Defense Acquisitions: Future Combat System Risks Underscore the Importance of Oversight
Published: 2007-03-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Army's Future Combat System (FCS) is a program characterized by bold goals and innovative concepts--transformational capabilities, system-of-systems approach, new technologies, a first-of-a-kind information network, and a total investment cost of more than $200 billion. As such, the FCS program is considered high risk and in need of special oversight and review. Today's testimony is based on work conducted over the past year in response to (1) the National Defense Authorization Act for Fiscal Year 2006, which requires GAO to report annually on the FCS acquisition; and (2) the John Warner National Defense Authorization Act for Fiscal Year 2007, which requires GAO to report on the role of the lead systems integrator in the Army's FCS program. Accordingly, this statement discusses (1) the business case for FCS to be successful and (2) the business arrangements for the FCS program.
section_title: What GAO Found
paragraphs: The Army has far less knowledge about FCS and its potential for success than is needed to fulfill the basic elements of a business case. Those elements are not new to the Army, nor to the Department of Defense (DOD), which addresses such criteria in its weapon system acquisition policy. The Army has made improvements to the program, such as lengthening time frames for demonstrating capabilities and for providing capabilities to current forces. While the Army has also made progress, what it still lacks in knowledge raises doubts about the soundness of the FCS business case. The Army has yet to fully define FCS requirements; FCS technologies that should have been matured in 2003, when the program started, are still immature; key testing to demonstrate FCS performance will not be completed and maturity of design and product will not be demonstrated until after production starts in 2013; and an independent cost estimate from the Office of the Secretary of Defense is between $203 billion and $234 billion, a far higher figure than the Army's cost estimate. To achieve its goals for the FCS program, the Army decided to employ a lead systems integrator (LSI) to assist in defining, developing, and integrating the FCS. This decision reflected the fact that not only were FCS goals ambitious, but also that the Army had limited capacity to manage the undertaking. Boeing Corporation is the LSI. Its relationship with the Army on FCS breaks new ground for collaboration between the government and a contractor. The close working relationship has advantages and disadvantages. An advantage is that such a relationship allows flexibility in responding to shifting priorities. A disadvantage is an increase in risks to the Army's ability to provide oversight over the long term. The contract itself is structured in such a way as to enable the LSI to be paid over 80 percent of its costs and fees by completion of the critical design review in 2011--a point after which programs typically experience most of their cost growth. This is consistent with the Army's desire to provide incentives for the development effort. On the other hand, this contract, as with many cost-reimbursable research and development contracts, makes the contractor responsible for providing its best efforts, but does not assure a successful FCS. The foregoing underscores the important role of the Office of the Secretary of Defense in providing oversight on the FCS program. To date, the Office of the Secretary of Defense has largely accepted the Army's approach to FCS, even though it runs counter to DOD's policy for weapon system acquisition. GAO believes the Office of the Secretary of Defense needs to hold the FCS program accountable to high standards at the congressionally directed decision in 2009 on whether to proceed with FCS. Financial commitments to production will grow rapidly after that point. The Office of the Secretary of Defense should also be mindful of the department-wide implications of the future use of LSIs as well as the system-of-systems approach to developing weapon acquisitions.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Department of the Army’s  Future Combat System (FCS), a networked family of weapons and other  integrated systems. FCS is in the forefront of efforts to help the Army  transform itself into a lighter, more agile, and more capable combat force  by using a new concept of operations, new technologies, and a new  information network linking whole brigades together. This is an  extraordinary undertaking that will involve a total investment cost on the  order of $200 billion over the next few decades.
My statement today is based on the work that we have conducted over the  past year in response to (1) the National Defense Authorization Act for  Fiscal Year 2006, which requires GAO to report annually on the product  development phase of the FCS acquisition; and (2) the John Warner  National Defense Authorization Act for Fiscal Year 2007, which requires  GAO to report on the role of the lead systems integrator in the Army’s FCS  program. Accordingly, I will focus my statement on the business case and  the business arrangements for the FCS program.
subsections: section_title: Background
paragraphs: The FCS concept is designed to be part of the Army’s Future Force, which  is intended to transform the Army into a more rapidly deployable and  responsive force—one that differs substantially from the large division- centric structure of the past. The Army is reorganizing its current forces  into modular brigade combat teams, each of which is expected to be  highly survivable and the most lethal brigade-sized unit the Army has ever  fielded. The Army expects FCS-equipped brigade combat teams to provide  significant warfighting capabilities to DOD’s overall joint military  operations.
