Defense Acquisitions: Role of Lead Systems Integrator on Future Combat Systems Program Poses Oversight Challenges
Published: 2007-06-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Army's Future Combat Systems (FCS) program features multiple new systems linked by a first-of-a-kind information network. The Army contracted with a lead systems integrator (LSI) for FCS that could serve in a more expansive role than a typical prime contractor would. In response to a congressional mandate, this report addresses (1) why the Army decided to employ an LSI for the FCS program; (2) the nature of the LSI's working relationship with the Army; and (3) how FCS contract fees, provisions, and incentives work. In conducting its work, GAO reviewed extensive program documentation and held discussions with key officials at DOD and throughout the FCS program.
section_title: What GAO Found
paragraphs: In 2003, the Army contracted with an LSI for FCS because of the program's ambitious goals and the Army's belief that it did not have the capacity to manage the program. The original timeframe for FCS's development was a shorter time frame than for an individual weapon system program, let alone a complex systems-of-systems program with a high number of immature technologies at program start. The Army realized that its compartmentalized workforce did not lend itself to the kind of crosscutting work that the FCS program would demand. The Army workforce also did not have the expertise needed to develop the FCS information network or enough people to support the program had it been organized into separate program offices. In contracting with the Boeing Company as LSI, the Army believed it found a management partner who could define and develop FCS and reach across the Army's organizations. Boeing subcontracted with another company, Science Applications International Corporation, to assist with its responsibilities as LSI. The working relationship between the LSI and the Army is complex. The LSI is a traditional contractor in terms of developing a product for its customer, the Army, but also serves like a partner to the Army in management of the FCS program. In its management role, the LSI makes decisions collaboratively with the Army. An advantage of this arrangement is that the LSI and Army can maintain flexibility when dealing with shifting priorities. However, that relationship may pose significant risks to the Army's ability to provide oversight over the long term. The Office of the Secretary of Defense is in a position to provide this oversight but thus far has allowed the Army to depart significantly from best practices and the Office's own policy for weapon system acquisitions. For example, the Office of the Secretary of Defense has also allowed the Army to use its own cost estimates rather than independent--and significantly higher--cost estimates when submitting budget requests. The Army's experience with the LSI on the FCS program may provide the Office of the Secretary of Defense insights on broader acquisition management issues. The Army has structured the FCS contract consistent with its desire to incentivize development efforts. The definitized cost-reimbursable research and development contract valued at $17.5 billion contains up to a 15 percent total fixed/incentive fee, or about $2.3 billion. As with many research and development contracts, the FCS contract obligates the contractor to put forth its best efforts, but does not assure successful outcomes. Assuming that critical design review is completed in 2011, the Army will have paid the LSI over 80 percent to cover the contract costs, plus a possible 80 percent of its fee or profit. GAO has previously reported that most cost growth in DOD weapon system programs occurs after critical design review. Therefore, it is possible for the LSI to have garnered most of its payouts in costs and fees early next decade, even if despite its best efforts, the FCS capability ends up falling far short of the Army's goals. The Army notes that its fee structure is intended to encourage good performance early in the program.

section_title: Letter
paragraphs: With the Future Combat Systems (FCS) program, the Army is embracing a  new warfighting concept by replacing most of its combat systems with a  family of manned and unmanned vehicles and systems linked by an  advanced information network. The warfighting concept embodied by FCS  involves breaking with Army traditions and making unprecedented  technological leaps. After several decades of developing systems through  disconnected warfighter communities within the Army, FCS is proposed  as an integrated, system-of-systems concept rather than having integration  occur after systems are produced. Using this new approach, the Army  intends to manage trade-offs across individual warfighter communities and  weapon systems, save cost, and accelerate delivery. Recent estimates  show that the total investment cost of the FCS program will be at least  $163 billion and perhaps over $200 billion when complementary programs  are included.
To achieve its 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 role of the LSI is not simply that of a traditional prime  contractor, but also includes some elements of a partner to the  government in ensuring the design, development and prototype  implementation of the FCS network and family of systems. The pros and  cons of LSI arrangements have been the subject of much debate on the  FCS and other programs, such as the Coast Guard’s Deepwater program.  The Institute for Defense Analyses, the Army Audit Agency, and GAO have  highlighted potential risks with the LSI approach on the FCS program. In  light of the scope of the FCS program and its associated cost estimates, as  well as concerns over the role of the LSI, Congress mandated that GAO  review and report on the use of an LSI on FCS. Our letter dated March 15,  2007 satisfied the reporting requirements for that mandate. As agreed with  committee staff, this report addresses the questions from the mandate,  specifically: (1) why the Army decided to employ an LSI for the FCS  program; (2) the nature of the LSI’s working relationship with the Army;  and (3) how the contract fees, provisions, and incentives work.
In conducting our work, we reviewed extensive program documentation  pertaining to the business arrangement between the Army and LSI. This  included such items as the program contract and acquisition strategy. In  addition, we held discussions with key officials at DOD and throughout  the FCS program, including representatives from the Army, the LSI and  various subcontractors. We also drew significantly on existing GAO work  on weapon system acquisitions. We conducted our work from May 2006  through June 2007 in accordance with generally accepted government  accountability standards. Further detail about our scope and methodology  is provided in Appendix I of this report.
subsections: section_title: Background
paragraphs: In May 2003, the Army and Boeing entered into an “other transaction  agreement” for the system development and demonstration phase of the  FCS program. Other transaction agreements are not subject to the Federal  Acquisition Regulation (FAR) and this gave the Army considerable  flexibility to negotiate the terms and conditions with Boeing as the LSI.  The Army’s rationale for using such an agreement was to encourage  innovation and to use its wide latitude in tailoring business, organizational,  and technical relationships to achieve the program goals. Congress raised  concerns over the use of the agreement for the development of a program  as large and risky as FCS, and the Secretary of the Army directed that the  other transaction agreement be converted to a FAR-based contract. In  March 2006, the Army definitized a FAR-based contract with Boeing for  the remainder of FCS development. Science Applications International  Corporation (SAIC) has a contract with Boeing to provide assistance in  performing the LSI functions. All of the work performed from May 2003  through September 2005 is accounted for under the prior other transaction  agreement, and all work after September 2005 is included under the new  contract. Appendix II of this report provides a brief discussion of the  conversion of the FCS contract from an other transaction agreement to a  FAR-based contract.
