs associated with the manufacturing of the prototypes have likely been realized. The Marine Corps made efforts to reduce cost risk to the government by adopting a fixed-price incentive (firm target) contract type for the construction of the prototype vehicles. As we previously reported in October 2015, the Marine Corps planned to award hybrid contracts to each of the ACV development contractors, which would apply different pricing structures for different activities. The Marine Corps awarded the contracts in November 2015 as planned. Most critically, a fixed-price incentive contract type is being used for items in the contract associated with the manufacturing of the development prototypes, which was anticipated to be the largest portion of ACV development contract costs. Under this contract type, the government’s risk is generally limited to the contract’s price ceiling. Incentive contracts are appropriate when a firm- fixed-price contract is not appropriate and the required supplies can be acquired at lower costs by relating the amount of profit or fee to the contractor’s performance. According to Federal Acquisition Regulation, since it is usually to the government’s advantage for the contractor to assume substantial cost responsibility and appropriate share of the cost risk, fixed-price incentive contracts are preferred over cost-reimbursement incentive contracts when contract costs and performance requirements are reasonably certain. The fixed-price incentive (firm target) contract type provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference. As we also previously reported, however, the Marine Corps received a waiver to forgo the establishment of a certified Earned Value Management System for the ACV program, which reduces the regularly-available cost, schedule, and performance data available for the program to review. The ACV program office and DOD also indicated that they anticipate production costs will be within goals established at the start of development, though key production costs have not yet been determined. The program’s development contracts with the two competing contractors contain fixed-price incentive options for 4 years of production. The pricing of the production vehicles will not occur, however, until DOD makes a production decision in June 2018 and negotiates the final terms and exercises the production option with one of the contractors. The Marine Corps has made no major changes to the ACV acquisition schedule since we previously reported on the program in April 2017. In that report we found that the production decision was moved from February to June 2018 after a stop work order was issued to the contractors in response to a bid protest from a vendor that was not selected for one of the ACV development contracts. A senior program official emphasized the importance of keeping the ACV acquisition on schedule because the capability it provides is complementary to a broader set of capability updates across multiple platforms that the Marine Corps is in the process of procuring. ACV May Enter Production with Manufacturing Maturity That Does Not Meet Best Practices The ACV program office is in the process of conducting tests and assessments to determine if the program is on track to meet the criteria to enter production, but program officials told us the Navy—which has the authority to approve major acquisition milestone decisions for the program—may choose to start low-rate production without meeting established best practices for manufacturing maturity. At the start of development, DOD established criteria for entering production in areas such as capability performance and the status of the contractors’ manufacturing readiness to manufacture the ACV vehicles. Leading up to the production decision, the program is engaged in a number of activities such as the operational assessment and production readiness review to inform the decision to start production. The production readiness review has a critical role in informing the decision to enter production because it represents an opportunity for the program to determine the maturity of the contractor’s manufacturing process and assess potential risks related to cost, schedule, or performance. Our previous reviews about manufacturing best practices found that identifying manufacturing risks early in the acquisition cycle and assessing those risks prior to key decision points, such as the decision to enter production, reduces the likelihood of cost growth and potential delays. The ACV program has used the DOD Manufacturing Readiness Level (MRL) Deskbook to identify levels of manufacturing capability and establish targets for minimal levels of manufacturing readiness at specific acquisition milestones. The ratings are applied to various risk areas such as design, materials, process capability and control, and quality management. Table 1 shows the basic MRL definitions provided by the Joint Defense Technology Panel. The MRL Deskbook recommends that a program is expected to demonstrate a MRL of 8 by the time of the low-rate production decision. However, GAO’s previously identified best practices for managing manufacturing risks recommend programs reach a higher level—MRL- 9— for the risk area of process capability and control before entering low- rate production. At MRL-9, a program is expected to have its applicable manufacturing processes in statistical control. The MRL Deskbook recommends that a program achieve an MRL-9 at the start of full-rate production. The Marine Corps has eliminated manufacturing capability as a criterion for consideration in the down-select production decision. In the solicitation issued to the two competing contractors for the production decision in December 2017, the Marine Corps identified two criteria that would be considered to determine the winner of the down-select competition for the production decision. They are, in descending order of importance: (1) technical performance of the prototype vehicles and (2) the contractors’ submitted cost proposals. Previously, the ACV acquisition strategy and development contracts identified five criteria for the selection process, with manufacturing capability as the second most important factor (behind