Fundamentally, the FCS concept is to replace mass with superior  information—that is, to see and hit the enemy first rather than to rely on  heavy armor to withstand a hit. This solution attempts to address a  mismatch that has posed a dilemma to the Army for decades: the Army’s  heavy forces had the necessary firepower needed to win but required  extensive support and too much time to deploy while its light forces could  deploy rapidly but lacked firepower. If the Future Force becomes a reality,  then the Army would be better organized, staffed, equipped, and trained  for prompt and sustained land combat, qualities intended to ensure that  the Army would dominate over evolving, sophisticated threats. The Future  Force is to be offensively oriented and will employ revolutionary concepts  of operations, enabled by new technology. The Army envisions a new way  of fighting that depends on networking the force, which involves linking  people, platforms, weapons, and sensors seamlessly together in a system-  of-systems.
In 2006, Congress mandated that the Secretary of Defense conduct a  milestone review for the FCS program, following the preliminary design  review scheduled for early 2009. Congress stated that the review should  include an assessment of (1) whether the requirements are valid and can  be best met with the FCS program, (2) whether the FCS program can be  developed and produced within existing resources, and (3) whether the  program should continue as currently structured, be restructured, or be  terminated. The Congress required the Secretary of Defense to review  specific aspects of the program, including the maturity of critical  technologies, program risks, demonstrations of the FCS concept and  software, and a new cost estimate and affordability assessment and to  submit a report of the findings and conclusions of the review to Congress.
Congressional defense committees have asked GAO on numerous  occasions to report and testify on FCS activities. This statement is based  on work which was conducted between March 2006 and March 2007 and  in accordance with generally accepted government auditing standards.
section_title: Status of FCS Business Case
paragraphs: In our March 2007 report, we found that despite the investment of $8  billion already made in the FCS program, it still has significantly less  knowledge—and less assurance of success—than required by best  practices or DOD policy. By early 2009, enough knowledge should be  available about the key elements of the FCS business case to make a well- informed decision on whether and how to proceed with the program. If  significant doubts remain regarding the program’s executability, DOD will  have to consider alternatives to proceeding with the program as planned.  Central to the go/no-go decision will be demonstrable soundness of the  FCS business case in the areas of requirements, technology, acquisition  strategy, and finances. Our specific findings in the areas of requirements,  technologies, acquisition strategy, and finances are summarized below.
subsections: section_title: Requirements Definition
paragraphs: The Army has made considerable progress in defining system-of-systems  level requirements and allocating those requirements to the individual FCS  systems. This progress has necessitated significant trade-offs to reconcile  requirements and technical feasibility. A key example of this has been the  decision to allow a significant increase in manned ground vehicle weight  to meet survivability requirements that in turn has forced trade-offs in  transportability requirements. The feasibility of FCS requirements still  depends on key assumptions about immature technologies, costs, and  other performance characteristics like the reliability of the network and  other systems. As current assumptions in these areas are replaced with  demonstrated performance, more trade-offs are likely. At this point, the  Army has identified about 70 high-level risks to be resolved to assure the  technical feasibility of requirements. A challenge for the Army in making  these trades—which are practical necessities—is determining the  cumulative effect of an individual decision on overall requirements. For  example, a decision to discontinue a munition technology could result in  less lethality, possibly less survivability if our vehicles have to shoot more  than once to defeat an enemy, and less responsiveness due to the weight  added by carrying more ammunition and fuel.
