Coast Guard: Preliminary Observations on Deepwater Program Assets and Management Challenges
Published: 2007-02-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Coast Guard's Deepwater program was designed to upgrade or replace its aging legacy aircraft and vessels with assets focusing on the Coast Guard's traditional at-sea roles. After the September 11, 2001 terrorist attacks, the Coast Guard took on additional security missions, resulting in revisions to the Deepwater plan. GAO's prior work raised concerns about Coast Guard's efforts to upgrade or acquire assets on schedule, and manage and effectively monitor the system integrator. This testimony provides GAO's preliminary observations on (1) events and issues surrounding the Coast Guard's bridging strategy to convert the legacy 110-foot patrol boats to 123-foot patrol boats; (2) the status of the Coast Guard's efforts to acquire new or upgraded Deepwater assets; and (3) the Coast Guard's ability to effectively manage the Deepwater program, hold contractors accountable, and control costs through competition. GAO's preliminary observations are based on audit work performed from August 2006 to February 2007.
section_title: What GAO Found
paragraphs: Numerous events since January 2001 led up to the failure of the Coast Guard's bridging strategy to convert its legacy 110-foot patrol boats into 123-foot patrol boats. These converted boats were removed from service on November 30, 2006 because of operational and safety concerns. According to the Coast Guard Commandant, actions are being taken to mitigate the impact of the removal of these patrol boats on mission activities. For example, patrol hours of some 110-foot patrol boats have been increased through the addition of crews from the 123-foot patrol boats, and other Coast Guard vessels have been deployed to assist in carrying out missions. The delivery record for the 10 classes of upgraded or new Deepwater aircraft and vessels is mixed. Specifically, 7 of the 10 asset classes are on or ahead of schedule. Among these, 5 first-in-class assets have been delivered on or ahead of schedule; 2 others remain on time but their planned delivery dates are in 2009 or beyond; therefore, delays could still potentially occur. Three Deepwater asset classes are currently behind schedule due to various problems related to designs, technology, or funding. For example, the Fast Response Cutter (a new vessel), which had been scheduled for first-in-class delivery in 2007, has been delayed by at least 2 years in part because work on its design was suspended until technical problems can be addressed. From the program's outset, GAO has raised concerns about the risks involved with the Coast Guard's acquisition strategy. In 2004, GAO reported that program management, contractor accountability, and cost control were all challenges, and made recommendations in these areas. Insufficient staffing, ineffective performance measures, and the Coast Guard's lack of knowledge about the extent to which the contractor was using competition have contributed to program risk. The Coast Guard has taken some actions to address these issues. GAO plans to continue to assess the Coast Guard's Deepwater program, including its efforts to address GAO recommendations, and will report the findings later this year.

section_title: Letter
paragraphs: I appreciate the opportunity to participate in today’s hearing to discuss our  preliminary observations on the status of the United States Coast Guard’s  Integrated Deepwater System program. These observations are based  upon our ongoing analysis for this Committee and the Senate  Appropriations Committee, and we plan to provide a more complete  analysis when we issue our report later this year.
Deepwater is a 25-year, $24-billion effort to upgrade or replace existing  Coast Guard aircraft and vessels in order to carry out its missions along  our coastlines and farther out at sea. An initial emphasis of the Deepwater  program was to improve existing assets, known as “legacy” assets, as a  bridging strategy until new assets could be delivered and begin operating.  One of the key legacy assets to be improved was the 110-foot patrol boat,  which was to be converted to a 123-foot patrol boat by lengthening the hull  and modernizing various components. While the Coast Guard originally  planned to convert all 49 of its 110-foot patrol boats to 123-foot patrol  boats, it halted the patrol boat conversion program after 8 boats because  of hull buckling and the inability of these converted patrol boats to meet  post-September 11, 2001 mission requirements.
The Deepwater program is eventually to include 10 major classes of new  or upgraded assets—5 major classes each of aircraft and vessels. By 2027,  under these 10 asset classes, a total of 215 vessels and 240 aircraft are to  be acquired or upgraded. To carry out this effort, the Coast Guard has  relied on an acquisition strategy that allows a prime contractor (system  integrator) to manage the acquisition process, including identifying the  assets needed, and then using tiers of subcontractors to design and build  the assets.
Since 2001, we have reviewed the Deepwater program and have informed  Congress, the Department of Homeland Security (DHS), and the Coast  Guard of the problems, risks, and uncertainties inherent with such a large  acquisition. In March 2004, we made recommendations to the Coast Guard  to address three broad areas of concern: improving program management,  strengthening contractor accountability, and promoting cost control  through greater competition among potential subcontractors.  In April  2006, we issued a follow-on report describing efforts the Coast Guard had  taken to address the outstanding recommendations.
This statement offers preliminary observations on the Coast Guard’s  management of the Deepwater program. Specifically, it discusses:    events and issues surrounding the problems encountered with the  Coast Guard’s bridging strategy to convert the legacy 110-foot patrol  boats to 123-foot patrol boats;  the status of the Coast Guard’s efforts to acquire new or upgraded  Deepwater assets; and    the Coast Guard’s ability to effectively manage the Deepwater program,    hold contractors accountable, and control costs through competition.