The LSI as an entity is intended as a single contractor responsible for  developing and integrating the FCS system of systems within a given  budget and schedule. Furthermore, the LSI was intended to act throughout  the system development and demonstration phase to optimize the FCS  capability, maximize competition, ensure interoperability and maintain  commonality to reduce life-cycle cost. The Army established a number of  key tenets that it wanted to achieve on the FCS program, in partnership  with the LSI. They include:    create opportunity for best of industry to participate;  leverage government technology base to maximum extent;    associate ongoing enabling efforts with LSI-led activity;    maintain a collaborative environment from design through     as a minimum, achieve commonality at subsystem/component level;    design/plan for technology integration and insertion;    maintain and shape the industrial base for the future;   retain competition throughout future force acquisition;    have appropriate government involvement in procurement    achieve consistent and continuous definition of requirements;    maintain and shape government acquisition community;    achieve program affordability—balance performance and    have a “one team” operating with partnership and teamwork.
An LSI creates an additional tier in the management structure of the FCS  program that would not appear in an acquisition program for a major  individual system. The Army itself does not have a direct contractual  relationship with the prime-item developers as it would when buying a  single system, but rather works through the LSI. This additional tier serves  as a layer of separation between the customer (the Army) and the platform  developers (the tier immediately below the LSI). The Army believes that  this additional layer is required to bring all of the developers together to a  single point of communication and interaction for the Army. The Army,  LSI and platform developers are all members of the “one-team” structure  of the FCS program.
The current contract between the Army and Boeing continues into fiscal  year 2015 and the Army intends to begin low-rate initial production in  2013. The Army intends to start full-rate production in 2016. The Army  plans to achieve initial operational capability in fiscal year 2015 and full  operational capability in fiscal year 2017. The Army intends to continue  FCS procurement through fiscal year 2030, eventually equipping   15 brigade combat teams—about one-third of the current active force.
Figure 1 shows the schedule of key events for the FCS program.
The Army has recently decided to make a number of key changes to the  FCS program as it was considering funding plans for the fiscal 2008-2013  period. These changes include eliminating or deferring certain FCS  systems, increasing quantities of some systems, reducing quantities of  other systems, reducing annual procurement rates, and delaying key  program milestone dates. For example, the Army deleted or deferred four  systems from the FCS system of systems architecture and delayed the  start of initial FCS production by five months.
section_title: Army Decision to Use LSI Framed by Scope of Program and Workforce Limitations
paragraphs: The FCS program’s complexity and aggressive schedule is unprecedented  for the Army. As we have reported, the program was not near ready for  starting the system development and demonstration phase when it did,  primarily because the majority of the needed technologies were immature.  The Army not only went forward with FCS, it did so with a planned  schedule less than that of a single new system. The Army determined that  with its existing acquisition workforce and organizations, it did not have  the agility, capability, or capacity to manage the program without an LSI to  assist with certain aspects of program management. In using an LSI, the  Army also wanted to structure a development contract that would create  incentives for the contractor to succeed and profit in development and to  increase competition at lower levels in the supplier chain.
subsections: section_title: Concurrent Development and Integration of FCS Is Most Complex Acquisition Army Has Ever Undertaken
paragraphs: The sheer scope and complexity of the program was driven by the Army’s  desire to concurrently develop and field all systems as an integrated unit.  The backbone of this unit is a ubiquitous network through which all  systems of FCS will operate and communicate—a first-of-a-kind network  that will also have to be developed. FCS represents a huge technological  leap in system development and acquisition. Some of the major technical  challenges faced in the program include:    The 14 major weapon systems or platforms have to be designed and  integrated simultaneously and within strict size and weight  limitations.
At least 46 technologies that are considered critical to achieving  critical performance capabilities will need to be matured and  integrated into the system of systems.
The development, demonstration, and production of as many as   170 complementary systems and associated programs must be  synchronized with FCS content and schedule. This will also involve  developing about 100 network interfaces so the FCS can be  interoperable with other Army and joint forces.
An estimated 63 million lines of software code, more than 3 times  the amount being developed for the Joint Strike Fighter program.
In addition to the complexity of the integration task, the Army also  outlined an unprecedented timeline for FCS’s development—about   5½ years—a shorter timeline than typical for a single weapon system  development. We have pointed out a third source of risk, in addition to  complexity and schedule, namely that the program started before it was  ready for system development and demonstration because the majority of  its critical technologies were immature. Mature technologies are central to  having a sound business case at the start of development. Cognizant of  these risks, the Army believed it could achieve its goals through use of an  LSI because of the technical expertise and workforce flexibility that a  private company could bring to the program. In fact, the Army wanted the  LSI to help it define the FCS solution.
section_title: Mismatches between Scope and Pace of FCS and Capacity of Army Workforce
paragraphs: The Army determined it could not meet the challenges of the FCS scope  and accelerated schedule with its workforce alone and with traditional  management approaches. Army leadership saw its workforce as  stovepiped into organizations having areas of expertise that were not a full  match for what FCS needed and not large enough with the right skills to  staff several separate program offices. Army leadership did not see its  workforce as being well-suited to making the tradeoffs and integration  that the FCS program demanded.
As an integrated system of systems, defining requirements and designing  solutions for FCS would necessitate crossing two sets of organizational  lines. The first involves the Army’s traditional warfare communities, such  as infantry, armor, artillery, and aviation. In the past, these communities  developed their own requirements and their own weapon systems. FCS  program officials noted that the Army had little success integrating such  separately developed platforms because the individual communities did  not coordinate their development efforts; specifically, they did not  interface across communities during development to ensure systems were  being designed to work with each other. A second organizational line  involves the users, who develop requirements, and the developers, who  manage the weapon systems. Much of the Army’s previous experience  with major integration efforts was problematic because of a lack of  coordination between the developers and the users. Each system was  developed separately and integrated into the force after the fact. The  users’ needs to have multiple systems integrated and working together in  the field were thus not sufficiently considered in the development process.  The Army believed that an LSI could achieve this more effectively than an  Army program office because a contractor had greater flexibility to work  across these lines.
Capability of the Army’s workforce was also a factor in the decision to use  an LSI. The Army’s traditional areas of technical expertise, such as in  armored vehicles like tanks, were not sufficient to address all the needed  expertise for FCS. FCS performance is controlled to a great extent— estimated at 95 percent—by software. Current estimates put the amount of  software needed at 63 million lines—the most ever for a weapon system— much of which will be needed for the information network that is the heart  of FCS. The Army did not have sufficient skills in software and networks  to manage this effort. Even with the LSI, the relative thinness of the  Army’s expertise in these areas is evident in the integrated product teams  through which the Army and the LSI jointly manage the program. For  example, according to an LSI program official, there are 28 LSI  representatives for every Army representative on the team responsible for  developing the information network. However, according to data provided  by an Army official, on the manned ground vehicles team, where the Army  has more expertise, there are only about 15 LSI representatives for every  Army representative. Service contractors separate from the LSI are  counted among the Army program office representatives. Thus, the actual  numbers of individuals who work for the Army directly is lower than these  numbers represent.
