Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results but Delivers Less at a Higher Cost
Published: 2007-03-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Over the next 5 years, the Missile Defense Agency (MDA) expects to invest $49 billion in the BMD system's development and fielding. MDA's strategy is to field new capabilities in 2-year blocks. In January 2006, MDA initiated its second block--Block 2006--to protect against attacks from North Korea and the Middle East. Congress requires GAO to assess MDA's progress annually. This year's report addresses MDA's progress during fiscal year 2006 and follows up on program oversight issues and the current status of MDA's quality assurance program. GAO assessed the progress of each element being developed by MDA, examined acquisition laws applicable to major acquisition programs, and reviewed the impact of implemented quality initiatives.
section_title: What GAO Found
paragraphs: During fiscal year 2006, MDA fielded additional assets for the Ballistic Missile Defense System (BMDS), enhanced the capability of some assets, and realized several noteworthy testing achievements. For example, the Ground-based Midcourse Defense (GMD) element successfully conducted its first end-to-end test of one engagement scenario, the element's first successful intercept test since 2002. However, MDA will not meet its original Block 2006 cost, fielding, or performance goals because the agency has revised those goals. In March 2006, MDA: reduced its goal for fielded assets to provide funds for technical problems and new and increased operations and sustainment requirements; increased its cost goal by about $1 billion--from $19.3 to $20.3 billion; and reduced its performance goal commensurate with the reduction of assets. MDA may also reduce the scope of the block further by deferring other work until a future block because four elements incurred about $478 million in fiscal year 2006 budget overruns. With the possible exception of GMD interceptors, MDA is generally on track to meet its revised quantity goals. But the deferral of work, both into and out of Block 2006, and inconsistent reporting of costs by some BMDS elements, makes the actual cost of Block 2006 difficult to determine. In addition, GAO cannot assess whether the block will meet its revised performance goals until MDA's models and simulations are anchored by sufficient flight tests to have confidence that predictions of performance are reliable. Because MDA has not entered the Department of Defense (DOD) acquisition cycle, it is not yet required to apply certain laws intended to hold major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. MDA is more agile in its decision-making because it does not have to wait for outside reviews or obtain higher-level approvals of its goals or changes to those goals. Because MDA can revise its baseline, it has the ability to field fewer assets than planned, defer work to a future block, and increase planned cost. All of this makes it hard to reconcile cost and outcomes against original goals and to determine the value of the work accomplished. Also, using research and development funds to purchase operational assets allows costs to be spread over 2 or more years, which makes costs harder to track and commits future budgets. MDA continues to identify quality assurance weaknesses, but the agency's corrective measures are beginning to produce results. Quality deficiencies are declining as MDA implements corrective actions, such as a teaming approach, designed to restore the reliability of key suppliers.

section_title: Letter
paragraphs: The concern that nuclear, biological, or chemical weapons are  proliferating has heightened the sense of urgency for our country to  develop a comprehensive missile defense system capable of defending the  United States and its allies against weapons of mass destruction and the  ballistic missiles that could deliver them. The threat from ballistic missiles  is growing with at least 25 countries now possessing or acquiring  sophisticated missile technology. For nearly half a century, the  Department of Defense (DOD) has been funding efforts to develop a  system to detect, track, and defeat ballistic missiles deployed from enemy  launch sites. The current system under development–the Ballistic Missile  Defense System (BMDS)–includes a diverse collection of land-, air-, sea-,  and space-based assets located around the globe and founded on cutting- edge technology. DOD plans to invest an additional $49 billion in this  system, or about 13 percent of its research and development budget, over  the next 5 years.
The Missile Defense Agency (MDA)—the agency charged with developing  an integrated BMDS—is currently developing nine BMDS elements. The  elements are: Airborne Laser (ABL); Aegis Ballistic Missile Defense (Aegis  BMD); BMDS Sensors; Command, Control, Battle Management, and  Communications (C2BMC); Ground-based Midcourse Defense (GMD);  Kinetic Energy Interceptors (KEI); Multiple Kill Vehicles (MKV); Space  Tracking and Surveillance System (STSS); and Terminal High Altitude  Area Defense (THAAD). MDA has adopted an evolutionary acquisition  approach in which the BMDS will be fielded in 2-year blocks. The first  block, known as Block 2004, ended on December 31, 2005. The block  fielded a limited capability that included initial versions of GMD; Aegis  BMD; Patriot Advanced Capability-3; and C2BMC elements. This capability  is designed to provide limited protection of the United States from  intercontinental ballistic missile attacks out of North Korea and the Middle  East and protection of U.S. forces and critical assets from short- and  medium-range ballistic missiles.
The current block, Block 2006–which represents the period of  development for calendar years 2006 and 2007—enhances existing  capabilities, provides additional assets for operational use, and continues  development of future capabilities. MDA submitted its goals for Block  2006 to Congress shortly after its fiscal year 2006 budget request. The  goals quantified the number of assets that MDA planned to field by the end  of the block, defined the performance that fielded assets were expected to  deliver, and identified the cost of all Block 2006 efforts, including the cost  of assets being fielded and of developmental activities for three  elements—ABL, STSS, and THAAD—that will not be operational until  future blocks. Fiscal year testing goals were also established by element  program offices, but these goals were not formally reported to Congress.
The National Defense Authorization Acts for fiscal years 2002 and 2005  mandated that we prepare annual assessments of MDA’s ongoing cost,  schedule, testing, and performance progress through fiscal year 2006. To  date, we have delivered assessments covering fiscal years 2003, 2004, and  2005 to Congress. In this report, we assess the progress MDA made during  fiscal year 2006 against the Block 2006 goals submitted to Congress in  March 2005, as well as the testing goals established by the nine BMDS  elements. We have also followed up on two previously reported issues:   (1) whether the flexibility granted to MDA in acquiring the BMDS has  reduced decision-makers’ knowledge of program outcomes, thereby  limiting program oversight and MDA’s accountability for the investment  being made in missile defense; and (2) the current status of MDA’s quality  assurance program.
To address our objectives, we looked at the accomplishments of six BMDS  elements—ABL, Aegis BMD, BMDS Sensors, C2BMC, GMD, and STSS. The  report also includes information on the progress of three elements—KEI,  MKV, and THAAD–being developed during fiscal year 2006 that MDA  considers part of future blocks. Together, these nine elements collectively  account for about 72 percent of MDA’s fiscal year 2006 research and  development budget. The remainder of MDA’s budget funds activities such  as new technology and system concepts and common support for all  elements. To determine the elements’ progress toward Block 2006 goals,  we examined System Element Reviews, test plans and reports, production  plans, and Contract Performance Reports. We also interviewed officials  within each element program office and within MDA functional offices. In  assessing whether a match exists between the missile defense program’s  flexibility, and the program’s transparency, we examined documents such  as those defining MDA’s changes to Block 2006 goals, acquisition laws for  major DOD programs, and BMDS policy directives issued by the Secretary  of Defense. We examined the current status of MDA’s quality assurance  program by visiting various contractor facilities and holding discussions  with MDA officials, such as officials in the Office of Quality, Safety, and  Mission Assurance. We performed our work from June 2006 to March 2007  in accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: MDA’s mission is to develop and field an integrated and layered Ballistic  Missile Defense System to defend the United States, its deployed forces,  allies, and friends against all ranges of enemy ballistic missiles in all  phases of flight. This is challenging, requiring a complex combination of  defensive components—space-based sensors, surveillance and tracking  radars, advanced interceptors, command and control, and reliable  communications—that work together as an integrated system.
A typical hit-to-kill engagement scenario for an intercontinental ballistic  missile (ICBM) would unfold as follows:  Infrared sensors aboard early-warning satellites detect the hot plume of  a missile launch and alert the command authority of a possible attack.
Upon receiving the alert, land- or sea-based radars are directed to track  the various objects released from the missile and, if so designed, to  identify the warhead from among spent rocket motors, decoys, and  debris.
When the trajectory of the missile’s warhead has been adequately  established, an interceptor—consisting of a “kill vehicle” mounted atop  a booster—is launched to engage the threat. The interceptor boosts  itself toward a predicted intercept point and releases the kill vehicle.