The preliminary findings and observations noted in this testimony are  based on our review of key documents, including the 2005 Deepwater  Acquisition Program Baseline; schedule information provided by the Coast  Guard; Coast Guard memoranda regarding the 123-foot patrol boat  conversion; and Coast Guard’s human capital plan, its award fee and  award term documentation, and its competition monitoring plan. We  conducted interviews with Coast Guard officials at agency headquarters in  Washington, D.C.; officials in Coast Guard’s System Integration Program  Office in Arlington, VA; and Coast Guard contractor staff. In addition, we  interviewed Coast Guard officials during visits to the Pacific and Atlantic  Area Commands and their associated Maintenance and Logistics  Commands and at the Coast Guard’s Aircraft Repair and Supply Center.   Our work was conducted from August 2006 to February 2007 in  accordance with generally accepted government auditing standards.  Appendix I contains a list of related GAO products.
subsections: section_title: Background
paragraphs: The Coast Guard is the lead federal agency for maritime security within  DHS. The Coast Guard is responsible for a variety of missions, including  ensuring ports, waterways, and coastline security; conducting search and  rescue missions; interdicting illicit drug shipments and illegal aliens; and   enforcing fisheries laws.  In 1996, in order to continue carrying out its  responsibilities and operations, the Coast Guard initiated the Deepwater  program to replace or upgrade its aging vessels, aircraft, and other  essential equipment.
As originally conceived, Deepwater was designed around producing  aircraft and vessels that would function in the Coast Guard’s traditional at- sea roles—such as interdicting illicit drug shipments or rescuing mariners  from difficulty at sea—and the original 2002 Deepwater program was  focused on those traditional missions. After the terrorist attacks on  September 11, 2001, the Coast Guard was also assigned homeland security  missions related to protection of ports, waterways, and coastal areas.  Based on its revised mission responsibilities, the Coast Guard updated its  Deepwater Acquisition Program Baseline in November 2005.  The new  baseline contained changes in the balance between new assets to be  acquired and legacy assets to be upgraded and adjusted the delivery  schedule and costs for many of these assets.  Overall, the Deepwater  acquisition schedule was lengthened by 5 years, with the final assets now  scheduled for delivery in 2027.
Upon its completion, the Deepwater program is to consist of 5 new classes  of vessels, 1 new class of fixed-wing aircraft, 1 new class of unmanned  aerial vehicles, 2 classes of upgraded helicopters, and 1 class of upgraded  fixed-wing aircraft. The 215 new vessels consist of five new asset  classes—the National Security Cutter (NSC), Offshore Patrol Cutter  (OPC), Fast Response Cutter (FRC), Long-Range Interceptor (LRI), and  Short-Range Prosecutor (SRP). The 240 aircraft are composed of two new  aircraft classes, the Vertical Unmanned Aerial Vehicle (VUAV) and the  Maritime Patrol Aircraft (MPA); and three upgraded asset classes—the  Long-Range Surveillance Aircraft (LRS), Medium-Range Recovery  Helicopter (MRR), and the Multi-Mission Cutter Helicopter (MCH).
Table 1 provides an overview, by asset class, of the Deepwater vessels to  be acquired and table 2 provides an overview of the Deepwater aircraft to  be acquired or upgraded. As noted in Table 1, the 140-foot FRC was  designated as a replacement vessel for the 110-foot and 123-foot patrol  boats.
Since 2001, we have reviewed the Deepwater program and have informed  Congress, DHS, and Coast Guard of the problems, risks, and uncertainties  inherent with such a large acquisition that relies on a system integrator to  identify the assets needed and then using tiers of subcontractors to design  and build the assets. In March 2004, we made recommendations to the  Coast Guard to address three broad areas of concern: improving program  management, strengthening contractor accountability, and promoting cost  control through greater competition among potential subcontractors (see  table 3).  We have issued a number of follow-on reports describing efforts  the Coast Guard has taken to address these recommendations. (See app. I  for a list of related GAO products.)
section_title: Coast Guard Removed 123-foot Patrol Boats from Service for Operational and Safety Reasons, and is Acting to Mitigate Operational Impacts
paragraphs: Between January 2001 and November 2006, numerous events led up to the  failure of the Coast Guard’s bridging strategy to convert the legacy   110-foot patrol boats into 123-foot patrol boats. In January 2001, an  independent study found that the 110-foot patrol boats based in south  Florida and Puerto Rico were experiencing severe hull corrosion and that  their structural integrity was deteriorating rapidly. To address these  issues, the Coast Guard’s original (2002) Deepwater plan included a  strategy to convert all 49 of the 110-foot patrol boats into 123-foot patrol  boats to strengthen the hulls.  Also, the plan was to provide additional  capabilities, such as stern launch and recovery capabilities and enhanced  and improved command, control, communications, computers,  intelligence, surveillance, and reconnaissance (C4ISR). While Coast Guard  originally planned to convert all 49 of its 110-foot patrol boats to 123-foot  patrol boats, it halted the patrol boat conversion program after 8 boats  because of continued hull buckling and the inability of these converted  patrol boats to meet post-September 11, 2001 mission requirements. These  8 converted boats were removed from service on November 30, 2006  because of operational and safety concerns.