A third factor was workforce capacity. If the FCS platforms were to be  developed as separate programs, each platform would need its own  workforce, meaning several separate Army program offices, each with a  full complement of acquisition and technical staff. The demand for this  many people would have been a challenge in light of the decline in its  acquisition workforce throughout the 1990s. DOD estimates put the  decline of its civilian workforce at 38 percent—much of it in  acquisitions—from 1989 through 2002. Hence, the Army would not have  the capacity to manage a multi-system effort like FCS with separate  program offices and likely would have had to turn to contractors to fully  staff the program offices.
section_title: Other Goals in Using an LSI on FCS
paragraphs: In addition to the complexity and workforce implications of FCS, the  Army saw an opportunity for the LSI to give its best effort in development  and to create more competition at lower supplier levels. Army leadership  involved with setting up the FCS program believed that traditionally,  contractors made much of their profit in production, not in research and  development. Thus, the Army reasoned, the contractors are not as  motivated by research and development as they are by production. Army  leadership believed that by using an LSI that would not necessarily have to  be retained for production, the Army could get the best effort from the  contractor during the system development and demonstration phase,  while at the same time making the effort profitable for the contractor.
Army leadership also set up the FCS program and contract in such a way  that it would create more competition and have more influence over the  selection of suppliers below the LSI. Army leadership noted that  traditionally, once the Army hired a prime contractor, that contractor  would bring its own supplier chains. The Army was not very involved in  the choice of the suppliers. In FCS, the prime contractor—or LSI—is  mainly an integrator, and the Army called for the LSI to hold a competition  for the next tier of contractors. The Army had veto power over these  selections. In addition, the Army directed that the LSI contract with  integrators at lower levels in the program and the Army has been involved  with these selections. These integrators also hold competitions to select  suppliers for those systems. This strategy kept the first tier of contractors  (the one-team) from bringing their own supplier chains and pushed  competition and Army visibility down lower in the supplier chain. It was  also a means for the Army to ensure commonality of key subsystems  across FCS platforms. Thus, for example, each of the manned ground  vehicles would use the same sensors and engines, rather than the past  practice of each vehicle having its own unique set of subsystems.
section_title: Close Working Relationship between Army and LSI Increases the Burden of Oversight
paragraphs: The relationship between the Army and the LSI is complex. 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 also performs certain  program management and integration responsibilities for the entire  program and has a partner-like relationship with the Army. In forging a  close partner-like relationship with the LSI, the Army sought to gain  advantages such as maintaining flexibility to deal with shifting priorities.  At the same time, this relationship, coupled with the vast scope of FCS and  the synonymy of the program with the future Army, poses risks for the  Army’s ability to provide independent oversight 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 though it is at wide  variance from the best practices embodied in OSD’s own acquisition  policies.
subsections: section_title: Boeing Is a Key Supplier for Critical Software
paragraphs: For the FCS program, Boeing serves as a traditional supplier, developing  two software-intensive subsystems for the Army. Specifically, the Boeing  unit that is serving as LSI is developing the System of Systems Common  Operating Environment (SOSCOE). Additionally, a separate Boeing unit is  developing the Warfighter Machine Interface (WMI). Both are critical to  the success of FCS and, as noted by one program manager, will affect the  FCS systems being developed by other contractors.
As part of the original 2003 other transaction agreement to begin system  development and demonstration, the LSI was permitted to internally  develop SOSCOE rather than contracting that work out to a separate  supplier. This make decision was approved by the Army. Referred to in the  statement of work as the “information management backbone” for FCS,  SOSCOE has been likened to a computer operating system like Microsoft  Windows®. All FCS systems will have to interface with this software to  function as a single, integrated brigade combat team. Ultimately, the  success of the FCS program hinges on the successful development of  SOSCOE.
Boeing is also developing WMI. This work was awarded as a separate  competitive subcontract by Boeing as the LSI to a separate unit within the  Boeing Company under the original 2003 other transaction agreement. The  software will provide a common interface for the soldiers in the brigade  combat unit to receive information. The goal of this software is to provide  an integrated presentation of all types of battlefield information.
Subsequent to the award of WMI, the current FCS contract for system  development and demonstration was definitized with language that  provides a process to mitigate potential conflicts of interest on the part of  Boeing or SAIC as LSI. Under the predecessor other transaction  agreement, an organizational conflict of interest clause required that  certain safeguards be put in place when either a Boeing or SAIC unit  wanted to compete for a subcontract. Under the current contract, an  organizational conflict of interest clause is included that completely  prohibits either company from competing for any work at any tier for any  proposed subcontract under the FCS contract. So, although an award was  made to Boeing under the predecessor other transaction agreement, any  further awards are prohibited for the duration of the contract.
section_title: Close Working Relationship May Pose Risks
paragraphs: The government’s relationship with a contractor—regardless if it is an LSI  or a more traditional prime contractor–for a major project like a weapon  system can range from a distant, arms-length relationship to a close,  partner-like relationship. An arms-length relationship is characterized by  separation between the government as the customer and the contractor as  the supplier or developer. In this arrangement, communications between  the government and the contractor are more likely to be periodic and  formal. For weapon system programs, these kinds of relationships can  often be found in situations in which the government can establish  detailed technical specifications for the weapon system, enabling the  contractor to design and develop a weapon system to meet the  specifications without much government involvement. An arms-length  relationship optimizes the independence of the government by minimizing  the interaction between its staff and that of the contractor. The downside  of this type of relationship is that information can flow slowly between the  two parties, and decision-making can be sequential and untimely. For  example, if the government were to wait 6 or more months between  program reviews, work done in the interim could go astray from the  government’s wishes and have to be redone.
In a partner-like relationship, the government and the contractor work  together on a continual basis to decide what work is to be done. Over the  past 10 years, DOD has attempted to employ more partner-like  arrangements on its programs. For example, in the 1990s, DOD program  offices began employing integrated product teams, which are  multidisciplinary teams that have the cross-functional talent from both the  government and the contractor to make more informed decisions about a  product’s design, production, and support. In addition, DOD has  attempted to increase its use of performance-based contracting, in which  agencies contract for results rather then processes and leave the  determination of how best to achieve the results to the contractor. DOD  guidance on performance-based contracting states that a positive  relationship between the government and the contractor is essential to  that kind of arrangement. For example, the guidance notes that the  government and industry should work together as a team to communicate  expectations, agree on common goals, and identify and address problems  early on to achieve desirable outcomes. Such a partner-like relationship is  intended to enable more real-time, better informed decisions, reduce  rework, and provide increased flexibility to adjust to new demands.
A partner-like relationship can also pose risks for the government.  Depending on the closeness of the working relationship, 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, the partner-like  relationship between the Army and the LSI breaks new ground and as such  these risks are present. More specifically, in FCS the Army is more  involved in the selection of subcontractors than we have seen on other  programs, which 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 for oversight over the long term.