The kill vehicle uses its onboard sensors and divert thrusters to detect,  identify, and steer itself into the warhead. With a combined closing  speed on the order of 10 kilometers per second (22,000 miles per hour),  the warhead is destroyed through a “hit-to-kill” collision with the kill  vehicle above the atmosphere.
To develop a system capable of carrying out such an engagement, MDA is  executing an evolutionary acquisition strategy in which the fielding of  missile defense capabilities is organized in 2-year increments known as  blocks. Each block is intended to provide the Ballistic Missile Defense  System with capabilities that will enhance the development and overall  performance of the system. The first block—Block 2004—ended on  December 31, 2005, and fielded a limited initial capability that included  early versions of the Ground-based Midcourse Defense; Aegis Ballistic  Missile Defense; Patriot Advanced Capability-3; and the Command,  Control, Battle Management, and Communications element.
During calendar year 2006 and 2007, MDA is focusing its program of work  on the enhancement of four fielded BMDS elements—GMD, Aegis BMD,  Sensors, and C2BMC. The primary contribution of Block 2006 is that it  fields additional assets and continues the evolution of Block 2004 by  providing improved GMD interceptors, enhanced Aegis BMD missiles,  upgraded Aegis BMD ships, a Forward-Based X-Band—Transportable  radar, and enhancements to the C2BMC software.
MDA divides each year’s budget request into a request for the current  block and requests for future blocks that have not yet formally begun. For  example, in fiscal year 2006, MDA requested funds for Block 2006 and for  blocks that begin in 2008, 2010, 2012, and 2014. When MDA submitted its  Block 2006 budget to Congress in February 2005, the agency requested  funding for not only the four elements fielding assets during Block 2006,  but also for the continued development of three elements—ABL, STSS,  and THAAD—that will not field assets for operational use until future  blocks.  According to MDA officials, these elements—which are primarily  developmental elements—were included in the block because the agency  believed that during the block time frame the elements offered some  emergency capability. MDA also requested fiscal year 2006 funds for two  other developmental elements, MKV and KEI. However, MDA did not  include funding for these elements in its Block 2006 budget request  because they provided no capability during the block. Instead, MDA  requested funding for MKV in its fiscal year 2006 request for Advanced  Component Development and Prototypes—a program element that is not  tied to any block—and for KEI in the agency’s fiscal year 2006 request for  Block 2014. Table 1 provides a brief description of all elements being  developed by MDA.
As part of MDA’s planning process, the agency defines overarching goals  for the development and fielding of the current BMDS block. These goals  identify the composition of the block (the elements in development and  those planned for fielding), the type and quantity of assets to be fielded,  the cost associated with element development and fielding (including  operation and sustainment activites), and the performance expected of  fielded assets. For example, in March 2005, MDA told Congress that its  Block 2006 program of work would include seven elements—ABL, Aegis  BMD, C2BMC, GMD, Sensors, STSS, and THAAD. Further, MDA identified  the cumulative number of assets that Aegis BMD, C2BMC, GMD, and the  Sensors elements would field by the end of the block, and the performance  that those assets would deliver in terms of probability of engagement  success, the land area from which a ballistic missile launch could be  denied, and the land area that could be protected from a ballistic missile  launch. Finally, MDA told Congress that it would try to complete all Block  2006 work for $20.458 billion.
To enable MDA to meet its overarching goals, each element’s program  office establishes its own plan for fielding and/or developmental activities.  For example, each program office develops a delivery plan and a test  schedule that contributes to MDA’s performance and fielding goals. The  programs also work with their prime contractor to plan the block of work  so that it can be completed within the program’s share of MDA’s budget.
Since 2002, missile defense has been seen as a national priority and has  been funded at nearly requested levels. However, DOD’s Program Budget  Decision in December 2004 called for MDA to plan for a $5 billion  reduction in funding over fiscal years 2006-2011. Future MDA budgets  could be affected by cost growth in federal entitlement programs that are  likely to decrease discretionary spending and by increased DOD  expenditures, such as expenses created by the Iraq conflict.
Last year we reported that MDA strayed from the knowledge-based  acquisition strategy that allows successful developers to deliver, within  budget, a product whose performance has been demonstrated. In doing  so, MDA fielded assets before their capability was known and the full cost  of the capability was not transparent to decision makers. We noted that it  was possible for MDA to return to a knowledge-based approach to  development while still fielding capability in blocks, but that corrective  action was needed to put all BMDS elements on a knowledge-based  approach. That is, instead of concurrently developing, testing and fielding  the BMDS, MDA would need to adopt knowledge points at which the  program would determine if it was ready to begin new acquisition  activities. These knowledge points would be consistent with those called  out in DOD’s acquisition system policy. To provide a basis for holding  MDA accountable for delivering within estimated resources and to ensure  the success of future MDA development efforts, we recommended that the  Secretary of Defense implement a knowledge-based acquisition strategy  for all the BMDS elements, assess whether the current 2-year block  strategy was compatible with the knowledge-based development strategy,  and adopt more transparent criteria for reporting each element’s  quantities, cost, and performance. DOD has not taken any action on the  first two recommendations because it considers MDA’s acquisition  strategy as knowledge-based and because MDA’s block strategy is  compatible with the strategy MDA is implementing. Neither did DOD agree  to take action on our third recommendation to adopt more transparent  criteria for identifying and reporting program changes. In its comments,  DOD responded that MDA is required by statute to report significant  variances in each block’s baseline and that these reports along with  quarterly DOD reviews provide an adequate level of program oversight.
section_title: BMDS Elements Made Progress, but It Was Less Than Expected and It Cost More than Planned
paragraphs: MDA made progress during fiscal year 2006 in carrying out planned  accomplishments for the block elements, but it will not deliver the value  originally planned for Block 2006. Costs have increased, while the scope of  work has decreased. It is also likely that in addition to fielding fewer  assets other Block 2006 work will be deferred to offset growing contractor  costs. Actual costs cannot be reconciled with original goals because the  goals have been changed, work travels to and from other blocks, and  individual program elements do not account for costs consistently. In  addition, although element program offices achieved most of their 2006  test objectives, the performance of the BMDS cannot yet be fully assessed  because there have been too few flight tests conducted to anchor the  models and simulations that predict overall system performance. Several  elements continue to experience technical problems which pose questions  about the performance of the fielded system and could delay the  enhancement of future blocks.
subsections: section_title: Block 2006 Costs Have Increased, but a Full Accounting Is Not Possible
paragraphs: Block 2006 costs have increased because of technical problems and  greater than expected GMD operations and sustainment costs. In March  2006, shortly after the formal initiation of Block 2006, increasing costs and  other events prompted MDA to reduce the quantity of assets it intended to  field during the block. Although the agency reduced the scope of Block  2006, most of the elements’ prime contractors reported that work  completed during fiscal year 2006 cost more than planned. Consequently,  MDA officials told us it is likely that other work planned for Block 2006  will be deferred until Block 2008 to cover fiscal year 2006 overruns.  Furthermore, changing goals, inconsistent reporting of costs by the  individual elements, and MDA’s past practice of accounting for the cost of  deferred work prevents a determination of the actual cost of Block 2006.
subsections: section_title: Cost Increases Lead to Revised Block 2006 Cost Goal
paragraphs: MDA’s cost goal for Block 2006 has increased by approximately $1 billion.  In March 2005, MDA established a goal of $20.458 billion for the  development, fielding, and sustainment of all Block 2006 components.  However by March 2006, it had grown by about $1 billion.  Cost increases  were caused by the:    addition of previously unknown operations and sustainment  requirements,  realignment of the GMD program to support a successful return to  flight,  realignment of the Aegis BMD program to address technical  challenges and invest in upgrades to keep pace with the near term  threat, and    preparations for round-the-clock operation of the BMDS when the  system was put on alert.