The first patrol boat conversion was completed in March 2004, on the  Matagorda. Between March 2004 and late August 2004, the Matagorda  underwent additional maintenance that was not included in the contract to  convert it to 123 feet, according to Coast Guard officials. On September 10,  2004, while en route to its home port in Key West, the Matagorda  experienced hull and deck buckling, while transiting the Gulf of Mexico.
By March 2005, 2 other converted 123-foot patrol boats, the Nunivak and  the Padre, also began experiencing problems with hull buckling. That  same month, similar hull deformations were discovered in 3 other 123-foot  patrol boats—the Metompkin, Vashon, and Monhegan. As a result of the  deteriorating hull conditions, Coast Guard imposed operational  restrictions in April 2005 on the 123-foot patrol boats. These restrictions  specified that the converted patrol boats could not operate in seas with  wave heights exceeding 8 feet (they were originally intended to operate in  seas up to roughly 13 feet) and that they had to operate at reduced speeds.  Figure 1 provides a timeline of key events that led to the eventual removal  from service of the 123-foot patrol boats.
The Coast Guard is taking actions to mitigate the operational impacts  resulting from the removal of the 123-foot patrol boats from service.  Specifically, in recent testimony, the Commandant of the Coast Guard  stated that Coast Guard has taken the following actions:     multi-crewing certain 110-foot patrol boats with crews from the   123-foot patrol boats that have been removed from service so that  patrol hours for these vessels can be increased;    deploying other Coast Guard vessels to assist in missions formerly  performed by the 123-foot patrol boats; and    securing permission from the U.S. Navy to continue using 179-foot  cutters on loan from the Navy for an additional 5 years (these were  originally to be returned to the Navy in 2008) to supplement the Coast  Guard’s patrol craft.
We will continue to review the actions the Coast Guard is taking to  mitigate the removal from service of the 123-foot patrol boats as part of  our ongoing work.
section_title: Deepwater Asset Delivery Schedule is Mixed, with 7 of 10 on or Ahead of Schedule and 3 Behind Due to Various Factors
paragraphs: Our review of available data show that as of January 2007, of the 10  classes of Deepwater assets to be acquired or upgraded, 4 are ahead of  schedule; 3 remain on schedule (and for 1 of these, design problems have  arisen); and 3 are behind scheduled delivery and face design, funding, or  technology challenges. Using the 2005 Deepwater Acquisition Program  Baseline as the baseline, figure 2 indicates, for each asset class, whether  delivery of the first-in-class (that is, the first of several to be produced in  its class) is ahead of schedule, on schedule, or behind schedule, as of  January 2007.
Among the Deepwater assets, 3 of the 5 aircraft classes are upgrades to  existing legacy systems, and these are all on or ahead of schedule; 1 new  aircraft class is ahead of schedule; and the remaining new aircraft class is  6 years behind schedule. With respect to Deepwater vessels, all 5 asset  classes are new, and of these, 2 are behind schedule, and a third, while on  schedule, faces structural modifications. The remaining 2 new maritime  assets are small vessels that are on or ahead of schedule at this time. Table  4 provides an overview of schedule status for the Deepwater aircraft and  vessel classes.
subsections: section_title: Assets That Are on Schedule as of January 2007
paragraphs: The status of each asset class, and our preliminary observations on the  factors affecting their status, is discussed below.
subsections: section_title: Long-Range Interceptor
paragraphs: The LRI is a 36-foot small boat that is to be carried and deployed on each  NSC and OPC. Coast Guard has one LRI on contract for delivery in August  2007, to match delivery of the first NSC.
section_title: Short-Range Prosecutor
paragraphs: According to the Coast Guard, the SRP is on schedule at this time and 8  have been delivered to date. Coast Guard is currently planning to pursue  construction and delivery of the remaining SRPs outside of the system  integrator contract.  By doing so, the Coast Guard expects to achieve a  cost savings.
section_title: Maritime Patrol Aircraft
paragraphs: The MPA is a commercial aircraft produced in Spain that is being acquired  to replace the legacy HU-25 aircraft and will permit the Coast Guard to  carry out missions, such as search and rescue, marine environmental  protection, and maritime security. The first MPA was delivered to the  Coast Guard in December 2006, and the second and third are due for  delivery by April 2007. Pilots and aircrew participated in training classes in  Spain, and Coast Guard is to take responsibility for the development and  implementation of MPA’s maintenance and logistics.