The degree of the Army’s collaboration with the LSI in the FCS program  and the possible risks this poses can be illustrated in the following areas:  Requirements. The Army initially established the operational requirements  for FCS. Based on those requirements, the Army and LSI are  collaboratively refining the FCS system of systems requirements and  system-level requirements (or system specifications). This refinement  process has also resulted in changes and clarifications to the FCS  operational requirements. The collaboration allows both parties to agree  on and refine requirements that they believe are feasible based on system- of-systems requirements analysis conducted by the LSI and its  subcontractors. Subsequently, the Army and LSI can reach agreement on  what requirements are appropriate to achieve the FCS capability within  cost and schedule goals. For example, the Army and LSI recently  collaborated on the feasibility of the manned ground vehicle weight  requirement. As a result of this collaboration, the Army decided to trade  off the original air transport requirement that FCS manned ground  vehicles weigh no more than 24 tons because they did not have enough  armor to meet the survivability requirement. The Army and LSI again  collaborated with the Army ultimately deciding that the requirement for  vehicle weight be allowed to grow to as much as 29 tons to provide the  needed armor. This change was significant, because the FCS vehicles will  now have to be transported by a larger aircraft, the C-17, rather than by  the C-130 transporter. Part of the reason for the change was that,  according to program officials, an advanced armor being developed by the  Army did not prove as effective as expected within desired weight  parameters. There are several other key technologies that are still  immature, and to the extent they do not perform as expected,  requirements could continue to be changed to match what is technically  possible. This could help ensure that FCS development can continue but  may produce less value in terms of capability for the investment.
Subcontract Selections. The Army and the LSI collaborate on subcontract  selection decisions in contracting tiers below the prime contractor level.  Subcontract selections at these levels have normally been made by the  contractors without much government involvement. Army officials  participated in the selection process for the one team subcontracts  awarded by the LSI to build and integrate major platforms. The Army also  plays a role in the selection of lower tier subcontractors. For example, the  Army participated in the selection of a subcontractor to build the Active  Protection System to protect vehicles from rocket propelled grenades.  This is a fourth-tier subcontractor. Although the Army is involved with the  selections, the subcontracts are awarded by the LSI or other lower-tier  contractors, so traditional government bid protest remedies are not  available to the losing contractors, as with any procurement between  private entities. To the extent that a subcontractor selected with the  Army’s involvement underperforms, the Army may bear some  responsibility for the long term consequences of that performance.
Test and Evaluation. The LSI has a lead role in developmental testing and  verification of technical requirements throughout FCS development. For  the FCS program, testing and evaluation of system prototypes will be  managed through a combined test organization co-led by the LSI and the  Army and made of up representatives of the LSI, Army Test and Evaluation  Command and the Army’s FCS program management office. In its role   co-leading the test organization, the LSI will coordinate and perform a  number of activities to ensure FCS performance is effectively and  efficiently achieved. Building and testing prototypes is funded through the  LSI contract, and the LSI will recommend how many and what type  prototypes will be fabricated. Typically, the Army test command conducts  and/or monitors system development tests and conducts operational tests  of systems to provide an objective, performance-based evaluation of  system capabilities against expectations in weapons programs. Their  independent role is an important source of information on how well a  program is progressing. In the FCS situation, the Army test command is in  the position of relying on the LSI to plan for and conduct sufficient  developmental testing—as well as proper corrective actions for identified  issues—which is an important precursor to a successful operational test  program. This has led to concerns by members of the Army test  community about their ability to conduct sufficient independent testing,  while having to work so closely with the LSI. It also raises the question of  whether the LSI is too involved with testing its own solution.
Involvement in Production. According to the FCS program manager, the  Army plans to contract with Boeing during fiscal year 2008 for the initial  production of FCS capabilities to be spun out to the current forces and for  the early production of the FCS non-line-of-sight cannon. The current LSI  development contract for the core FCS systems extends almost 2 years  beyond the FCS initial production decision. The Army does not expect that  the initial brigades outfitted by FCS will meet the upper range of its  requirements, and has made the LSI responsible for planning future FCS  enhancements in the production phase. The LSI is also responsible for  defining and maintaining a FCS growth strategy for integrating new  technologies into brigade combat teams. This role keeps the LSI involved  in the FCS program in the production phase and could make the LSI  indispensable to the Army.
section_title: FCS Program Can Benefit from Stronger OSD Oversight
paragraphs: OSD is in a position to provide the arms-length oversight that can  counterbalance some of the potential risks associated with the Army’s  level of involvement with both the FCS program and the LSI. Thus far,  OSD has not played an active oversight role but rather has allowed FCS to  proceed according to the Army’s plans. It has passed on opportunities to  assert its own positions on knowledge-based acquisition and cost  estimates. In response to a statutory requirement, OSD has committed  itself to a formal decision review of the program following its preliminary  design review in 2009.
In August 2004, the Institute for Defense Analyses expressed concerns that  the collaborative arrangement between the Army and LSI created an  inherent tension between the roles of Army participants as both  teammates and customer representatives. The Institute expressed the  need for a corporate perspective on the FCS program on behalf of the  Army, so an independent eye could be put toward cost, schedule and  performance issues. This may be a difficult principle for the Army to put  into practice. The FCS program is nearly synonymous with the Army’s  future forces and necessarily requires the commitment and involvement of  Army leadership. FCS represents the bulk of the Army’s investment  portfolio.
Additionally, the nature of FCS being made up of several programs that are  large enough to have been individual acquisitions in and of themselves,  reduces the level of granularity of oversight that may have otherwise been  exercised over those programs. Major defense acquisition programs have  certain reporting requirements under law that provide information to  decision-makers about those programs. The programs within FCS are not  designated separately from FCS, so the reporting requirements for them  are not the same as if they were separately designated. Since FCS  generally meets those reporting requirements at the system-of-system  level, the granularity of reporting on individual systems within FCS is less  defined.
OSD can help provide the corporate perspective on FCS through its  oversight role. To date, OSD has kept informed of the program and  reviews the program annually. However, it held only one corporate-level  decision meeting on FCS at which it approved the program to begin  despite its being at odds with DOD’s own standards for such program  initiation. Although OSD has remained involved in the program, it has thus  far largely accepted the program as defined by the Army. Specifically, in  May 2003, the Under Secretary of Defense (Acquisition, Technology, and  Logistics) approved the FCS program to begin the system development  and demonstration phase, referred to as the milestone B decision. It is  DOD policy for programs to have mature technologies at that point, and  for programs to be evolutionary in nature—that is, an incremental  improvement over existing capabilities. FCS was neither, as all of the  program’s 49 critical technologies were immature and the program was a  revolutionary departure from existing Army capabilities. Instead, the Army  is following its own, lower standard for technology maturity— achievement by the critical design review in 2011—over 7 years later than  called for by DOD policy.