In an effort to keep costs within the goal, MDA shifted THAAD’s future  development costs of $1.13 billion to another block. That is, the agency  moved the cost associated with THAAD’s development in fiscal years 2006  through 2011—which in March 2005 was considered a Block 2006 cost—to  Block 2008. This accounting change accommodated the cost increase.  According to MDA’s November 2006 Report to Congress, THAAD costs  will be reported as part of Block 2008 costs to better align the agency’s  resources with the planned delivery of THAAD fire units in 2008. Tables 2  and 3 compare the Block 2006 cost goal established for the BMDS in  March 2005 and March 2006.
For the purposes of this report, we have adjusted the March 2005 cost goal  to reflect the deletion of future THAAD cost from Block 2006. This enables  the revised cost goal that excludes THAAD to be compared with the  original cost goal. Had THAAD’s cost been removed from MDA’s March  2005 cost goal, Block 2006 would have actually totaled about   $19.3 billion. Comparing this with the March 2006 revised goal of  approximately $20.3 billion reveals the $1 billion increase in estimated  Block 2006 costs.
section_title: Individual Elements Account for Block 2006 Costs Differently
paragraphs: The 2-year block structure established by MDA has proven to be a  complicated concept for its BMDS elements to implement. According to  officials, MDA defines its block structure in two types of capabilities:    Early Capability–A capability that has completed sufficient testing  to provide confidence that the capability will perform as designed.  In addition, operator training is complete and logistical support is  ready. So far, Aegis BMD, C2BMC, and GMD are the only elements  that have met these criteria.
Full Capability–These capabilities have completed all system-level  testing and have shown that they meet expectations. At this stage,  all doctrine, organization, training, material, leadership, personnel,  and facilities are in place.
According to MDA officials, the early capability is typically fielded during  one block and the full capability is usually attained during the next or a  subsequent block. However, not all elements account for Block 2006 costs  in the same manner. For example, table 4 below shows that some elements  included costs that will be incurred to reach full capability—costs that will  be recognized in fiscal year 2009 through 2011—while other elements have  not.
According to agency officials, the cost of all activities needed to validate  the performance of Block 2006 Fielded Configuration elements should be  included as part of the BMDS Block 2006 costs even though these  activities may occur during future blocks. According to officials from  MDA’s Systems Engineering and Integration Directorate, the C2BMC and  Aegis BMD programs’ cost accounting for Block 2006 are the most  accurate because the programs included the costs to conduct follow-on  testing in subsequent years. Additionally, the officials said that other  elements of the BMDS will conduct similar tests in the years following the  actual delivery of their Block 2006 capabilities; however, the costs were  not included as Block 2006 costs. If each BMDS element were to  consistently report block costs, the planned costs for Block 2006 would be  higher than MDA’s current reported costs of $20.34 billion.
section_title: Increasing Costs Are Causing MDA to Reduce Scope of Block 2006
paragraphs: MDA is making some progress toward achieving its revised Block 2006  goals, but the number of fielded assets and their overall performance will  be less than planned when MDA submitted its Block 2006 goals to  Congress in March 2005. MDA notified Congress that it was revising its  Block 2006 Fielded Configuration Baseline in March 2006, shortly after  submitting its fiscal year 2007 budget.
When MDA provided Congress with its quantity goals in March 2005, it  stated those goals cumulatively. That is, MDA added the number of Block  2004 assets that it planned to field by December 31, 2005, to the number of  assets planned for Block 2006. However, in the case of GMD interceptors,  MDA was unable to meet its Block 2004 quantity goals, which, in effect,  caused MDA’s Block 2006 goal for interceptors to increase. For example,  MDA planned to field 18 GMD interceptors by December 31, 2005, and to  field an additional 7 interceptors during Block 2006, for a total of 25  interceptors by the end of Block 2006. But, because it did not meet its  Block 2004 fielding goal—fielding only 10 of the 18 planned interceptors— MDA could not meet its Block 2006 cumulative goal of 25 without  increasing its Block 2006 deliveries. For purposes of this report, we  determined the number of assets that MDA would have to produce to meet  its Block 2006 cumulative quantity goal. Table 5 depicts only those  quantities and shows how they have changed over time.
According to MDA, it reduced the number of GMD interceptors in March  2006 for four primary reasons:    delays in interceptor deliveries caused by an explosion at a    a halt in production after several flight test failures and pending  Mission Readiness Task Force (MRTF) reviews,    a MRTF review that redirected some interceptors from fielding to  testing, and  the temporary suspension of fielding interceptors due to  manufacturing and quality issues associated with the  exoatomospheric kill vehicle (EKV).
MDA also delayed a partial upgrade to the Thule early warning radar until  a full upgrade can be accomplished. According to a July 11, 2005, DOD  memorandum, the full upgrade of Thule is the most economical option and  it meets DOD’s desire to retain a single configuration of upgraded early  warning radars.
Additionally, the delivery of Aegis BMD Standard Missile -3 (SM-3) was  reduced as technical challenges associated with the Divert Attitude  Control System were addressed and as investments in upgrades were  made to keep pace with emerging ballistic missile threats. According to  Aegis BMD officials, the program also revised the upgrade schedule for  engagement destroyers because other priorities prevent the Navy from  making one ship available before the end of the block.
Budget cuts to the C2BMC program also caused MDA to defer the  installation of C2BMC suites at three sites. MDA had planned to install the  suites at U.S. Central Command, European Command, and another site  that was to be determined before the end of the block. However, MDA  now plans to place less expensive Web browsers at these sites.
MDA made progress in fielding additional BMDS assets in 2006 and is  generally on track to meet most of its revised block goals. MDA’s delivery  schedules and System Element Review reports show that MDA planned to  accomplish these goals by making the following progress by December 31,  2006: adding 4 Aegis BMD missiles to inventory, adding 2 new Aegis BMD  destroyers for long-range surveillance and tracking, upgrading 2 Aegis  BMD destroyers and 2 Aegis BMD cruisers to perform both engagement  and long-range surveillance and tracking, adding 1 new Aegis BMD  destroyer and 1 new cruiser with both engagement and long-range  surveillance and tracking capability, completing a number of activities  prior to delivering the FBX-T radar, delivering the hardware for the 3 Web  browsers, and emplacing 8 GMD interceptors. With the exception of the  GMD interceptors, MDA completed all work as planned. The GMD  program was only able to emplace four interceptors by December 2006,  rather than the eight planned. However, program officials told us that the  contractor has increased the number of shifts that it is working and the  program believes that with this change the contractor can accelerate  deliveries and emplace as many as 24 interceptors by the end of the block.  However, to do so, the GMD program will have to more than double its  2007 interceptor emplacement rate.
section_title: MDA Likely to Defer Additional Work into Future Blocks to Offset Rising Costs
paragraphs: Even though MDA reduced the quantity of assets it planned to deliver  during Block 2006 to free up funds, most of the MDA’s prime contractors  overran their fiscal year 2006 budgets. Collectively, the prime contractors  developing elements included in Block 2006 exceeded their budgets by  approximately $478 million, with GMD accounting for about 72 percent of  the overrun. Table 6 contains our analysis of prime contractors’ cost and  schedule performance in fiscal year 2006 and the potential overrun or  underrun of each contract at completion. All estimates of the contracts’  cost at completion are based on the contractors’ performance through  fiscal year 2006. Appendix II provides further details regarding the cost  and schedule performance of the prime contractors for the seven elements  shown in table 6.
As shown in table 6, the Sensors element is the only Block 2006 element  that according to our analysis performed within its fiscal year 2006 budget.  The ABL, Aegis BMD, GMD, and STSS programs overran their fiscal year  budgets as a result of technical problems and integration issues  encountered during the year. We could not assess the C2BMC contractor’s  cost and schedule performance because MDA suspended Earned Value  reporting during the year as the contractor replanned its Block 2006  program of work.
In addition to analyzing the fiscal year 2006 cost and schedule  performance of elements included in Block 2006, we also analyzed the  performance of elements included in other blocks. Of the elements  reporting Earned Value data, only KEI performed within its budget.  THAAD’s integration problems once again caused it to exceed its budget.  We were unable to determine whether the work accomplished by the MKV  contractor cost more than originally planned because Contract  Performance Reports were suspended in February 2006 as the program  transitioned from an advanced technology development program to a  system development program. This transition prompted MKV to establish a  new baseline for the program, which the contractor will not report against  until early in fiscal year 2007.