section_title: Long-Range Surveillance Aircraft
paragraphs: The LRS is an upgraded legacy fixed-wing aircraft that includes 6 C-130Js  and 16 C-130Hs. The first aircraft entered the modification process in  January 2007, and five additional aircraft are to be modified by July 2008.  In fiscal year 2008, funding has been requested to upgrade the C-130H  radar and avionics, and for the C-130J fleet introduction.
section_title: Medium-Range Recovery Helicopter
paragraphs: The MRR is an upgraded legacy HH-60 helicopter. It began receiving a  series of upgrades beginning in fiscal year 2006, which will continue into  fiscal year 2012, including the service life extension program and radar  upgrades.
section_title: Multi-Mission Cutter Helicopter
paragraphs: The MCH is an upgraded legacy HH-65 helicopter. According to Coast  Guard officials, the MCH assets will not have a single delivery date, as the  process involves three phases of upgrades. Phase I is the purchase and  delivery of new engines and engine control systems, Phase II is a service- life extension program, and Phase III includes communications upgrades.  A Coast Guard official stated that 84 of the 95 HH-65s should be re-engined  by June 2007, and all 95 should be finished by October 2007. The fiscal  year 2008 congressional justification states that Phase II began in fiscal  year 2007 and will end in fiscal year 2014, and that Phase III is to begin in  fiscal year 2008 and is to end in fiscal year 2014.
section_title: Deepwater Asset Reported to Be on Schedule as of January 2007, Despite Design Issues
subsections: section_title: National Security Cutter
paragraphs: According to Coast Guard documentation, the NSC is on schedule for  delivery despite required modifications regarding its structural integrity. In  particular, the Coast Guard Commandant recently stated that internal  reviews by Coast Guard engineers, as well as by independent analysts,  have concluded that the NSC, as designed, will need structural  reinforcement to meet its expected 30-year service life. In addition, the  DHS Office of Inspector General recently reported that the NSC design  will not achieve a 30-year service life based on an operating profile of 230  days underway per year in general Atlantic and North Pacific sea  conditions and added that Coast Guard technical experts believe the  NSC’s design deficiencies will lead to increased maintenance costs and  reduced service life.
To address the structural modifications of the NSC, Coast Guard is taking  a two-pronged approach. First, Coast Guard is working with contractors to  enhance the structural integrity of the hulls of the remaining six NSCs that  have not yet been constructed. Second, after determining that the NSC’s  deficiencies are not related to the safe operation of the vessel in the near  term, Coast Guard has decided to address the structural modifications of  the hulls of the first two cutters as part of planned depot-level  maintenance about 5 years after they are delivered. The Commandant  stated that he decided to delay the repairs to these hulls to prevent further   delays in construction and delivery.
section_title: Deepwater Assets Behind Schedule as of January 2007
subsections: section_title: Offshore Patrol Cutter
paragraphs: Coast Guard officials have stated that further work on the development of  the OPC is on hold and the Coast Guard did not request funding for the  OPC in fiscal years 2007 or 2008.  Delivery of the first OPC has been  delayed by 5 years—from 2010 to 2015.
section_title: Fast Response Cutter
paragraphs: Concerns about the viability of the design of the FRC have delayed the  delivery of the first FRC by at least 2 years. As we have previously  reported, design and delivery of the original FRC was accelerated as a  bridging strategy to offset the failed conversion of the 110-foot patrol  boats into 123-foot patrol boats. According to the 2005 Deepwater  Acquisition Program Baseline, the first FRC was scheduled to be delivered  in 2007—11 years earlier than the 2018 date listed in the original (2002)  Deepwater plan. Coast Guard suspended design work on the FRC in late  February 2006; however, because of design risks, including excessive  weight and horsepower requirements. As a result, Coast Guard is moving  forward with a “dual-path approach” for acquiring new patrol boats to  replace its existing 110-foot and 123-foot patrol boats.
The first component of this dual path approach is to have the Deepwater  system integrator purchase a commercial (off-the-shelf) patrol boat design  that can be adapted for Coast Guard use. According to Coast Guard  officials, unlike the original plans, this FRC class is not expected to meet  all performance requirements originally specified, but is intended as a way  to field an FRC more quickly than would otherwise occur and that can,  therefore, serve as an interim replacement for the deteriorating fleet of   110-foot patrol boats. The Coast Guard Commandant recently stated that  the Coast Guard expects delivery of the commercial FRCs in the first half  of fiscal year 2010, about 2 years behind the estimated delivery date  specified in the 2005 Deepwater Acquisition Program Baseline.