technical performance). The development contracts stipulated that the government reserved the right to adjust the factors and their order of importance prior to the release of the solicitation for the production down- select decision. Program officials said that narrowing the down-select factors to performance test results and cost was in line with the original intent of the program to use the best value tradeoff process described in the Federal Acquisition Regulation and that the revised criteria were appropriate for a non-developmental item such as the ACV. While the program removed manufacturing capabilities from its criteria for selecting the contractor for production, ACV program officials are still assessing manufacturing readiness to support their production decision. Program officials stated that they could enter production at a lower level of manufacturing readiness than DOD guidance or GAO identified best practices suggest. The program started a production readiness review in November 2017 to determine the contractors’ respective manufacturing maturity. According to program officials, they will keep the review open until April 2018, at which point the program will make a determination about the contractors’ manufacturing readiness levels. The program office confirmed that the ACV criterion for entering production is to achieve an MRL-8 but noted that it is possible that the program could choose to enter into production without an overall MRL-8. Program officials stated that if there are any specific risk areas that are assessed below that threshold, the program office will define the risk and make a recommendation to the Navy for entry into production based on whether or not they consider the risk acceptable. To help inform its determination, program officials said that they will review the manufacturing readiness assessments produced by the contractors, as well as reviews by the DCMA, which is responsible for assisting with contract oversight. Because the two contractors were still in competition at the time of the release of this report, we are unable to publicly report additional, more detailed, information about production readiness or performance tests. However, we have previously found that programs with insufficient manufacturing knowledge at the production decision face increased risk of production quality issues, cost growth, and schedule delays. Entering the production phase of the ACV acquisition with manufacturing readiness levels lower than those recommended by DOD guidance and GAO-identified best practices would increase the likelihood of outcomes associated with insufficiently mature manufacturing capabilities, such as production quality issues and schedule delays. The Marine Corps has already been authorized funding to start production and plans to exercise options in 2018 to produce 30 vehicles for the first year of low-rate production. However, the Marine Corps has two upcoming decisions that would provide opportunities to refocus on manufacturing readiness for the ACV—specifically the decision to enter into the second year of low-rate production in 2019 for 30 vehicles, and the decision to enter the first year of full-rate production in 2020 and acquire 56 of the remaining 148 vehicles. Acquiring additional vehicles before ensuring sufficient manufacturing maturity could raise the risk that the contractor may not be sufficiently prepared for continued production, which could result in delays in delivery of acceptable vehicles or additional costs to the government. Conclusions The Marine Corps has long identified the need for the enhanced capabilities envisioned through the ACV program and is nearing the potential production of such a vehicle. Following the cancellation of the EFV program after the expenditure of $3.7 billion, the ACV program represents an opportunity to follow a better acquisition approach. It is too early to determine whether the contractors will meet targets for production readiness by the time of the production decision, but the program office is considering entering production without meeting the recommended manufacturing maturity levels established by DOD or GAO-identified best practices. We have already identified the ACV program as adopting an aggressive acquisition schedule in which the amount of concurrent developmental testing and production is more than typical acquisition programs. In fiscal year 2018, Congress authorized funding for the program to start production, but the decision to enter a second year of low-rate production and the decision to start full-rate production represent opportunities for the ACV program to verify the manufacturer has achieved a sufficient level of readiness before commencing production of the bulk of vehicles. If the Marine Corps does not take steps to ensure that the contractor’s manufacturing readiness is sufficiently mature, as demonstrated through MRLs, prior to committing to additional production beyond the first year of low-rate production, there is an increased risk for production quality issues, cost growth, and schedule delays. Recommendations for Executive Action We are making two recommendations to DOD. The Secretary of the Navy should take steps to ensure that the Marine Corps not enter the second year of low-rate production until after the Marine Corps has determined that the contractor has achieved an MRL of at least an 8 for all risk areas. (Recommendation 1) The Secretary of the Navy should take steps to ensure that the Marine Corps not enter full-rate production until the Marine Corps has determined that the contractor has achieved an MRL of at least 9 for all risk areas. (Recommendation 2) Agency Comments and Our Evaluation We provided a draft of this product to DOD for comment. In its comments, reproduced in appendix I, DOD partially concurred with GAO’s recommendations. DOD agreed that manufacturing readiness should be assessed prior entering both the second year of low-rate production and the start of full- rate production, and plans to do so. DOD acknowledged that the MRL Deskbook provides best practices for identifying risks, but noted that the ACV program is not required to follow it. DOD noted that it may be reasonable to proceed