MDA officials told us that MDA is likely to defer some Block 2006 work  activities (other than the delivery of assets) into future blocks in an effort  to operate within the funds programmed for the block. If the agency  reports the cost of deferred work as it has in the past, the cost of Block  2006 will not include all work that benefits the block and the cost of the  future block will be overstated.
The deferral of work, while necessary to offset increased costs,  complicates making a comparison of a block’s actual costs with its original  estimate. According to the Statement of Federal Financial Accounting  Standards Number 4, a federal program should report the full cost of its  outputs, which is defined as the total amount of resources used to produce  the output. In March 2006, we reported that the cost of MDA’s Block 2004  program of work was understated because the reported costs for the block  did not include the cost of Block 2004 activities that were deferred until  Block 2006. Conversely, the cost of Block 2006 is overstated because the  deferred activities from Block 2004 do not directly contribute to the output  of Block 2006. Similarly, if MDA decides to defer Block 2006 activities until  Block 2008 as officials in MDA’s Office of Agency Operations told us is  likely, the cost of those activities will likely be captured as part of Block  2008 costs.
section_title: MDA Able to Achieve Most Test Objectives Despite Some Delays in Test Schedule
paragraphs: Most BMDS elements achieved their primary calendar year 2006 test  objectives and conducted test activities on schedule. By December 2006– the midpoint of Block 2006–three of the six Block 2006 elements and all  elements considered part of future blocks—met their 2006 primary test  objectives. Only the ABL, Aegis BMD, and STSS elements were unable to  achieve these objectives.
subsections: section_title: Progress Made on Block 2006 Elements
paragraphs: Although the elements encountered test delays, some were able to achieve  noteworthy accomplishments. For example, in its third flight test, the  GMD program exceeded its test objectives by intercepting a target. This  intercept was particularly noteworthy because it was the first successful  intercept attempt for the program since 2002. Also, although the test was  for only one engagement scenario, it was notable because it was GMD’s  first end-to-end test.
The GMD program originally planned to conduct four major flight tests,  during fiscal year 2006, two using operational interceptors. However, the  program was only able to conduct three flight tests during the fiscal year.  In one, an operational interceptor was launched against a simulated target;  in a second test, a simulated target was launched to demonstrate the  ability of the Beale radar to provide a weapon system task plan; and in the  other, an interceptor was launched against an actual target. It was in the  third test that—for one end-to-end scenario—the program exceeded test  objectives by destroying a target representative of a real world threat. The  objectives of the fourth test were to be similar to those of the third test— an interceptor flying-by a target with no expectation of a hit. However,  program officials told us that the success of the earlier tests caused them  to accelerate the objectives of the fourth test by making it an intercept  attempt. The fourth test has not yet taken place because a delay in the  third test caused a similar delay in the fourth test and because components  of the test interceptor are being changed to ensure that they will function  reliably. This test is currently scheduled no earlier than the third quarter of  fiscal year 2007.
Both the C2BMC and Sensors elements conducted all planned test  activities on schedule and were able to meet their 2006 objectives. The  C2BMC software, which enables the system to display real-time target  information collected by BMDS sensors, was tested in several flight tests  with the Aegis BMD and GMD programs and was generally successful. The  Sensors element was also able to complete all tests planned to ensure that  the Forward-Based X-Band— Transportable (FBX-T) radar will be ready  for operations. The warfighter will determine when the FBX-T will become  operational, but MDA officials told us that this may not occur until the  United States is able to provide the radar’s data to Japan.
MDA was unable to successfully execute the 2006 test objectives for the  STSS program. Thermal vacuum testing that was to be conducted after the  first payload was integrated with space vehicle 1 was delayed as a result of  integration problems. According to program officials, testing began in  January 2007 and it was expected to be completed in late February 2007.
Although the Aegis BMD program conducted its planned test activities on  schedule, it was unable to achieve all of its test objectives for 2006. Since  the beginning of Block 2006, the program has conducted one successful  intercept, which tested the new Standard Missile-3 design that is being  fielded for the first time during Block 2006. This new missile design  provides a capability against more difficult threats and has a longer service  life than the missile produced in Block 2004. In December 2006, a second  intercept attempt failed because the weapon system component was  incorrectly configured and did not classify the target as a threat, which  prevented the interceptor from launching. Had this test been successful, it  would have been the first time that the pulse mode of the missile’s Solid  Divert and Attitude Control System would have been partially flight tested.
A sixth BMDS element–ABL–experienced delays in its testing schedule  and was also unable to achieve its fiscal year 2006 test objectives. ABL is  an important element because if it works as desired, it will defeat enemy  missiles soon after launch, before decoys are released to confuse other  BMDS elements. Development of the element began in 1996, but MDA has  not yet demonstrated that all of ABL’s leading-edge technologies will  work. The ABL program plans to prove critical technologies during a  lethality demonstration. This demonstration is a key knowledge point for  ABL because it is the point at which MDA will decide the program’s future.
However, technical problems encountered with the element’s Beam  Control/Fire Control component caused the program to experience over a  3-month delay in its ground test program, which has delayed the planned  lethality demonstration until 2009. In addition, all software problems have  not been completely resolved and, according to ABL’s Program Manager,  will have to be corrected before flight testing can begin, which could  further delay the lethality demonstration.
section_title: Test Results for Future Block Elements Are Positive
paragraphs: The KEI element also has a key decision point—a booster flight test— within the next few years. In preparation for this test, the program  successfully conducted static fire tests and wind tunnel tests in fiscal year  2006 to better assess booster performance. Upon completion of KEI’s 2008  flight test and ABL’s 2009 lethalithy demonstration, MDA will compare the  progress of the two programs and decide their futures.
In January 2005, MDA established ABL as the primary boost phase defense  element. At the same time, MDA restructured the KEI program to develop  an upgraded long-range midcourse interceptor and reduced KEI’s role in  the boost phase to that of risk mitigation. A KEI official told us that a  proposal is being developed that suggests MDA approach the 2009  decision as a down select or source selection that would decide whether  ABL or KEI would be the BMDS boost phase capability.
The MKV program accomplished all of its planned activities as scheduled  during fiscal year 2006, which included several successful propulsion tests.  In November 2005, the program tested a preliminary design of MKV’s liquid  propellant divert and attitude control system–the steering mechanism for  the carrier and kill vehicles. This test was a precursor to a successful July  2006 test of the liquid divert and attitude control system’s divert thruster,  which was conducted under more realistic conditions. The program also  executed a solid propellant divert and attitude control system test in  December 2005. Results of the December test, combined with a technology  assessment, led program officials to pursue a low-risk, high-performance  liquid fueled divert and attitude control system. The MKV program will  continue to explore other divert and attitude control system technologies  for future use.
The THAAD program achieved its primary fiscal year 2006 test objectives,  although it did experience test delays. The program planned to conduct  five flight tests during fiscal year 2006, but was only able to execute four.  During the program’s first two flight tests, program officials demonstrated  the missile’s performance, including the operation of the missile’s divert  and attitude control system and the control of its kill vehicle. The third  flight test conducted in July 2006 demonstrated THAAD’s ability to  successfully locate and intercept a target, a primary 2006 test objective.  The fourth THAAD flight test was declared a “no-test” after the target  malfunctioned shortly after its launch, forcing program officials to  terminate the test. THAAD officials told us that the aborted test will be  deleted from the test schedule and any objectives of the test that have not  been satisfied will be rolled-up into future tests. The program planned to  conduct its fifth (missile only) flight test–to demonstrate the missile’s  performance in the low atmosphere–in December 2006. However, due to  reprioritization in test flights, the fifth flight test is now scheduled for the  second quarter of fiscal year 2007. Flight test 6, the next scheduled flight  test, was successfully conducted at the end of January 2007. It was the  first flight test performed at the Pacific Missile Range.
section_title: Overall BMDS Performance Remains Unverified
paragraphs: In March 2005, MDA set performance goals for Block 2006 that included a  numerical goal for the probability of a successful BMDS engagement, a  defined area from which the BMDS would prevent an enemy from  launching a ballistic missile, and a defined area that the BMDS would  protect from ballistic missile attacks. In March 2006, MDA altered its  Block 2006 performance goals commensurate with reductions in Block  2006 fielded assets. Although MDA revised its goal downward, insufficient  data exists to assess whether MDA is on track to meet its new goal.