The second component of the dual-path approach is to eventually acquire  another cutter—a redesigned FRC. However, due to continuing questions  about the feasibility of its planned composite hull, Coast Guard has now  further delayed a decision about its development or acquisition until it  receives results from two studies. First, the Coast Guard is conducting a  business case analysis comparing the use of composite versus steel hulls.  Second, the Coast Guard told us that DHS’s Science and Technology  Directorate will be conducting tests on composite hull technology, and  that it will wait to see the results of these tests before making a decision  on the redesigned FRC. Until recently, the Coast Guard anticipated  delivery of the redesigned FRC in 2009 or 2010. However, the decision to  not request funding for this redesigned FRC in fiscal year 2008, and to  await the results of both studies before moving forward, will likely further  delay delivery of the redesigned FRC.
section_title: Vertical Unmanned Aerial Vehicle
paragraphs: According to the Coast Guard, evolving technological developments and  the corresponding amount of funding provided in fiscal year 2006 have  delayed the delivery of the VUAV by 6 years—from 2007 to 2013.  As a  result, the Coast Guard has adjusted the VUAV development plan. The  fiscal year 2008 DHS congressional budget justification indicates that the  Coast Guard does not plan to request funding for the VUAV through fiscal  year 2012. Coast Guard originally intended on matching the NSC and  VUAV delivery dates so that the VUAV could be launched from the NSC to  provide surveillance capabilities beyond the cutter’s visual range or  sensors. However, with the delay in the VUAV’s development schedule, it  no longer aligns with the NSC’s initial deployment schedule. Specifically,  Coast Guard officials stated that the VUAV will not be integrated with the  NSC before fiscal year 2013, 6 years later than planned. Coast Guard  officials stated that they are discussing how to address the operational  impacts of having the NSC operate without the VUAV. In addition, Coast  Guard officials explained that since the time of the original contract  award, the Department of Defense has progressed in developing a  different unmanned aerial vehicle—the Fire Scout—that Coast Guard  officials say is more closely aligned with Coast Guard needs. Coast Guard  has issued a contract to an independent third party to compare the  capabilities of its planned VUAV to the Fire Scout.
section_title: Preliminary Observations on the Status of Deepwater Program Management, Contractor Accountability, and Cost Control
paragraphs: Since the inception of the Deepwater program, we have expressed  concerns about the risks involved with the Coast Guard’s system-of- systems acquisition approach and the Coast Guard’s ability to manage and  oversee the program.  Our concerns have centered on three main areas:   program management, contractor accountability, and cost control through  competition. We have made a number of recommendations to improve the  program—most of which the Coast Guard has agreed with and is working  to address.  However, while actions are under way, a project of this  magnitude will likely continue to experience other problems as more  becomes known.  We will continue our work focusing on the Coast  Guard’s efforts to address our recommendations and report on our  findings later this year.
subsections: section_title: Program Management
paragraphs: In 2004, we reported that the Coast Guard had not effectively implemented  key components needed to manage and oversee the system integrator.    Specifically, we reported at that time and subsequently on issues related to  integrated product teams (IPT), the Coast Guard’s human capital strategy,  and communication with field personnel (individuals responsible for  operating and maintaining the assets).  Our preliminary observations on  the Coast Guard’s progress in improving these program management  areas, based on our ongoing work, follow.
subsections: section_title: Integrated Product Teams
paragraphs: In 2004, we found that IPTs, the Coast Guard’s primary tool for managing  the Deepwater program and overseeing the contractor, had not been  effective due to changing membership, understaffing, insufficient training,  lack of authority for decision making, and inadequate communication. We  recommended the Coast Guard take actions to address IPT effectiveness.   We subsequently reported that IPT decision-making was to a large extent  stove-piped, and some teams lacked adequate authority to make decisions  within their realm of responsibility. Coast Guard officials believed  collaboration among the subcontractors was problematic and that the  system integrator wielded little influence to compel decisions among  them.  For example, proposed design changes to assets under construction  were submitted as two separate proposals from both subcontractors  rather than one coherent plan.  According to Coast Guard performance  monitors, this approach complicated the government review of design  changes because the two proposals often carried overlapping work items,  thereby forcing the Coast Guard to act as the system integrator in those  situations.  Although some efforts have been made to improve the  effectiveness of the IPTs—such as providing them with more timely  charters and entry-level training—our preliminary observations are that  more improvements are needed.
The Coast Guard’s ability to assess IPT performance continues to be  problematic.  Former assessments of IPT effectiveness simply focused on  measures such as frequency of meetings, attendance, and training.  As a  result, IPTs received positive assessments while the assets under their  realm of responsibility—such as the National Security Cutter—were  experiencing problems. The new team measurements include outcome- based metrics such as cost and schedule performance of assets (ships,  aircraft, and command, control, communications, computers, intelligence,  surveillance, and reconnaissance (C4ISR)). However, Deepwater’s overall  program management quarterly report shows that the connection between  IPT performance and program results continues to be misaligned.  For  example, the first quarterly report to incorporate the new measurements,  covering the period October to December 2006, indicates that the IPTs’  performance for all domains is “on-schedule or non-problematic” even  while some assets’ cost or schedule performance is rated “behind schedule  or problematic.”   Further, even though the Deepwater program is  addressing fundamental problems surrounding the 123-foot patrol boat  and FRC, IPTs no longer exist for these assets.  In some cases, Coast  Guard officials stated they have established work groups outside of the  existing IPT structure to address identified issues and problems related to  assets, such as the NSC. We will continue to review the IPTs’ roles and  relevance in the management of the Deepwater program.