As it proceeds to the preliminary design review and the subsequent go/no- go milestone, the Army faces considerable challenges in completing the  definition of technically achievable and affordable system-level  requirements, an essential element of a sound business case. The Army  will have to complete definition of all system-level requirements and the  network as well as the preliminary designs for all systems and subsystems.  By the time of the review, it should be able to demonstrate that the FCS  will satisfy key performance parameters and the Army’s user community  with a program that is as good as or better than what is available with  current forces. To do this, the Army will have to mitigate FCS technical  risks to significantly lower levels and make demonstrable progress toward  meeting key FCS goals including weight reduction, reliability  improvement, and average unit production cost reduction.
section_title: Maturity of Technology
paragraphs: The Army has made progress in the areas of critical technologies,  complementary programs, and software development, but it will take  several more years to reach the level of maturity needed in 2003. Program  officials report that the number of critical technologies they consider as  mature has doubled in the past year. While this is good progress by any  measure, FCS technologies are far less mature at this point in the program  than they should be, and they still have a long way to go to reach full  maturity. The Army only sees the need to reach a technology readiness  level that requires demonstration of capabilities in a relevant environment  by 2011. This does not assure that these capabilities will actually perform  as needed in a realistic environment, as required by best practices for a  sound business case. We also note that last year, technology maturity  levels had been the result of an independent assessment, while the current  levels have been determined by the FCS program office. The Army has  made some difficult decisions to improve the acquisition strategies for  some key complementary programs, such as Joint Tactical Radio System  and Warfighter Information Network-Tactical, but they still face significant  technological and funding hurdles. Finally, the Army and the LSI are  attempting to utilize many software-development best practices and have  delivered the initial increments of software on schedule. On the other  hand, most of the software development effort lies ahead, and the amount  of software code to be written—already an unprecedented undertaking— continues to grow as the demands of the FCS design becomes better  understood. The Army and the LSI have recognized several high-risk  aspects of that effort and mitigation efforts are underway.
As it approaches the preliminary design review and the subsequent go/no- go milestone review, the Army should have made additional progress in  developing technologies and software as well as aligning the development  of complementary programs with the FCS. The Army faces many  challenges, such as demonstrating that critical technologies are mature  and having this maturity independently validated. The Army will need to  mitigate the recognized technical risks and integrate the technologies with  other systems. It will also need to address cost, schedule, and performance  risks related to software and mitigate those risks to acceptable levels.  Finally, the Army must settle on the set of complementary programs that  are essential for FCS success, ensure adequate funding for these systems,  and align their schedules with the FCS schedule.
section_title: Knowledge-Based Acquisition Strategy
paragraphs: The FCS acquisition strategy and testing schedule has become more  complex as plans have been made to spin out capabilities to current Army  forces. The strategy acquires knowledge later than called for by best  practices and DOD policy, although the elongated schedule of about   10 years provides a more realistic assessment of when capabilities can be  delivered. Knowledge deficits for requirements and technologies have  created enormous challenges for devising an acquisition strategy that can  demonstrate the maturity of design and production processes. Even if  setting requirements and maturing technologies proceed without incident,  FCS design and production maturity are not likely to be demonstrated  until after the production decision is made. The critical design review will  be held much later on FCS than other programs, and the Army will not be  building production-representative prototypes to test before production.  The first major test of the network and FCS together with a majority of  prototypes will not take place until 2012. Much of the testing up to the  2013 production decision will involve simulations, technology  demonstrations, experiments, and single-system testing. Only after that  point, however, will substantial testing of the complete brigade combat  team and the FCS concept of operations occur. However, production is the  most expensive phase in which to resolve design or other problems found  during testing. Spin-outs, which are intended to accelerate delivery of FCS  capabilities to the current force, also complicate the acquisition strategy  by absorbing considerable testing resources.
As the Army proceeds to the preliminary design review in 2009, it faces a  number of key challenges in the remaining portions of the acquisition  strategy. It must complete requirements definition and technology  maturity. The spin-out capabilities must be demonstrated before  committing to production. System integration must be completed and the  Army should be preparing to have released at least 90 percent of the  engineering drawings by the time of the critical design review, a best  practice. Finally, the program schedule must allocate sufficient time, as  needed, to test, fix and retest throughout the FCS test program. Each FCS  system, the information network, and the FCS concept should be  thoroughly tested and demonstrated before committing to low rate initial  production in 2013.