into manufacturing at lower MRLs, if steps to mitigate identified risks are taken. However, DOD disagreed that not demonstrating a specified MRL for any individual risk area, in itself, should delay the start of either production milestone. DOD expressed concern that delaying subsequent years of production, if MRLs are not at the levels recommended, could lead to counterproductive breaks in production. We agree that adopting the MRL Deskbook is not required by DOD and represents best practices to minimize production risk. However, we also believe that demonstrating the MRL levels recommended in the MRL Deskbook for all risk areas mitigates increased risk associated with the aggressive schedule pursued by the ACV program—about which we have previously expressed concerns. We believe our recommendation to achieve an overall MRL-8 by the second year of low-rate production is a reasonable goal, considering it gives the ACV program an additional year after the point at which the MRL Deskbook recommends reaching MRL- 8—the start of low-rate production. In addition, ensuring that all manufacturing readiness risk areas are at MRL-9 for the start of full-rate production, as recommended by best practices in the MRL Deskbook, would help further alleviate risks associated with the program’s aggressive schedule. We appreciate the DOD concerns about delaying subsequent years of production if MRLs have not reached those identified in the best practices in the MRL Deskbook, but note that not doing so increases the likelihood of production quality issues that could lead to cost growth and schedule delays in future years. Therefore, we made no changes to the recommendations in response to the comments. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Under Secretary of Defense for Acquisition and Sustainment; the Secretary of the Navy; and the Commandant of the Marine Corps. This report also is available at no charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on this report, please contact me at (202) 512-4841 or ludwigsonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report GAO staff who made key contributions to this report are listed in appendix II. Appendix I: Comments from the Department of Defense Appendix II: GAO Contact and Staff Acknowledgments GAO Contact: Staff Acknowledgments: In addition to the contact named above, Bruce H. Thomas (Assistant Director), Matt Shaffer (Analyst in Charge), Pete Anderson, Alexandra Jeszeck, Jennifer Leotta, Roxanna Sun, and Marie Ahearn made key contributions to this report.
target: In June 2018, the United States Marine Corps plans to select a contractor and begin low-rate production for the ACV, a vehicle used to transport Marines from ship to shore under hostile conditions. The ACV will replace all or part of the current Assault Amphibious Vehicle fleet. The National Defense Authorization Act for Fiscal Year 2014 included a provision for GAO to annually review and report on the ACV program until 2018. This report, GAO's last under that provision, assesses the extent to which the Marine Corps is making progress toward (1) meeting cost and schedule goals for the ACV program and (2) demonstrating manufacturing readiness. GAO reviewed program cost estimates, updated schedules, and program assessments of test results and production readiness, as well as compared ACV acquisition efforts to DOD guidance and GAO-identified best practices. GAO also interviewed program and testing officials, and visited both ACV primary assembly locations. The first version of the Amphibious Combat Vehicle (ACV 1.1) is on track to meet development cost goals with no additional anticipated delays for major acquisition milestones. With regard to costs, the development phase of ACV 1.1 is on pace to not exceed cost goals that were established at the start of development, based on a recent Navy estimate, the ACV program office, and reporting from the contractors. For example, a September 2017 program progress review reported a Navy estimate of the cost of development at $750.7 million, less than the $810.5 million baseline established at the beginning of development. With regard to schedule, the ACV program has made no major changes to the acquisition schedule since GAO previously reported on the program in April 2017. ACV 1.1 program officials are in the process of preparing to down-select to a single contactor and enter low-rate production in June 2018, start a second round of low rate production the following year, and begin full-rate production in 2020. ACV 1.1 may be followed by the acquisition of other versions (ACV 1.2 and ACV 2.0) with advanced capabilities such as higher water speeds. The ACV program is preparing to start production of ACV 1.1, which includes determining that the contractors' manufacturing capabilities are sufficiently mature. However, program officials are considering entering production with a lower level of manufacturing maturity than called for in Department of Defense (DOD) guidance or GAO identified best practices. The ACV program measures manufacturing maturity with manufacturing readiness levels (MRL) for risk areas such as design, materials, process capability and control, and quality management. DOD guidance for weapons acquisition production recommends that programs achieve an MRL of 8 across all risk areas before entering low-rate production and that a program achieve an MRL of 9 at the start of full-rate production. GAO's previous reviews about manufacturing best practices found that achieving manufacturing maturity and identifying production risks early in the acquisition cycle and assessing those risks prior to key decision points, such as the decision to enter production, reduces the likelihood of quality issues, cost growth, and delays. The Marine Corps contract option for producing the first round of low-rate production for ACV 1.1 will be exercised after June 2018; the contract also contains additional options for production vehicles. Making the decisions to proceed with the second round of low-rate production and for the start of full-rate production before meeting called-for levels of manufacturing readiness criteria increases the risk that ACV 1.1 will witness delays and increased costs.