Upon making that decision, the Under Secretary recognized the FCS  program’s immaturity and stated that there would be a milestone B update  review 18 months later. This was to be a decision-making review for which  the Under Secretary had listed several action items that the FCS program  had to complete in order to continue. However, this review never occurred  and the FCS program continued as originally planned. OSD has not since  revisited its decision to approve the program. Since that time, program  costs and schedule have roughly doubled. Accordingly, last year, we  recommended that OSD hold a decision-level meeting. However, while  OSD stated that it would have a Defense Acquisition Board review, it  would not commit to making it a milestone decision review. It had not  planned another decision meeting until the FCS production decision,  referred to as milestone C. This would have been too late to have any  material effect on the course of the program, short of cancellation which   is extremely rare at that point in a program. Subsequently, Congress  intervened and required that OSD hold the formal decision meeting,  currently scheduled for 2009. DOD has since proposed a serious approach  to making that decision, which is encouraging from an oversight  perspective.
Recognition and reporting of cost growth is another area in which OSD  has deferred to the Army. The Army has recently restructured the FCS  program to reduce the number of systems and reduce planned production  rates to stay within expected funding levels. This will mark the second  restructuring of the program in 4 years, which has seen program  investment costs increase from $77.2 billion in constant 2003 dollars to  $119.2 billion in 2005 according to Army estimates, and again to at least  $150.5 billion in 2006 according to an independent cost estimate. The Army  estimates the cost of the recently restructured program to be slightly  different than its 2005 estimate. The cost increases that have occurred  since 2003 have largely been determined by the Army and OSD to be  changes in scope, a distinction that is important for cost reporting  purposes. As we have previously reported, DOD has allowed unit cost  increases associated with quantity reductions or increases in capabilities  to be excluded from a determination of a Nunn-McCurdy breach. DOD  refers to these as programmatic adjustments and has concluded that  nearly all of FCS’ 76 percent cost increase—based solely on Army  estimates—falls in this category. As a result, the Secretary of Defense has  not had to carry out an assessment of the program or make a certification  to Congress. Such an assessment and certification of FCS would have had  value from an oversight perspective.
A recent decision not to use an independent cost estimate may have had a  similar effect on cost reporting. In May 2006, the OSD Cost Analysis  Improvement Group submitted an independent cost estimate that showed  its estimate of FCS investment costs to be 24-43 percent higher than the  Army estimate prepared by the FCS program office. OSD did not adopt  this estimate. While OSD is not obligated to adopt its independent  estimates, previous experience has shown these estimates to be more  accurate than the typically optimistic service estimates and could have  been become an additional factor to consider in a Nunn-McCurdy  determination.
section_title: Contract Provides Incentives for Best Effort but Not Accountability for Program Outcomes
paragraphs: The Army has structured the FCS contract consistent with its desire to  incentivize development efforts and make it financially rewarding for the  LSI for making such efforts. In general, contracts are limited in that they  cannot guarantee a successful outcome. This is true for the FCS contract,  and specific aspects of the contract could make it even more difficult to tie  the LSI’s performance to the actual outcomes of the development effort.  Key demonstrations of the actual capabilities of FCS systems will take  place after the LSI has been able to recoup over 80 percent of its costs and  had the opportunity to earn most of its fees. The Army shares  responsibility with the LSI for making some key decisions and to some  extent the Army’s performance may affect the performance of the LSI. As  with many cost-reimbursable research and development contracts, the LSI  is responsible to put forth its best effort on the development of the FCS  capability. If, given that effort, the FCS capability falls short of needs, the  LSI is not responsible and still it is entitled to have its costs reimbursed  and may earn its full fee.
subsections: section_title: FCS Contract Provides the LSI a High Level of Compensation
paragraphs: The current contract for completing FCS’s system development and  demonstration phase provides a relatively high level of compensation in  terms of total dollars, fee, and price of labor. The definitized contract  between the Army and the LSI is a cost-reimbursable contract that is  valued at $17.5 billion, comprised of $15.2 billion in cost and up to a   15-percent fee of $2.3 billion. The remaining costs and fees from the earlier  other transaction agreement were separated from the current FAR-based  contract that was definitized in March 2006. The current contract period,  which includes both the remaining work from the other transaction  agreement and the definitized action, effectively runs from September  2005 through the first quarter of fiscal year 2015. Under the FCS contract,  the LSI is required to put forth its best efforts to ensure a successful  system. The Army will reimburse the LSI’s allowable costs and reward the  contractor with profit in the form of a fixed and an incentive fee for its  efforts. The fixed fee is paid annually and the incentive fee is earned  incrementally based on the LSI’s demonstrated achievement of established  performance, cost and schedule criteria that are associated with program  events.
The total fee of 15 percent (which includes the potential incentive fees) is  based on the total value of the contract, as estimated at contract inception.  However, the benefit to the LSI is very favorable when considering the  cost of the work the LSI actually performs, versus the amount that it  subcontracts out to other firms. On FCS, the LSI will actually perform  about $8.7 billion worth of the work when combining the costs under the  previous other transaction agreement and subsequent FAR-based  contract. Using that as a base, the potential fee of $2.7 billion roughly  amounts to a 30 percent profit on the work the LSI actually does itself.  According to an analysis conducted within the Office of the Secretary of  Defense, this is a relatively high ratio of profit to value of work performed  when compared with other large development programs.
As with most cost reimbursable contracts, the reimbursable costs of the  prime contractor include its costs and the costs and fees of lower tier  subcontractors. The prime’s fee is separate from its reimbursable costs.  For example, if a company is awarded a prime development contract for  $300 million, that figure includes both costs and fees of the contractor’s  subcontracts. The prime contractor’s fees are calculated on the   $300 million cost figure included in the contract, but are not allowed to go  up if the contract costs increase. Accordingly, if the prime contractor then  awards a subcontract for $100 million of costs and pays the subcontractor  a fee of $15 million, the full $115 million paid to the subcontractor is part  of the $300 million of the prime contractor’s estimated reimbursable costs.
The prime contractor is entitled to be reimbursed for the full $300 million  in costs from the government plus be paid any fee it has earned. The result  of the FCS LSI arrangement is an additional layer of subcontractors and  associated costs. Thus, the costs and fees of all the prime item developers  and their subcontractors are included in the $15.2 billion in costs  reimbursable to the LSI under its contract with the Army. The LSI’s  potential $2.3 billion fee is calculated based on these costs, as with a  typical prime contract.