section_title: Human Capital
paragraphs: We also reported in 2004 that the Coast Guard had not adequately staffed  its program management function for Deepwater.  Although its Deepwater  human capital plan set a goal of a 95 percent or higher “fill rate” annually  for both military and civilian personnel, funded positions were below this  goal.  We recommended that the Coast Guard follow the procedures in its  Deepwater human capital plan to ensure that adequate staffing was in  place and that turnover of Coast Guard military personnel was proactively  addressed.  The Coast Guard subsequently revised its Deepwater human  capital plan in February 2005 to emphasize workforce planning, including  determining needed knowledge, skills, and abilities and developing ways  to leverage institutional knowledge as staff rotate out of the program.  We  reported in 2005 that the Coast Guard also took some short-term steps to  improve Deepwater program staffing, such as hiring contractors to assist  with program support functions, shifting some positions from military to  civilian to mitigate turnover risk, and identifying hard-to-fill positions and  developing recruitment plans specifically for them.
However, in February 2007, Coast Guard officials told us that key human  capital management objectives outlined in the revised plan have not been  accomplished and that the staffing levels needed to accomplish the known  workload have not been achieved.  In one example, a manager cited the  need for five additional staff per asset under his domain to satisfy the  current workload in a timely manner: contracting officer’s technical  representative, scheduler, cost estimator, analyst, and configuration  manager. Further, a February 2007 independent analysis found that the  Coast Guard does not possess a sufficient number of acquisition personnel  or the right level of experience needed to manage the Deepwater  program.  The Coast Guard has identified an acquisition structure re- organization that includes human capital as one component of the reform.   We will continue to monitor the implementation of the reorganization as  part of our ongoing work.
section_title: Communications with Field Personnel
paragraphs: In 2004, we found that the Coast Guard had not adequately communicated  to field personnel decisions on how the new and old assets were to be  integrated during the transition and whether Coast Guard or system  integrator personnel—or both—would be responsible for maintenance.  We recommended that the Coast Guard provide timely information and  training on the transition to Deepwater assets.  In 2006, we reported that  the Coast Guard had taken some steps to improve communications  between Deepwater program and field personnel, including having field  personnel as members on some IPTs. However, we continued to express  concerns that field personnel were not receiving important information  regarding training, maintenance, and integration of new Deepwater assets.
During our ongoing work, the field personnel involved in operating and  maintaining the assets and Deepwater program staff we interviewed  expressed continued concern that maintenance and logistics plans had not  been finalized.  Another official commented that there continues to be a  lack of clarity defining roles and responsibilities between the Coast Guard  and system integrator for maintenance and logistics.  Coast Guard officials  stated in fall 2006 that the system integrator was contractually responsible  for developing key documents related to plans for the maintenance and  logistics for the NSC and Maritime Patrol Aircraft.  However, Deepwater  program officials stated that because the Coast Guard was not satisfied  with the level of detail provided in early drafts of these plans, it was  simultaneously developing “interim” plans that it could rely on while the  system integrator continued to develop its own versions.  While the Coast  Guard’s more active role may help its ability to ensure adequate support  for Deepwater assets that are coming on-line in the near term, our on- going work will continue to focus on this issue.
section_title: Concerns Remain with Holding System Integrator Accountable
paragraphs: Our 2004 review revealed that the Coast Guard had not developed  quantifiable metrics to hold the system integrator accountable for its  ongoing performance.  For example, the process by which the Coast  Guard assessed performance to make the award fee determination after  the first year of the contract lacked rigor.  At that time, we also found that  the Coast Guard had not yet begun to measure contractor performance  against Deepwater program goals—the information it would need by June  2006 to decide whether to extend the system integrator’s contract award  term by up to another 5 years.  Additionally, we noted that the Coast  Guard needed to establish a solid baseline against which to measure  progress in lowering total ownership cost—one of the three overarching  goals of the Deepwater program. Furthermore, the Coast Guard had not  developed criteria for potential adjustments to the baseline.  Preliminary  observations from our ongoing work on the Coast Guard’s efforts to  improve system integrator accountability follow.
subsections: section_title: Award Fee Criteria
paragraphs: In 2004 we found the first annual award fee determination was based  largely on unsupported calculations.  Despite documented problems in  schedule, performance, cost control, and contract administration  throughout the first year, the program executive officer awarded the  contractor an overall rating of 87 percent, which fell in the “very good”  range as reported by the Coast Guard award fee determining official.  This  rating resulted in an award fee of $4 million of the maximum $4.6 million.   The Coast Guard continued to report design, cost, schedule, and delivery  problems, and evaluation of the system integrator’s performance  continued to result in award fees that ranged from 87 percent to 92  percent of the total possible award fee (with 92 percent falling into the  “excellent” range), or $3.5 to $4.8 million annually, for a total of over $16  million the first 4 years on the contract.  The Coast Guard continues to  revise the award fee criteria under which it assesses the system  integrator’s performance.