MDA uses the WILMA model to predict overall BMDS performance even  though this model has not been validated or verified by DOD’s Operational  Test Agency. According to Operational Test Agency officials, WILMA is a  legacy model that does not have sufficient fidelity for BMDS performance  analysis. MDA officials told us the agency is working to develop an  improved model that can be matured as the system matures.
In addition, the GMD program has not completed sufficient flight testing to  provide a high level of confidence that the BMDS can reliably intercept  ICBMs. In September 2006, the GMD program completed an end-to-end  test of one engagement sequence that the GMD element might carry out.  While this test provided some assurance that the element will work as  intended, the program must test other engagement sequences, which  would include other GMD assets that have not yet participated in an end- to-end flight test. Additionally, independent test agencies told us that  additional flight tests are needed to have a high level of confidence that  GMD can repeatedly intercept incoming ICBMs. Additional tests are also  needed to demonstrate that the GMD element can use long-range  surveillance and tracking data developed by the Aegis BMD element. In  March 2006, we reported that Aegis BMD was unable to participate in a  GMD flight test, which prevented MDA from exercising Aegis BMD’s long- range surveillance and tracking capability in a manner consistent with an  actual defensive mission. The program office told us that the Aegis BMD is  capable of performing this function and has demonstrated its ability to  surveil and track ICBMs in several exercises. Additionally, Aegis BMD has  shown that it can communicate this data to GMD in real time. However,  because of other testing priorities, GMD has not used this data to prepare  a weapon system task plan in real time. Rather GMD developed the plan in  post-test activities. Officials in the Office of the Director for Operational  Test and Evaluation told us that having GMD prepare the test plan in real  time would provide the data needed to more accurately gauge BMDS  performance.
Delayed testing and technical problems may also impact the performance  of the system and the timeliness of future enhancements to the fielded  system. For example, the performance of the new configuration of the  Aegis BMD SM-3 missile is unproven because design changes in the  missile’s solid divert and attitude control system and one burn pattern of  the third stage rocket motor, according to program officials, were not  flight tested before they were cut into the production line. MDA is  considering a full flight test of the pulsed solid divert and attitude control  system during the third quarter of fiscal year 2007. The solid divert and  attitude control system is needed to increase the missile’s ability to divert  into its designated target and counter more complex threats. The zero  pulse-mode of the missile’s third stage rocket motor, which is expected to  provide a capability against a limited set of threat scenarios, will not be  fully tested until fiscal year 2009.
Confidence in the performance of the BMDS is also reduced because the  GMD element continues to struggle with technical issues affecting the  reliability of some GMD interceptors. For example, GMD officials told us  that the element has experienced one anomaly during each of its flight  tests since its first flight test conducted in 1999. This anomaly has not yet  prevented the program from achieving any of its primary test objectives;  but, to date, neither its source nor solution has been clearly identified or  defined. Program officials plan to continue their assessment of current and  future test data to identify the root cause of the problem.
The reliability of emplaced GMD interceptors also remains uncertain  because inadequate mission assurance/quality control procedures may  have allowed less reliable or inappropriate parts to be incorporated into  the manufacturing process. Program officials plan to replace these parts in  the manufacturing process, but not until interceptor 18. The program plans  to begin retrofitting the previous 17 interceptors in fiscal year 2009.  According to GMD officials, the cost of retrofitting the interceptors will be  at least $65.5 million and could be more if replacement of some parts  proves more difficult than initially expected.
The ABL program also experienced a number of technical problems during  fiscal year 2006 that delayed future decisions for the BMDS program. As  previously noted, the program’s 2008 lethality demonstration will be  delayed until 2009. The delay is caused by Beam Control/Fire Control  (BC/FC) software, integration, and testing difficulties and unexpected  hardware failures. According to contractor reports, additional software  tests were needed because changes were made to the tested versions, the  software included basic logic errors, and unanticipated problems were  caused by differences in the software development laboratory and ABL  aircraft environments.
section_title: MDA’S Flexibility Comes at the Cost of Program Transparency
paragraphs: MDA enjoys a significant amount of flexibility in developing the BMDS,  but it comes at the cost of transparency and accountability. Because the  BMDS program has not formally entered the system development and  demonstration phase of the acquisition cycle, it is not yet required to apply  several important oversight mechanisms contained in certain acquisition  laws that, among other things, provide transparency into program progress  and decisions. This has enabled MDA to be agile in decision making and to  field an initial BMDS capability quickly. On the other hand, MDA operates  with considerable autonomy to change goals and plans, making it difficult  to reconcile outcomes with original expectations and to determine the  actual cost of each block and of individual operational assets.
subsections: section_title: Acquisition Laws Promote Program Transparency
paragraphs: Past Congresses have established a framework of laws that make major  defense acquisition programs accountable for their planned outcomes and  cost, give decision makers a means to conduct oversight, and ensure some  level of independent program review. The threshold application of these  acquisition laws is typically triggered by a program’s entry into system  development and demonstration—a phase during which the weapon  system is designed and then demonstrated in tests.  The BMDS has not  entered into system development and demonstration because it is being  developed outside DOD’s normal acquisition cycle.
To provide accountability, major defense acquisition programs are  required by statute to document program goals in an acquisition program  baseline that, as implemented by DOD, has been approved by a higher- level DOD official prior to the program’s initiation. The baseline, derived  from the users’ best estimates of cost, schedule, and performance  requirements, provides decision makers with the program’s total cost for  an increment of work, average unit costs for assets to be delivered, the  date that an initial operational capability will be fielded, and the weapon’s  intended performance parameters. The baseline is considered the  program’s initial business case–evidence that the concept of the program  can be developed and produced within existing resources. Once approved,  major acquisition programs are required to measure their program against  the baseline or to obtain approval from a higher-level acquisition executive  before making significant changes. Programs are also required to regularly  provide detailed program status information to Congress, including  information on program cost, in Selected Acquisition Reports. In  addition, Congress has established a cost monitoring mechanism that  requires programs to report significant increases in unit cost measured  from the program baseline.
Other statutes ensure that DOD provides some independent program  verification external to the program. Title 10, United States Code (U.S.C.),  section 2434 prohibits the Secretary of Defense from approving system  development and demonstration, or production and deployment, of a  major defense acquisition program unless an independent estimate of the  program’s full life-cycle cost has been considered by the Secretary. The  independent verification of a program’s cost estimate allows decision  makers to gauge whether the program is executable given other budget  demands and it increases the likelihood that a program can execute its  plan within estimated costs. In addition, 10 U.S.C. § 2399 requires  completion of initial operational test and evaluation of a weapon system  before a program can begin full-rate production. The Director of  Operational Test and Evaluation, a DOD office independent of the  acquisition program, not only approves the adequacy of the test plan and  its subsequent evaluation, but also reports to the Secretary of Defense  whether the test and evaluation were adequate and whether the test’s  results confirm that the items are effective and suitable for combat.
By law, appropriations are to be applied only to the objects for which the  appropriations were made except as otherwise provided by law.  Research and development appropriations are typically specified by  Congress to be used to pay the expenses of basic and applied scientific  research, development, test, and evaluation. On the other hand,  procurement appropriations are, in general, specified by Congress to be  used for the purchase of weapon systems and equipment, that is,  production or manufacturing. In the 1950s, Congress established a policy  that items being purchased with procurement funds be fully funded in the  year that the item is procured. This policy is meant to prevent a program  from incrementally funding the purchase of operational systems.