Based on data provided by FCS program officials, the cost of LSI  personnel is high relative to their government counterparts. The Army is  paying the average LSI full-time equivalent about 25 percent more than the  average cost of a federal employee in the senior executive service. These  costs assume salary, benefits, and other costs of maintaining an employee  on the program. We have recently reported that contractor personnel also  cost the Missile Defense Agency about 25 percent more than their  government counterparts. However, the comparison data for missile  defense personnel is based on all program personnel, not just the  members of the more highly compensated senior executive service.
section_title: Majority of Program Fees and Costs Are Available to the LSI before FCS Systems Demonstrate Their Performance
paragraphs: Under the terms of the FCS contract, the LSI can earn over 80 percent of  its $2.3 billion fee by the time the program’s critical design review is  completed in 2011, and roughly 80 percent of contract costs will have been  paid out by the Army by that point. Yet the actual demonstration of  individual FCS prototypes and the system-of-systems will take place after  the design review. Our work on past weapon system programs shows that  most cost growth—symptomatic of problems—occurs after the critical  design review.
The fee the LSI can earn under the FCS contract is divided between a fixed  fee of $1.13 billion that will be paid in annual installments and an incentive  fee of $1.14 billion that, according to a program official, can be earned on  an incremental basis as the LSI accomplishes certain performance, cost  and schedule criteria associated with each of nine key program events.  Thus, it can earn portions of its incentive fees prior to occurrence of the  event. Typically, incentive fees for weapon acquisition programs are based  largely on how well the contractor achieves cost targets, but the LSI is  eligible to receive a minimum of 50 percent of its available incentive fee  based on performance criteria, not cost. Additionally, the contract  provides for rolling over any unearned incentive fees to subsequent events.  This means that if work under a fee event is delayed, the Army can decide  to delay the associated fee as well and pay it when the work does get  done. To the extent that the contractor is responsible for the delay,  rollover can allow the contractor to get a second chance to recoup  performance fee that it did not perform well enough to earn according to  criteria at the original event, but it will not recoup the portion of the fee  associated with schedule performance. A high-level program official did  tell us that the Army plans to allow roll-over at only one program event, if  the LSI does not earn its full fee at that event. Previous GAO work on fees  highlighted the use of rollover as an indication that the fee structure for  the program lacks the appropriate incentives, transparency, and  accountability for an effective pay for performance system. The nine fee  events used to evaluate the performance of the LSI, along with the fixed  and incentive fees that can be earned are listed in the table below.
To date, the LSI has completed one incentive event under the FAR  contract and received 100 percent of the available incentive fee for its  efforts. By the time the Army completes the critical design review in 2011,  the LSI could earn over 80 percent of its incentive fee and over 80 percent  of its total fee. The critical design review is important because our work  has shown that by this point in time, a weapon system’s design should be  stable enough to release 90 percent of engineering drawings for  manufacturing. This level of knowledge is demonstrative that the design is  stable and capable of meeting performance requirements. It is the point at  which managers of a program can determine whether or not to build  production-representative prototypes to demonstrate the actual  performance of the design.
We have found that most cost growth on weapon system development  programs occurs after the critical design review. As shown in figure 2,  historical information on 26 major programs that have completed  development experienced about 28 percent cost growth, with almost   20 percent after critical design review.
This pattern of cost growth occurs because most programs hold critical  design review before the design is stable. Subsequent building and testing  of prototypes has led to the discovery of problems that are costly to fix in  the late stages of development. We have already reported that the critical  design review for the FCS program will occur before the program has  attained a sufficient level of knowledge to ensure that technologies are  mature. Moreover, the Army does not plan to build production- representative prototypes for testing, relying instead on less mature  prototypes and simulations. This sequence of events sets the stage for  much discovery about the FCS’s actual performance and potential  problems after the design review and after most of the fee can be paid to  the LSI.
section_title: Connecting Contract Performance with Program Performance Will be Difficult
paragraphs: For several reasons, it will be difficult to connect the LSI’s performance on  the contract with the success of the program. The contract itself, like  those for other weapon system developments, does not insure the Army  against an unsuccessful outcome. While the Army can gauge the progress  under the contract, the LSI is responsible for providing best efforts, not  successful outcomes. The criteria for fee events are not directly related to  achievement of total program outcomes, and the partner-like involvement  with the LSI creates a situation in which the Army’s performance can  affect the LSI’s performance.
The FCS contract is a cost-reimbursement research and development  contract. In this respect, it is no different than most contracts to develop  weapon systems. Essentially, under a research and development contract,  the contractor, or LSI in the case of FCS, is required to provide its best  efforts at developing a capability or weapon system to the Army but is not  responsible for actually producing the capability. Best efforts are  measured by the inputs the contractor puts toward development of the  system. Specifically, it must put the resources and processes in place to  demonstrate its best efforts at developing the Army’s desired capability.   If the weapon systems, individually or collectively, fail to provide that  capability, the LSI is not responsible as long as it has put forth best effort.
The contract fee events reflect the best effort nature of the LSI’s  performance and do not require the successful demonstration of specific  program knowledge or outcomes. For example, the criteria for the most  recent incentive fee event (which was valued at a total of about   $100 million) included such items as an updated force effectiveness  analysis, the update and approval of program technical performance  measures, and the completion of certain requirements and planning  products. However, the incentive fee event criteria do not specify what is  expected in terms of the effectiveness analysis results, the current status  of the technical performance measures, or when and how the  requirements process should be completed. Army program officials point  out that this fee structure is meant to create incentives for the LSI to focus  on putting processes in place to ensure successful development of the  system. They also note that in some past programs, contracts had devoted  inadequate resources to such activities. As noted in previous GAO work  and in NASA contracting guidance for major system acquisitions, input  factors such as those used as criteria for the fee events in FCS are  valuable, but they do not provide indications of success relative to the  desired end result of the program.
Because of its close involvement with the LSI, the Army has to make  judgments about what contract outcomes and changes it is responsible for  versus the LSI. The Army has already made judgments like these. When the  FCS program was restructured in 2004, the cost estimate and the program  schedule increased significantly as the Army changed the scope of the  program by increasing requirements and adding deferred systems to the  contract. The Army attributed the changes in cost and schedule to the  changes in scope and took responsibility for them, absolving the LSI of  responsibility. Evaluated against the revised cost and schedule estimates,  the Army awarded the LSI the full incentive fee at the next program  evaluation event. Such adjustments in the LSI’s contractual responsibilities  are possible in the future as well because the criteria for each fee event are  not set until the year the event occurs and payment of fee associated with  each event is done incrementally based on accomplishment of specific  criteria for each event. This could allow the Army to adjust the fee criteria  based on the status of the program at the time. Thus, if the LSI and Army  determine that a certain segment of work due to be completed by the time  of an event cannot be completed, the criteria for assessing that segment  can be shifted out of that event. This occurred in the most recent program  event where the scope of work associated with approximately $105,000 in  fee was shifted to the subsequent fee event. The Army and LSI decided this  was necessary because accomplishment of the criteria associated with  that fee was better suited for the next fiscal year.