section_title: Program Costs and Funding
paragraphs: In 2006, we reported that FCS program acquisition costs had increased to  $160.7 billion—76 percent—since the Army’s original estimate of   $91.4 billion (figures adjusted for inflation). While the Army’s current  estimate of $163.7 billion is essentially the same, an independent estimate  from the Office of the Secretary of Defense puts the acquisition cost of  FCS between $203 billion and $234 billion. The comparatively low level of  technology and design knowledge at this point in the program portends  future cost increases. Our work on a broad base of DOD weapon system  programs shows that most developmental cost increases occur after the  critical design review, which will be in 2011 for the FCS. Yet, by that point  in time, the Army will have spent about 80 percent of the FCS’s  development funds. Further, the Army has not yet fully estimated the cost  of essential complementary programs and the procurement of spin-out  items to the current force. The Army is cognizant of these resource  tensions and has adopted measures in an attempt to control FCS costs.  However, some of these measures do involve reducing program scope in  the form of lower requirements and capabilities, which will have to be  reassessed against the user’s demands. Symptomatic of the continuing  resource tension, the Army recently announced that it was restructuring  several aspects of the FCS program, including reducing the scope of the  program and its planned annual production rates to lower annual funding  demands.
I do want to point out the significance of the financial commitments the  Army will make in the next few years. The fiscal year 2008 request  includes $99.6 million in FCS procurement funds. Those funds are to  procure long lead items for production of (1) non-line-of-sight cannon and  other manned ground vehicles, and (2) the initial set of FCS spin-out kits.  The fiscal year 2008 request will also fund plant facilitization to support  FCS production beginning in fiscal year 2009. Procurement funds rise  quickly thereafter, growing from $328.6 million to $1.27 billion to   $6.8 billion in fiscal years 2009, 2011, and 2013, respectively.
By the time of the preliminary design review and the congressionally  mandated go/no-go milestone in 2009, the Army should have more of the  knowledge needed to build a better cost estimate for the FCS program.  The Army should also have more clarity about the level of funding that  may be available to it within the long-term budget projections to fully  develop and procure the FCS program of record. Also, by that time, the  Army will need to have developed an official Army cost position that  reconciles the gap between the Army’s estimates and the independent cost  estimate. In the cost estimate, the Army should clearly establish if it  includes the complete set and quantities of FCS equipment needed to meet  established requirements. Based on this estimate, the Army must ensure  that adequate funding exists in its current budget and future years to fully  fund the FCS program of record including the development of the  complementary systems deemed necessary for the FCS as well as to  procure the FCS capabilities planned to be spun out to the current forces.
section_title: Actions Recommended in Our March 2007 Report
paragraphs: In our March 2007 report, we noted that it was important that specific  criteria—as quantifiable as possible and consistent with best practices— be established now to evaluate the sufficiency of program knowledge. We  recommended specific criteria that should be included in the Secretary of  Defense’s evaluation of the FCS program as part of the go/no-go decision  following the preliminary design review in 2009. DOD agreed with this  recommendation and noted that the decision will be informed by a number  of critical assessments and analyses, but was unspecific as to criteria. We  agree that while it is necessary that good information—such as that  included in DOD’s response—be presented at the decision, it is also  necessary that quantitative criteria that reflect best practices be used to  evaluate the information.
We also noted that in view of the great technical challenges facing the  program, the possibility that FCS may not deliver the right capability must  be acknowledged and anticipated. We therefore recommended that the  Secretary of Defense analyze alternative courses of action DOD can take  to provide the Army with sufficient capabilities, should the FCS be judged  as unlikely to deliver needed capabilities in reasonable time frames and  within expected funding levels. DOD agreed with this recommendation as  well, citing it would rely on ongoing analyses of alternatives. We believe  that it is important to keep in mind that it is not necessary to find a rival  solution to FCS, but rather the next best solution should the program be  judged unable to deliver needed capabilities.
section_title: FCS Program Recently Restructured
paragraphs: The Army recently made a number of key changes to FCS to keep program  costs within available funding levels. Core program development and  production costs were reduced by deleting or deferring four of the original  systems, but these savings were offset by adding funding for spin-outs and  ammunition, which had previously not been funded. The program’s cost  estimate reflecting the adjustment is now $161.2 billion, a slight decrease  from $163.7 billion that we previously reported. Highlights include:    Four systems deleted or deferred: the Class II and III unmanned aerial  vehicles, the intelligent munitions system, and the armed robotic  vehicle. The munitions system will continue outside of FCS, while the  robotic vehicle will continue in the science and technology  environment.