According to the Congressional Research Service, “incremental funding  fell out of favor because opponents believed it could make the total  procurement costs of weapons and equipment more difficult for Congress  to understand and track, create a potential for DOD to start procurement  of an item without necessarily stating its total cost to Congress, permit one  Congress to ‘tie the hands’ of future Congresses, and increase weapon  procurement costs by exposing weapons under construction to  uneconomic start-up and stop costs.”
Congress continues to enact legislation that improves program  transparency. In 2006, Congress added 10 U.S.C. § 2366a, which prohibits  programs from entering system development and demonstration until  certain certifications are made. For example, the decision authority for the  program must certify that the program has a high likelihood of  accomplishing its intended mission and that the program is affordable  considering unit cost, total acquisition cost, and the resources available  during the year’s covered by DOD’s future years defense program.
Similar to other government programs, one of the laws affecting MDA  decisions is the Antideficiency Act. The fundamental concept of the  Antideficiency Act is to ensure that spending does not exceed  appropriated funds. The act is one of the major laws in which Congress  exercises its constitutional control of the public purse. The fiscal  principles underlying the Antideficiency Act are quite simple. Government  officials may not make payments, or commit the United States to make  payments at some future time, for goods or services unless the available  appropriation is sufficient to cover the cost in full. To ensure that it is  always in compliance with this law, MDA adjusts its goals and defers work  as needed to execute the BMDS within its available budget.
section_title: Benefits of MDA’s Flexibility
paragraphs: In 2001, DOD conducted extensive missile defense reviews to decide how  best to defend the United States, deployed troops, friends, and allies from  ballistic missile attacks. The studies determined that DOD needed to find  new approaches to acquire and deploy missile defenses. Flexibility was  one of the hallmarks of the new approach that DOD chose to implement.  One flexibility accorded MDA was the authority to develop the BMDS  outside of DOD’s normal acquisition cycle, by not formally entering the  system development and demonstration phase. This effectively enabled  MDA to defer application of certain acquisition laws until the agency  transfers a fully developed capability to a military service for production,  operation, and sustainment—the point at which DOD directed that the  BMDS program reenter the acquisition cycle. At that point, basic  development and initial fielding would generally be complete.
Because MDA currently does not have to apply many of the oversight  requirements for major defense acquisition programs directed by  acquisition laws, the BMDS program operates with unusual autonomy. In  2002, the Under Secretary of Defense for Acquisition, Technology, and  Logistics delegated to MDA the authority to establish its own baseline and  make changes to that baseline without approval outside of MDA. Because  it has not formally entered system development and demonstration, MDA  can also initiate a block of capability and move forward with its fielding  without an independent cost estimate or an independent test of the  effectiveness and suitability of assets intended for operational use. The  ability to make decisions on its own and proceed without independent  verifications reduces decision timelines, making the BMDS program more  agile than other DOD programs.
MDA’s ability to quickly field a missile defense capability is also enhanced  by its ability to field the BMDS before all testing is complete. MDA  considers the assets it has fielded to be developmental assets and not the  result of the production phase of the acquisition cycle. Because MDA has  not advanced the BMDS or its elements into the acquisition cycle, it is  continuing to produce and field assets without completing the operational  test and evaluation normally required by 10 U.S.C. § 2399 before full-rate  production. For example, MDA has acquired and emplaced 14 ground- based interceptors for operational use before both developmental and  operational testing is completed. The agency’s strategy is to continue  developmental testing while fielding assets and to also incorporate  operational realism into these tests so that the Director of Operational  Test and Evaluation can make an operational assessment of the fielded  assets’ capability.
Because all of MDA’s funding comes from the Research, Development,  Test, and Evaluation appropriation account, MDA enjoys greater flexibility  in how it can use funds compared to a traditional DOD acquisition  program where funding is typically divided into research, development,  and evaluation, procurement, and operations and maintenance. This is  particularly true of an element. For example, a Block 2006 element like  GMD covers a wide range of activities, from research and development on  future enhancements to the fabrication of interceptors for operations. If  the GMD program runs into problems with one activity, it can defer work  on another to cover the cost of the problems. MDA’s flexibility to change  goals for each element complements the flexibility in how it uses its funds.
section_title: Comparing Actual Work to Budgeted Work Is Difficult
paragraphs: After a new block of the BMDS has been presented in the budget, MDA  can change the outcomes–in terms of planned delivery of assets and other  work activities–that are expected of the block. While this freedom enables  MDA to operate within its budget, it decouples the activities actually  completed from the activities that were budgeted, making it difficult to  assess the value of what is actually accomplished. For example, between  2003 and mid-2005, MDA changed its Block 2004 delivery goals three  times, progressively decreasing the number of assets planned for the block  when it was initially approved for funding. This trend has continued into  Block 2006, with the agency changing its delivery plans once since it  presented its initial Block 2006 goals to Congress. MDA is required to  report such changes only if MDA’s Director considers the changes  significant.
In addition to deferring the delivery of assets from one block to another,  MDA also has the flexibility to defer other work activities from a current  to a future block. This creates a rolling scope, making it difficult to keep  track of what an individual block is responsible for delivering. For  example, during Block 2004, MDA deferred some planned development,  deployment, characterization, and verification activities until Block 2006  so that it could cover contractor budget overruns. MDA is unable to  determine exactly how much work was deferred. However, according to a  November 2006 report to Congress, MDA found it necessary to defer the  work until Block 2006 to make Block 2004 funding available to implement  a new GMD test strategy following two GMD flight test failures, resolve  quality issues associated with GMD interceptors and its exoatmospheric  kill vehicle, and add an FBX-T radar to the initial deployed capability.  Agency officials are already anticipating the deferral of work from Block  2006 into Block 2008. In fiscal year 2006, the work of five of the six  contractors responsible for elements included in Block 2006 cost more  than expected. Given program funding limits, MDA officials told us that  they will either have to defer work or request additional funds from  Congress during the remaining years of the block. MDA did not increase  its fiscal year 2007 budget request; therefore, it is likely that the agency  will once again have to defer some planned work into the next block.
Not only do changes in a block’s work plan make it difficult to know what  outcomes the program expects to achieve, the changes also have the  potential to impact the BMDS’ performance. For example, by decreasing  the number of fielded interceptors, MDA decreases the likelihood that it  can defeat enemy missiles if multiple threats are prevalent because the  number of available interceptors will be limited. In addition, if activities,  such as testing and validation, are not complete when assets are fielded,  the assets may not perform as expected and changes may be needed. This  effect of early fielding was seen in Block 2004 when GMD interceptors  were fielded before testing was complete. Later tests showed that the  interceptors may contain unreliable parts, some of which MDA now plans  to replace.
subsections: section_title: Lack of Independent Reviews Contributes to Changing Goals
paragraphs: Although acquisition laws governing major defense acquisition programs  as well as DOD acquisition policy recognize the need for independent  program reviews, few such reviews are part of the BMDS program. This  has contributed to the difficulty in assessing MDA’s progress toward  expected outcomes. As described above, major programs are required by  law to have an independent cost estimate (performed by the DOD Cost  Analysis Improvement Group) for entry into system development and  demonstration, as well as production and deployment. According to MDA  officials, MDA has so far obtained an independent assessment of only one  BMDS element’s life-cycle cost estimate—Aegis BMD’s estimate for Block  2004. In our opinion, without a full independent cost estimate, MDA has  established optimistic block goals that could not be met. This is supported  by an MDA spokesman’s statement that the agency’s optimism in  establishing Block 2004 cost and quantity goals contributed to several goal  changes. According to MDA officials, unlike its action on its Block 2004  cost goal, MDA did not request an assessment of MDA’s Block 2006 goal.