The Army’s own performance may be a factor in these decisions. For  example, the Army is responsible for maturing some of the key  technologies the LSI will need to integrate into the FCS systems. If these  technologies do not succeed, then the expectations of the LSI may have to  be adjusted accordingly. The decision to increase the weight requirement  for the manned ground vehicles is illustrative. Part of the reason for the  decision was the fact that an advanced, lightweight armor the Army was  developing outside the FCS contract was not performing as expected.  While the decision affected the vehicle design, the LSI was not responsible  for development of the armor technology.
section_title: Conclusions
paragraphs: Evaluating the use of the LSI on FCS involves consideration of several  intertwined factors. Some, like the best efforts provisions 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 any other program. FCS is not the first  program to use an LSI, but the extent of the partner-like relationship  between the Army and the LSI breaks new ground. Collectively, they make  the LSI arrangement in the FCS context unique.
We have reported the great costs and risks DOD has accepted by  committing to FCS investments. We have expressed concern that the FCS  program moved forward with insufficient knowledge and, therefore, an  insufficient business case. However, that aside, if one accepts the FCS  program for what it is and where it is in the development cycle, the Army  has set up a contractual relationship that is both consistent with its vision  for FCS and candid with respect to its workforce limitations. The Army  has been thoughtful about what it is trying to accomplish collaboratively  with the LSI, and has been working hard to make progress, including  facing up to difficult tradeoffs. On the other hand, the limits of the  contractual arrangements must also be recognized. Given the  unprecedented challenge FCS represents, it is unrealistic to expect that  any contracting approach alone could assure a successful outcome.  Ultimately, the risks of successful outcomes will be borne by the  government. The contractual arrangements are not a substitute for having  the high level of knowledge that a sound business case requires.
The Army has shown a high tolerance for accepting risk and responsibility  on this program. In addition to accepting high technical risk, the Army has  accepted responsibility for lowering the performance of some individual  systems, deleting some and adding other systems, reducing quantities, and  increasing costs and schedules. The Army has determined the bulk of cost  and schedule changes since 2003 to be programmatic or scope-related.  This determination has had two effects. First, the changes became the  responsibility of the Army, entitling the LSI to earn full fee thus far.  Second, the changes are excluded from a determination of a Nunn- McCurdy breach and its reporting and certification requirements. Over  time, the Army runs the risk of becoming increasingly vested as it makes  these and other decisions and less able to change course. Yet, the  government must safeguard its ability to change course in the future as  demonstrated knowledge replaces projections.
The foregoing underscores the important role of OSD in providing  oversight on the FCS program and holding the program accountable to its  own policies. While the Army works to manage the program, it is  important that OSD hold the program accountable to best practice  standards embedded in its policies. The go/no-go decision it will hold in  2009 provides an opportunity for OSD to do so. The use of an LSI on FCS  also needs to be seen as more significant than a contracting arrangement  for a single program. At the very least, a proposal to use an LSI approach  on any new program should be seen as a risk at the outset, not because it  is conceptually flawed, but because it indicates the government may be  pursuing a solution that it does not have the capacity to manage. Such  solutions ought not to be accepted as inevitable or unavoidable. Instead,  they require additional scrutiny before they are approved and increased  oversight if they are approved.
section_title: Recommendations
paragraphs: We recommend that the Secretary of Defense:  reassess OSD’s approach to overseeing the FCS program, including  asserting its own policy-based markers for progress, particularly in  the areas of cost, technology maturity, design maturity, and  production maturity.    ensure that there is the best link possible between the fee events in  the FCS contract and actual FCS demonstrations;  review major FCS program changes to ensure that determinations  for the government to accept changes as being programmatic or  scope-related in nature are carefully scrutinized; and    assess whether the experience of the LSI on FCS has broader  implications for acquisition management, such as the ability of the  DOD workforce to manage a system-of-systems acquisition.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD concurred with our recommendations. DOD stated that it was  updating its acquisition policy to address markers for progress in a  number of areas including cost, technology maturity, design maturity, and  production maturity. DOD agreed to use a variety of technical assessments  to inform the Defense Acquisition Board on the FCS program’s progress  against its policy-based markers. It is important that the Department be as  specific as possible and consistent with its own acquisition policy in  setting expectations that the FCS program must meet. The Department  also agreed to review the FCS award fee plan and to continue scrutinizing  FCS program changes and accurately report against the program baseline.  DOD noted that the FCS program scope has been expanded to add  capability and to meet affordability constraints. In our view, some of the  changes in scope were also made to correct shortcomings in the original  acquisition strategy. It is important for DOD to be able to make such  distinctions for reporting purposes.
In concurring that the Secretary of Defense assess whether the experience  of the LSI on FCS has broader implications for acquisition management,  DOD stated that its acquisition policy is being updated to better manage  and control system and system-of-systems acquisitions. In addition to  exploring how to improve the management of systems-of-systems and  LSIs, it is important for DOD to look at the more strategic questions such  as whether and under what circumstances these approaches should be  taken. For example, are systems-of-systems too large a scope to manage  and report as a single acquisition program? Is using an LSI preferable to  getting a better match between the acquisition programs being conceived  and the acquisition workforce DOD has to manage them? Should DOD be  looking at reducing the scope of programs, increasing the capability of its  own workforce, or both to achieve this match?
DOD also stated that it considers the business relationship for the FCS  development contract to be typical of a prime contract for a major system  because the FCS contractor performs a substantial portion of the  development work for the program. As there is no universally accepted  definition of a LSI, this distinction may be more a matter of opinion than  fact. In our opinion, the role played by the FCS LSI is not typical of a DOD  contractor. Two characteristics, in our view, distinguish a LSI from a  traditional contractor. First, the integrator is managing across what would  traditionally have been program lines, versus subsystems within a  program. Second, in so managing, the integrator is acting on behalf of, and  in the interests of, the government. The Army was specific about needing a  different, partner-like contracting arrangement like this when it began the  FCS program. We also note that while the FCS LSI is performing  substantive work on software systems, its portion of total work is low  relative to major prime contractors elsewhere in DOD and it is not directly  involved in the development of any hardware for the FCS system-of- systems.
Finally, the Department noted that the role of the FCS prime contractor in  requirements determination is not correctly framed in our draft report and  that we confuse operational requirements with design specifications. We  have characterized the LSI’s role in this report as requirements refinement,  rather than requirements definition. The requirements work being led by  the FCS LSI is intended to complete the definition of the system-of- systems requirements and the system-level requirements. Two aspects of  this role are, in our view, distinctive. First is the fact that because FCS is a  system-of-systems, the functions performed are one level higher than they  would have been for a typical single-system program. Thus, while the  Army determines the operational requirements for the FCS brigade  combat team the LSI is heavily involved with its subcontractors and the  Army in setting the requirements for individual systems. On single system  programs, the Army would have set the requirements for the individual  system. Second, the FCS solution is being formed concurrent with the  development of individual technologies and the design of systems. Thus,  as the limitations of technology and design are discovered, the LSI works  with the Army to change or refine the requirements to conform to these  limitations. While this process is not atypical of weapon system  acquisitions, the vast scope and large technical leaps sought in the FCS  program requires greater involvement by the LSI in the refinement  process.