Quantity changes: Class I unmanned aerial vehicle quantities will be cut  in half. Quantities of non-line-of-sight launch systems and precision  attack missiles were also reduced. The Army will buy eight additional  Class IV unmanned aerial vehicles for each brigade combat team.
Production rate reduction: Annual FCS production will be reduced  from 1.5 to 1 brigade combat team. This change will extend FCS  production by about 5 years to 2030.
Consolidation of spin-outs: Spin-outs will be reduced from four to three  and the content of the spin-outs have changed. The Army has now  funded procurement of the spin-outs that had previously been  unfunded.
Schedule extension: Initial FCS production has been delayed 5 months  to February 2013 and initial and full operational capabilities dates have  been delayed 6 months to June 2015 and June 2017, respectively.
According to Army officials, the Army’s initial assessment found little  difference between 14 and 18 systems on the capabilities of the FCS  brigade combat team. When the program was approved in 2003, it also had  14 systems. In 2004, when it was restructured, 4 systems were added back  in, bringing the total to 18, plus the network. It is not clear how the overall  performance of the system can be insensitive to the changes in the  composition of the FCS systems. Similarly, we do not yet have an  understanding on why FCS production costs have not increased because  of the lower production rates and consequent additional years of  production. Generally, slowing down the production rate increases costs  as the fixed costs of production facilities must be incurred for more years.
section_title: FCS Business Arrangements
paragraphs: To achieve the Army’s goals for the FCS program, in 2003 the Army  decided to employ a lead systems integrator (LSI) to assist in defining,  developing, and integrating FCS. In the past few years, DOD and other  agencies have applied the LSI concept in a variety of ways. In the case of  the FCS program, the LSI shares program management responsibilities  with the Army, including defining the FCS solution (refining  requirements), selecting and managing subcontractors, and managing  testing. Evaluating the use of the LSI on FCS involves consideration of  several intertwined factors, which collectively make the LSI arrangement  in the FCS context unique. Some, like the best efforts nature of a cost  reimbursable research and development contract, are not unique to the  LSI or to FCS. Other factors differ not so much in nature, but in degree  from other programs. For example, FCS is not the first system-of-systems  program DOD has proposed, but it is arguably the most complex. FCS is  not the first program to proceed with immature technologies, but it has  more immature technologies than other programs. FCS is not the first  program to employ an LSI, but the extent of the partner-like relationship  between the Army and the LSI breaks new ground.
subsections: section_title: Army Use of an LSI Framed by Scope of Program and Workforce Limitations
paragraphs: The Army’s decision to employ a lead systems integrator for the FCS  program was framed by two factors: (1) the ambitious goals of the FCS  program and (2) the Army’s capacity to manage it. As envisioned in 2003  when the program started, FCS presented a daunting technical and  management challenge: the concurrent development of multiple weapon  systems whose capabilities would be dependent on an information  network also to be developed. All of this was to take place in about   5½ years—much faster than a single weapon system typically takes. Army  leaders believed the Army did not have the workforce or flexibility to  manage development of FCS on its own within desired timelines. The  Army saw its limitations in meeting this challenge as (1) cultural: difficulty  in crossing traditional organizational lines; (2) capability: shortage of skills  in key areas, such as managing the development of a large information  network; and (3) capacity: insufficient resources to staff, manage, and  synchronize several separate programs. In addition to the complexity and  workforce implications of FCS, the Army saw an opportunity with an LSI  to create more incentives for a contractor to give its best effort in  development and to create more competition at lower supplier levels.  Thus, they employed a contractor—a lead systems integrator–with  significant program management responsibilities to help it define and  develop FCS and reach across traditional Army mission areas. In May  2003, the Army hired the Boeing Corporation to serve as the LSI for the  FCS system development and demonstration phase. Boeing subcontracted  with Science Applications International Corporation, another defense  contractor, to assist in performing the LSI functions.