Further, DOD policy calls for a milestone decision authority with overall  responsibility for the program that is independent of the program.  Although the Director reports to the Under Secretary of Defense for  Acquisition, Technology, and Logistics and keeps the Under Secretary and  congressional defense committees informed of MDA decisions, MDA’s  Director is authorized to make most program decisions without prior  approval from a higher-level authority. The Under Secretary of Defense  delegated this authority to the Director in a February 2002 memorandum.  The Secretary of Defense also appointed MDA’s Director as both the  BMDS Program Manager and its Acquisition Executive (including the  authority to serve as milestone decision authority until an element is  transferred out of MDA). As the Acquisition Executive, the Director was  given responsibility for establishing programmatic policy and conducting  all research and development of the BMDS. This delegation included  responsibility for formulating BMDS acquisition strategy, making program  commitments and terminations, deciding on affordability trade-offs, and  baselining the capability and configuration of blocks and elements.
section_title: Block Costs Cannot Be Tracked
paragraphs: Because MDA can redefine outcomes, the actual cost of a block cannot be  compared with the cost originally estimated. MDA considers the cost of  deferred work—which may be the delayed delivery of assets or other work  activities—as a cost of the block in which the work is performed, even  though the work benefits and was planned for a prior block. Further, MDA  does not track the cost of deferred work from one block to the next and,  therefore, cannot make adjustments that would match the cost with the  block it benefits. For example, in March 2006, we reported that MDA  deferred some Block 2004 work until Block 2006 so that it could use the  funds appropriated for that work to cover unexpected cost increases  caused by such problems as poor quality control procedures and technical  problems during development, testing, and production. MDA officials told  us that additional funds have been, or will be, requested during Block 2006  to carry out the work. However, the officials could not tell us how much of  the Block 2006 budget is attributable to the deferred work. These actions  caused Block 2004 cost to be understated and Block 2006 cost to be  overstated. In addition, if MDA delays some Block 2006 work until Block  2008, as expected, Block 2006 cost will become more difficult to compare  with its original estimate as the cost of the deferred work will no longer  count against the block. The Director, MDA, determines whether he  reports the cost of work being deferred to future blocks and, so far, has  not done so.
The planned and actual unit costs of assets being acquired for operational  use are equally hard to determine. Because the BMDS and its elements are  a single major defense acquisition program that has not officially entered  into system development and demonstration, it is not required to provide  the detailed reports to Congress directed by statute. While it is possible  to reconstruct planned unit costs from budget documents, the planned  unit cost of some assets—for example, GMD interceptors—is not easy to  determine because the research and development funds used to buy the  interceptors are spread across 3 to 5 budget years. Also, because MDA is  not required to report significant increases in unit cost, it is not easy to  determine whether an asset’s actual cost has increased significantly from  its expected cost. For example, we were unable to compare the actual and  planned cost of a GMD interceptor. By comparison, the Navy provides  more transparency in reporting on the cost of ships, some of which are  incrementally funded with procurement funds. When a Navy ship program  overruns the cost estimate used to justify the budget, the Navy identifies  the additional funding needed to cover the overruns separately from other  shipbuilding programs.
Using research and development funds to purchase fielded assets further  reduces cost transparency because these dollars are not covered by the  full-funding policy for procurement. Therefore, when the program for a 2- year block is first presented in the budget, Congress is not necessarily fully  aware of the dimensions and cost of that block. Although a particular  block may call for the delivery of a specific number of interceptors, the  full cost of those interceptors may not be contained in that block. In  addition, incremental funding has the potential to “tie the hands” of future  Congresses to finish funding for assets started in prior years. Otherwise,  Congress could run the risk of a production stoppage and the increased  costs associated with restarting the production line.
section_title: MDA Makes Significant Strides with Quality Improvement Processes
paragraphs: During Block 2004, poor quality control procedures that MDA officials  attribute to acquisition streamlining and schedule pressures caused the  missile defense program to experience test failures and slowed  production. MDA has initiated a number of actions to correct its quality  control weaknesses and those actions have been largely successful.  Although MDA continues to identify quality control procedures that need  improvement, the number of deficiencies has declined and contractors are  responding to MDA’s improvement efforts. These efforts include a teaming  approach designed to restore the reliability of MDA’s suppliers, regular  quality inspections to quickly identify and find resolutions for quality  problems, and award fees with an increased emphasis on quality  assurance. In addition, MDA’s attempts to improve quality assurance have  attracted the interest of other government agencies and contractors. MDA  is leading quality improvement conferences and co-sponsoring a Space  Quality Improvement Council.
Officials in MDA’s Office of Quality, Safety, and Mission Assurance and in  GMD’s Program Office attribute the weaknesses in MDA’s quality control  processes to acquisition streamlining and schedule pressures. According  to a former DOD Director of Operational Test and Evaluation, during the  early 1990’s there was a common goal for DOD management to streamline  the acquisition process to reduce burgeoning costs of new weapons. By  streamlining the process, DOD commissions and task forces hoped to  drastically cut system development and production time and reduce costs  by eliminating management layers, eliminating certain reporting  requirements, using more commercial-off-the-shelf systems and  subsystems, reducing oversight from within as well as from outside DOD,  and by eliminating perceived duplication of testing. In addition to  acquisition streamlining, schedule pressures caused MDA to be less  attentive to quality assurance issues. This was particularly true for the  GMD element that was tasked with completing development and  producing assets for operational use within 2 years of a Presidential  directive to begin fielding an initial missile defense capability. While the  GMD program had realized for some time that its quality controls needed  to be strengthened, the program’s accelerated schedule left little time to  address quality problems.
MDA has initiated a number of mechanisms to rectify the quality control  weaknesses identified in the BMDS program. For example, as early as  2003, MDA, in concert with industry partners, Boeing, Lockheed Martin,  Raytheon, and Orbital Sciences began a teaming approach to restore  reliability in a key supplier. In exchange for allowing the supplier to report  to a single customer—MDA—the supplier gave MDA’s Office of Quality,  Safety, and Mission Assurance authority to make a critical assessment of  the supplier’s processes. This assessment determined that the supplier’s  manufacturing processes lacked discipline, its corrective action  procedures were ineffective, its technical data package was inadequate,  and personnel were not properly trained. The supplier responded by hiring  a Quality Assurance Director, five quality assurance professionals, a  training manager, and a scheduler. In addition, the supplier installed an  electronic problem reporting database, formed new boards—such as a  failure review board—established a new configuration management  system, and ensured that manufacturing activity was consistent with  contract requirements. According to MDA, by 2005, these changes began  to produce results. Between March 2004 and September 2005, test failures  declined by 43 percent. In addition, open quality control issues decreased  by 64 percent between September 2005 and August 2006 and on-time  deliveries increased by 9 percent between March 2005 and August 2006.  MDA’s teaming approach was expanded in 2006 to another problem  supplier and many systemic solutions are already underway.
MDA also continues to carry-out regular contractor quality inspections.  For example, during fiscal year 2006, MDA completed quality audits of   6 contractors and identified a total of 372 deficiencies and observations.  As of December 2006, the contractors had closed 157 or 42 percent of all  audit findings. These audits are also producing other signs of quality  assurance improvements. For example, after an August 2006 review of  Raytheon’s production of the last five GMD exoatmospheric kill vehicles,  MDA auditors reported less variability in Raytheon’s production  processes, increasing stability in its statistical process control data, fewer  test problem reports and product waivers, compliance with manufacturing  “clean room” requirements, and a sustained improvement in product  quality. Because of the emphasis placed on the recognition of quality  problems, Raytheon is conducting regular inspections independently of  MDA to identify problems.
Over the course of 2006, MDA also continued to incorporate MDA  Assurance Provisions (MAP) into its prime contracts. The MAP provides  MDA methods to measure, verify, and validate mission success through  the collection of metrics, risk assessment, technical evaluations,  independent assessments, and reviews. Four BMDS elements–BMDS  Sensors, C2BMC, KEI, and THAAD–modified their contracts during 2006  to incorporate the MAP. The remaining five BMDS elements have not yet  included the plan on their contracts because the contract is mostly in  compliance with the MAP or because of the timing and additional costs of  adding the requirements.
MDA also encourages better quality assurance programs and contractors’  implementation of best practices through award fee plans. In 2003, three  BMDS elements–BMDS Sensors, KEI, and THAAD–revised their contracts  to include 25 MAP criteria in their award fee plans. For example, the  BMDS Sensors element included system quality, reliability, and  configuration control of data products as part of its award fee criteria for  its FBX-T contract. Contractors are also bringing their best practices to  the table. For example, in an effort to prevent foreign object debris in  components under assembly, Raytheon and Orbital Sciences have placed  all tools in special tool boxes known as shadow boxes. Raytheon has also  incorporated equipment into the production process that handles critical  components, removing the possibility that the components will be  dropped or mishandled by production personnel.