The current award fee criteria demonstrate the Coast Guard’s effort to use  both objective and subjective measures and to move toward clarity and  specificity with the criteria being used.  For example, the criteria include  24 specific milestone activities and dates to which the system integrator  will be held accountable for schedule management.  However, we recently  observed two changes to the criteria that could affect the Coast Guard’s  ability to hold the contractor accountable.  First, the current award fee  criteria no longer contain measures that specifically address IPTs, despite  a recommendation we made in 2004 that the Coast Guard hold the system  integrator accountable for IPT effectiveness.  The Coast Guard had agreed  with this recommendation and, as we reported in 2005, it had incorporated  award fee metrics tied to the system integrator’s management of  Deepwater, including administration, management commitment,  collaboration, training, and empowerment of the IPTs.  Second, a new  criterion to assess both schedule and cost management states that the  Coast Guard will not take into account milestone or cost impacts  determined by the government to be factors beyond the system  integrator’s control.  However, a Coast Guard official stated that there are  no formal written guidelines that define what factors are to be considered  as being beyond the system integrator’s control, what process the Coast  Guard is going to use to make this determination, or who is ultimately  responsible for making those determinations.
section_title: Award Term Evaluation
paragraphs: The Deepwater program management plan included three overarching  goals of the Deepwater program:  increased operational effectiveness,  lower total ownership cost, and customer satisfaction to be used for  determining whether to extend the contract period of performance, known  as the award term decision.  We reported in 2004 that the Coast Guard had  not begun to measure the system integrator’s performance in these three  areas, even though the information was essential to determining whether  to extend the contract after the first 5 years.  We also reported that the  models the Coast Guard was using to measure operational performance  lacked the fidelity to capture whether improvements may be due to Coast  Guard or contractor actions, and program officials noted the difficulty of  holding the contractor accountable for operational effectiveness before  Deepwater assets are delivered.  We made a recommendation to Coast  Guard to address these issues.
According to a Coast Guard official, the Coast Guard evaluated the  contractor subjectively for the first award term period in May 2006, using  operational effectiveness, total ownership costs, and customer satisfaction  as the criteria.  The result was a new award term period of 43 of a possible  60 months.  To measure the system’s operational effectiveness, the Coast  Guard has developed models to simulate the effect of the Deepwater  assets’ capabilities on its ability to meet its missions and to measure the  “presence” of those assets.  However, in its assessment of the contractor,  the Coast Guard assumed full operational capability of assets and  communications and did not account for actual asset operating data.   Furthermore, the models still lacked the fidelity to capture whether  operational improvements are attributable to Coast Guard or contractor  actions.  As a result the contractor received credit for factors beyond its  control—although no formal process existed for approving such factors.   Total ownership cost was difficult to measure, thus the contractor was  given a neutral score, according to Coast Guard officials.  Finally, the  contractor was rated “marginal” in customer satisfaction.
The Coast Guard has modified the award term evaluation criteria to be  used to determine whether to grant a further contract extension after the  43-month period ends in January 2011. The new criteria incorporate more  objective measures.
While the three overall Deepwater program objectives (operational  effectiveness, total ownership costs, and customer satisfaction)  carried a weight of 100 percent under the first award term decision,  they will represent only about a third of the total weight for the second  award term decision.  The criteria include items such as new  operational effectiveness measures that will include an evaluation of  asset-level key performance parameters, such as endurance, operating  range, and detection range.
The new award term criteria have de-emphasized measurement of total  ownership cost, concentrating instead on cost control.  Program  officials noted the difficulty of estimating ownership costs far into the  future, while cost control can be measured objectively using actual  costs and earned value data. In 2004, we recommended that the Coast  Guard establish a total ownership cost baseline that could be used to  periodically measure whether the Deepwater system-of-systems  acquisition approach is providing the government with increased  efficiencies compared to what it would have cost without this  approach.  Our recommendation was consistent with the cost baseline  criteria set forth in the Deepwater program management plan.  The  Coast Guard agreed with the recommendation at the time, but  subsequently told us it does not plan to implement it.
In our current work, we will explore the implication of the revised award  term evaluation criteria and the Coast Guard’s ability to measure the  overarching goals of the acquisition strategy.
section_title: Establishing Criteria and Documenting Changes to the Baseline
paragraphs: Establishing a solid baseline against which to measure progress in  lowering total ownership cost is critical to holding the contractor  accountable.  The Coast Guard’s original plan, set forth in the Deepwater  program management plan, was to establish as its baseline the dollar value  of replacing assets under a traditional, asset-by-asset approach as the  “upper limit for total ownership cost.”  In practice, the Coast Guard  decided to use the system integrator’s estimated cost of $70.97 billion plus  10 percent (in fiscal year 2002 dollars) for the system-of-systems approach  as the baseline.   In 2004, we recommended that the Coast Guard establish  criteria to determine when the total ownership cost baseline should be  adjusted and ensure that the reasons for any changes are documented.