section_title: Close Working Relationship Increases the Burden of Oversight
paragraphs: The relationship between the Army and the LSI is complicated. On the one  hand, the LSI plays the traditional role of developing a product for its  customer, the Army, and on the other hand the LSI acts like a partner to  the Army in ensuring the design, development, and prototype  implementation of the FCS network and family of systems. In forging a  partner-like relationship with the LSI, the Army sought to gain managerial  advantages such as maintaining flexibility to deal with shifting priorities. A  partner-like relationship also poses long-term risks for the government.  Depending on the closeness of the working relationship, the government’s  ability to provide oversight can be reduced compared with an arms-length  relationship; more specifically, the government can become increasingly  vested in the results of shared decisions and runs the risk of being less  able to provide oversight compared with an arms-length relationship,  especially when the government is disadvantaged in terms of workforce  and skills. In the case of FCS, these risks are present. The Army is more  involved in the selection of subcontractors than we have seen on other  programs, involvement that can, over time, make the Army somewhat  responsible for the LSI’s subcontracting network. On the other hand, the  LSI is more involved with influencing the requirements, defining the  solution, and testing that solution than we have seen on other programs.  This is not to say that the level of involvement or collaboration between  the Army and the LSI is inherently improper, but that it may have  unintended consequences over the long term.
OSD is in a position to provide this oversight, but thus far has largely  accepted the program and its changes as defined by the Army, even when  they are at wide variance from the best practices embodied in OSD’s own  acquisition policies. In 2003, OSD approved the FCS for system  development and demonstration prematurely despite the program’s  combination of immature technologies and short schedule and then  declined to follow through on plans to make a better informed decision   18 months later. OSD has allowed the Army to use its cost estimates rather  than OSD’s own independent—and significantly higher—cost estimates  and has agreed with the Army’s determination that the bulk of cost  increases since 2003 are the result of scope changes and thus do not  trigger congressional reporting requirements. In the fiscal year 2007  National Defense Authorization Act, Congress mandated that DOD hold a  formal go/no-go decision meeting on the FCS in 2009. DOD has since  proposed a serious approach to making that decision, a step that is  encouraging from an oversight perspective.
section_title: Contract Provides Incentives for Best Effort but Cannot Assure Success
paragraphs: The Army has structured the FCS contract consistent with its desire to  incentivize development efforts and make it financially rewarding for the  LSI to make such efforts. In that regard, the FCS contract pays well.  According to an independent estimate from the Office of the Secretary of  Defense, the fee payable to the LSI is relatively high based on the value of  work it actually performs, and its average employee assigned to the  program costs more than a federal executive. The business arrangement  between the Army and LSI has been converted from an other transaction  agreement to a Federal Acquisition Regulation-based contract. Yet, there  remain substantive risks on whether the contract can result in a successful  program outcome. As with many cost-reimbursable research and  development contracts, the contractor is responsible for putting forth its  best effort to ensure a successful FCS. However, if that system fails to  meet expectations or requirements despite that effort, the LSI is not  responsible.
The Army provides incentive payments through nine program events  called out in the current contract, for which the LSI must demonstrate  progress in setting up and implementing various program processes. By  the time the FCS critical design review is completed in 2011, the Army will  have paid out over 80 percent of the costs of the LSI contract and the LSI  will have had the opportunity to earn more than 80 percent of its total fee.  While the Army rationally notes that it is important to use fees to  encourage good performance early, the experiences of previous weapon  systems shows that most cost growth occurs after the critical design  review. Key demonstrations of the actual capabilities of FCS systems will  take place after this point. The Army shares responsibility with the LSI for  making key decisions and to some extent the Army’s performance affects  the performance of the LSI. For example, some of the technologies critical  to the FCS are being developed by the Army, not the LSI. If the  technologies do not perform as planned, the LSI may not be responsible  for the consequent trade-offs in performance. Furthermore, the Army is  responsible for all program changes and therefore can adjust its  expectations of the LSI according to those changes and the LSI may still  earn its full fee.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions you or members of the subcommittee may have.
section_title: Contacts & Staff Acknowledgments
paragraphs: For future questions about this statement, please contact me at   (202) 512-4841 or francisp@gao.gov. Individuals making key contributions  to this statement include William R. Graveline, William C. Allbritton, Noah  B. Bleicher, Lily J. Chin, Brendan S. Culley, Marcus C. Ferguson, Michael  D. O’Neill, Kenneth E. Patton, Thomas P. Twambly, Adam Vodraska, and  Carrie R. Wilson.
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