DOD’s comments are reprinted in Appendix III. DOD also provided  technical comments, which were addressed throughout the report as  appropriate.
We are sending copies of this report to the Secretary of Defense; the  Secretary of the Army; and the Director, Office of Management and  Budget. Copies will also be made available to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
Please contact me on (202) 512-4841 if you or your staff has any questions  concerning this report. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Other contributors to this report were Assistant Director William R.  Graveline, Noah B. Bleicher, Lily J. Chin, Brendan S. Culley, Michael D.  O’Neill, Kenneth E. Patton, and Thomas P. Twambly.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify factors that led to the Army’s decision to use an LSI for the  FCS program and to determine the work performed by the LSI, we  performed the following:    We obtained and analyzed the program documents including the  FCS system development and demonstration contract, statement of  work, Army FCS acquisition strategy report, and FCS operational  requirements document to gain an understanding of the terms and  conditions of LSI responsibilities, the structure and processes of the  program, and goals of the Army. We reviewed FCS subcontracts to  understand the nature of the FCS one team and to ascertain how  Federal Acquisition Regulation clauses were flowed down after FCS  contract conversion. We reviewed Army audits, Defense Contract  Management Agency and Defense Contract Audit Agency reports, as  well as GAO reports and testimonies.
We reviewed Army and DOD guidance as well as the Federal  Acquisition Regulation to understand government contracting  standards and procedures used for the acquisition of major weapon  systems.
We interviewed FCS program officials from the Tank-Automotive  and Armaments Command, DOD’s Office of Acquisitions,  Technology, and Logistics, Defense Contract Audit Agency, and  Defense Contract Management Agency to gain insight into why the  Army chose and LSI business arrangement, how it is performing,  and potential concerns for the future.
We interviewed one team partner officials from 12 of the major  platform development offices to receive feedback from those  implementing the program decisions made by the LSI. These  discussions focused on differences, benefits, and drawbacks of the  LSI business approach when compared to more traditional, prime  contractor arrangements. As many of these firms have extensive  experience in defense contracting, we spoke about alternatives that  the Army could have used for the FCS procurement. Finally, these  discussions allow us to gain insight into the implementation and  impact of the other transaction agreement to FAR contract  conversion.
To evaluate the implications of the Army’s relationship with the LSI, we  performed the following:    We reviewed and collected information from the acquisition  strategy report, statement of work, the FAR-based contract,  documents related to source selection decisions, the integrated  master schedule and documents related to the in-process  preliminary design review, and the operational requirements  document to identify the roles and responsibilities of the Army and  LSI.
We interviewed key Army and LSI program managers, who were  responsible for the overall FCS program, the Army and LSI leaders  of the major integrated product development teams and met with  selected officials from the first tier of major subcontractors to  assess communication and decision making within the program.
To evaluate the Army’s criteria for assessing the LSI’s performance, we  conducted the following:    We reviewed the financial terms of the contract, the criteria for  assessing the LSI’s performance at program incentive events  contained in the contract and integrated master plan and conducted  quantitative analyses of the contract’s fixed and incentive fees;    We reviewed the LSI’s presentations for the Army’s assessment and  also interviewed Army officials, who were responsible for reviewing  the LSI’s performance. To evaluate the program’s financial reporting  systems, we interviewed officials from the Defense Contract  Management Agency and Defense Contract Audit Agency.
To accomplish our work, we visited and interviewed officials from the  Army Tank and Automotive Command, Warren, Mich.; Army integrated  product team leaders in Huntsville, Ala., Hazelwood, Mo., Fort Picatinny,  N.J.; LSI officials, in Hazelwood, Mo. and Huntington Beach, Calif. In  addition, we interviewed 12 one team partners across the United States.  We also interviewed officials from the Defense Contract Management  Agency, Defense Contract Audit Agency and the Office of the Secretary of  Defense’s Cost Analysis Improvement Group.
We conducted our review between May 2006 and June 2007 in accordance  with generally accepted government accounting standards.
section_title: Appendix II: Overview of FAR Provisions Included in Future Combat Systems Lead Systems Integrator Contract
paragraphs: The Federal Acquisition Regulation (FAR) provides uniform policies and  procedures for acquisitions by federal government executive agencies.  Depending on the type of contract entered into, different FAR clauses and  provisions are used to protect the government’s interests and define the  terms of the agreement. Likewise, contracting officers structure a contract  appropriately depending on the products or services being procured. A  multitude of FAR provisions and agency FAR supplement provisions give  contracting officers a wide range of options to tailor government contracts  to meet the specific agency needs. While many FAR clauses are required to  be incorporated in all contracts of a particular type, other provisions are  only required to be included as applicable.
The Army’s original FCS Other Transaction Agreement was converted into  a FAR-based cost-reimbursable research and development contract in  2006. According to the Army, the new FCS contract includes the FAR and  Defense Federal Acquisition Regulation Supplement (DFARS)  requirements appropriate for this type of procurement. While GAO  confirmed the Army’s analysis of the FAR-based contractual provisions, it  did not conduct an independent detailed examination of every applicable  clause in the contract. However, GAO did confirm the inclusion of several  FAR requirements that address areas of key concern.
Cost Accounting Standards (CAS) – Two FAR part 12 provisions  pertaining to the use and administration of CAS have been included  in the FCS contract.
Procurement Integrity Act (PIA) – The FCS contract includes the  two FAR clauses required to address PIA concerns.
Truth in Negotiations Act (TINA) – TINA standards for cost and  pricing data are addressed in three FAR part 12 provisions.  Additional information regarding exceptions and requirements for  cost and pricing data are included separately in the FCS contract.
Organizational Conflict of Interest (OCI) – Although the  predecessor other transaction agreement contained an OCI clause  that required certain safeguards be put into place if and when  Boeing and SAIC competed for subcontracts, it did not preclude  them from such competitions. The FCS FAR contract includes an  OCI provision that precludes the Boeing/SAIC LSI team from  competing for any FCS subcontract awards. Though FCS  subcontractors may compete for additional FCS subcontracts, the  OCI provision in the FCS contract requires that steps be taken to  ensure an absence of any organizational conflicts of interest during  subcontractor selection activities. Additionally, this clause provides  instruction on how proprietary information should be protected.
section_title: Appendix III: Comments from the Department of Defense