Since then, the Coast Guard established a process that would require DHS  approval for adjustments to the total ownership cost baseline. The  Deepwater Program Executive Officer maintains authority to approve  baseline revisions at the asset or domain level.  However, depending on  the severity of the change, these changes are also subject to review and  approval by DHS.  In November 2005, the Coast Guard increased the total  ownership cost baseline against which the contractor will be evaluated to  $304 billion.  Deepwater officials stated that the adjustment was the result  of incorporating the new homeland security mission requirements and  revising dollar estimates to a current year basis.  Although the Coast  Guard is required to provide information to DHS on causal factors and  propose corrective action for a baseline breach of 8 percent or more, the   8 percent threshold has not been breached because the threshold is  measured against total program costs and not on an asset basis.  For  example, the decision to stop the conversion of the 49 110-foot patrol  boats after 8 hulls did not exceed the threshold; nor did the damages and  schedule delay to the NSC attributed to Hurricane Katrina.  During our  ongoing work, Coast Guard officials acknowledged that only a  catastrophic event would ever trigger a threshold breach.  According to a  Coast Guard official, DHS approval is pending on shifting the baseline  against which the system integrator is measured to an asset basis.
section_title: Limited Knowledge of Cost Control Achieved Through Competition
paragraphs: Further, our 2004 report also had recommendations related to cost control  through the use of competition.  We reported that, although competition  among subcontractors was a key mechanism for controlling costs, the  Coast Guard had neither measured the extent of competition among the  suppliers of Deepwater assets nor held the system integrator accountable  for taking steps to achieve competition.  As the two first-tier  subcontractors to the system integrator, Lockheed Martin and Northrop  Grumman have sole responsibility for determining whether to provide the  Deepwater assets themselves or hold competitions—decisions commonly  referred to as “make or buy.”  We noted that the Coast Guard’s hands-off  approach to make-or-buy decisions and its failure to assess the extent of  competition raised questions about whether the government would be able  to control Deepwater program costs.
The Coast Guard has taken steps to establish a reporting requirement for  the system integrator to provide information on competition on a semi- annual basis.  The system integrator is to provide detailed plans, policies,  and procedures necessary to ensure proper monitoring, reporting, and  control of its subcontractors.  Further, reports are to include total  procurement activity, the value of competitive procurements, and the  subcontractors’ name and addresses.  The system integrator provided the  first competition report in October 2006.  However, because the report did  not include the level of detail required by Coast Guard guidelines, a Coast  Guard official deemed that the extent of competition could not be  validated by the information provided and a request was made to the  system integrator for more information.  We will continue to assess the  Coast Guard’s efforts to hold the system integrator accountable for  ensuring an adequate degree of competition. -     -     -     -     -  Mr. Chairman, this concludes my testimony. I would be happy to respond  to any questions Members of the Committee may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact:  John Hutton, Acting Director, Acquisition and Sourcing Management,  (202) 512-4841, huttonj@gao.gov Stephen L. Caldwell, Acting Director, Homeland Security & Justice, (202)  512-9610, caldwells@gao.gov In addition to the contacts named above, Penny Berrier Augustine, Amy  Bernstein, Christopher Conrad, Adam Couvillion, Kathryn Edelman,  Melissa Jaynes, Crystal M. Jones, Michele Mackin, Jessica Nierenberg,  Raffaele Roffo, Karen Sloan, and Jonathan R. Tumin made key  contributions to this report.
section_title: Appendix I: Related GAO Products
paragraphs: Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts,  GAO-06-764 (Washington, D.C.: June 23, 2006).
Coast Guard: Changes to Deepwater Plan Appear Sound, and Program  Management Has Improved, but Continued Monitoring is Warranted,  GAO-06-546 (Washington, D.C.: Apr. 28, 2006).
Coast Guard: Progress Being Made on Addressing Deepwater Legacy  Asset Condition Issues and Program Management, but Acquisition  Challenges Remain, GAO-05-757 (Washington, D.C.: Jul. 22, 2005).
Coast Guard: Preliminary Observations on the Condition of Deepwater  Legacy Assets and Acquisition Management Challenges, GAO-05-651T  (Washington, D.C.: Jun. 21, 2005).
Coast Guard: Preliminary Observations on the Condition of Deepwater  Legacy Assets and Acquisition Management Challenges, GAO-05-307T  (Washington, D.C.: Apr. 20, 2005).
Coast Guard: Deepwater Program Acquisition Schedule Update Needed,  GAO-04-695 (Washington, D.C.: Jun. 14, 2004).
Contract Management: Coast Guard’s Deepwater Program Needs  Increased Attention to Management and Contractor Oversight, GAO-04- 380 (Washington, D.C.: Mar. 9, 2004).
Coast Guard: Actions Needed to Mitigate Deepwater Project Risks, GAO- 01-659T (Washington, D.C.: May 3, 2001).
Coast Guard: Progress Being Made on Deepwater Project, but Risks  Remain, GAO-01-564 (Washington, D.C.: May, 2, 2001).
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