Because of its quality assurance efforts, contractors and other government  agencies have called on MDA to lead quality conferences and sponsor an  improvement council. MDA’s Office of Quality, Safety, and Mission  Assurance was co-sponsor of a conference on quality in the space and  defense industry and the office’s Director has also served as panel  discussion chair at numerous other conferences. The conferences focus  on the safety, reliability, and quality aspects of all industries and agencies  involved in defense and space exploration. MDA is also a co-sponsor of the  Space Quality Improvement Council, a council established to  cooperatively address critical issues in the development, acquisition, and  deployment of national security space systems. Contractors are also  adopting some MDA methods for improving quality assurance. For  example, Raytheon Integrated Defense Systems has adopted the MAP as a  performance standard for all of its defense programs.
section_title: Conclusions
paragraphs: In a general sense, our assessment of MDA’s progress on missile defense is  similar to that of previous years: accomplishments have been made and  capability has been increased, but costs have grown and the scope of  planned work has been reduced. The fielding of additional assets, the  ability to put BMDS on alert status, and the first end-to-end test of GMD  were notable accomplishments during fiscal year 2006. On the other hand,  it is not easy to answer the question of how well BMDS is progressing  relative to the funds it has received and goals it has set for those funds.
As with previous years, we have found it difficult to reconcile the progress  made in Block 2006 with the original cost and scope of the program. The  block concept, while a useful construct for harvesting and fielding  capability incrementally, is a muddy construct for accountability. Although  BMDS is managed within a relatively level budget of about $10 billion a  year, the scope of planned work is altered several times each year.  Consequently, work travels from one block to another, weakening the  connection between the actual cost and scope of work done and the  estimated cost and scope of work used to justify budget requests. Block  2006 is a case in point. Compared with its original budget justification, it  now contains unanticipated work from Block 2004 but has deferred some  of its own planned work to future blocks. Costs for the THAAD element  are no longer being counted in Block 2006 although they were last year.  Some developmental elements that will be fielded in later blocks, such as  KEI and MKV, are not considered part of Block 2006, while ABL, which is  also a developmental element to be fielded in later blocks, is considered  part of Block 2006. Establishing planned and actual costs for individual  assets is also elusive because MDA’s development of the BMDS outside of  DOD’s acquisition cycle blurs the audit trail. Using research and  development funds—funds that are not covered by the full-funding  policy—contributes to the difficulty in determining some assets’ cost.
None of the foregoing is to suggest that MDA has acted inconsistently with  the authorities it has been granted. Indeed, by virtue of its not having  formally begun system development and demonstration, coupled with its  authority to use research and development funds to manufacture and field  assets, MDA has the sanctioned flexibility to manage exactly as it has. It  could be argued that without this latitude, the initial capability fielded last  year and put on alert this year would not have been possible. Yet, the  question remains as to whether this degree of flexibility should be retained  on a program that will spend about $10 billion a year for the foreseeable  future. It does not seem unreasonable to expect a program of this  magnitude to be held to a higher standard of accountability than delivering  some capability within budgeted funds. In fact, the program is likely to  undergo greater scrutiny as DOD faces increasing pressure to make  funding trade-offs between its investment portfolios, ongoing military  operations, and recapitalization of its current weapon systems.
Within BMDS, key decisions lie ahead for DOD. Perhaps the most  significant decision in the next 2 years will be to determine what  investments should be made in the two boost phase elements—ABL and  KEI—under development. This decision would benefit greatly from good  data on actual versus expected performance, actual versus expected cost,  and independent assessments of both cost and performance.
The recommendations that follow build upon those we made in last year’s  report on missile defense. In general, those recommendations called for  the Secretary of Defense to align individual BMDS elements around a  knowledge-based strategy and to determine whether a block approach to  fielding was compatible with such a strategy.
section_title: Recommendations for Executive Action
paragraphs: To increase transparency in the missile defense program, we recommend  that the Secretary of Defense:    Develop a firm cost, schedule, and performance baseline for those  elements considered far enough along to be in system development  and demonstration, and report against that baseline.
Propose an approach for those same elements that provides  information consistent with the acquisition laws that govern  baselines and unit cost reporting, independent cost estimates, and  operational test and evaluation for major DOD programs. Such an  approach could provide necessary information while preserving the  MDA Director’s flexibility to make decisions.  Include in blocks only those elements that will field capabilities  during the block period and develop a firm cost, schedule, and  performance baseline for that block capability including the unit  cost of its assets.
Request and use procurement funds, rather than research,  development, test, and evaluation funds, to acquire fielded assets.
Conduct an independent evaluation of ABL and KEI after key  demonstrations, now scheduled for 2008 and 2009, to inform  decisions on the future of the two programs.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD’s comments on our draft report are reprinted in appendix I. DOD  partially concurred with our first three recommendations and non- concurred with the last two.
In partially concurring with the first recommendation, DOD recognized the  need for greater program transparency, but objected to implementing an  element-centric approach to reporting, believing that this would detract  from managing the BMDS as a single integrated system. We agree that  management of the BMDS as a single, integrated program should be  preserved. However, since DOD already requests funding and awards  contracts by the individual elements that compose the BMDS, we believe  that establishing a baseline for those elements far enough along to be  considered in system development and demonstration provides the best  basis for transparency of actual performance. This would not change  DOD’s approach to managing the BMDS, because merely reporting the  cost and performance of individual elements would not cause each  element to become a major defense acquisition program. DOD stated that  MDA intends to modify its current biennial block approach that is used to  define reporting baselines. In making this change, MDA states that it  intends to work with both Congress and GAO to ensure that its new  approach provides useful information for accountability purposes. At this  point, we believe that the information needed to define a reporting  baseline for a block would best be derived from individual elements. That  having been said, a discourse can be had on whether elements are the only  way to achieve the needed transparency and we welcome the opportunity  to work toward constructive changes.
DOD also partially concurred with our second recommendation that  BMDS elements effectively in system development and demonstration  provide information consistent with the acquisition laws that govern  baselines and unit cost reporting, independent cost estimates, and  operational test and evaluation for major programs. DOD did commit to  providing additional information to Congress to promote accountability,  consistency, and transparency. Nonetheless, DOD remains concerned that  having elements, rather than the BMD system, report according to these  laws will have a fragmenting effect on the development of an integrated  system and put more emphasis on individual programs as though each is a  major defense acquisition program. We believe that greater transparency  into the BMDS program depends on DOD reporting in the same manner  that it requests program funding. This ensures that decision makers can  reconcile the expected cost and performance of assets DOD plans to  acquire with actual cost and performance. We recognize that MDA does  provide Congress with information on cost and testing, but this  information is not of the caliber or consistency called for by acquisition  laws.
DOD stated that our third recommendation on reporting at the BMDS-level  appears to be inconsistent with our recommendations on reporting at the  element level. The basis for our third recommendation is that a block,  which is a construct to describe and manage a defined BMDS-wide  capability, must be derived from the capabilities that individual elements  can yield. Except for activities like integrated tests that involve multiple  elements, the cost, schedule, and performance of the individual assets to  be delivered in a block come from the elements. Further, those elements  that are not far enough along to deliver assets or capabilities within a  particular block should not be considered part of that block. We believe  that as MDA works to modify its current biennial block approach, it needs  to be clearer and more consistent about what is and is not included in a  block and that the cost, schedule, and performance of the specific assets  in the block should be derived from the information already generated by  the elements.
DOD did not concur with our recommendation that it request and use  procurement funds to acquire fielded assets. It noted that the flexibility  provided by Research, Development, Test, and Evaluation funding is  necessary to develop and acquire new capabilities quickly that can  respond to new and unexpected ballistic missile threats. We recognize the  need to be able to respond to such threats. However, other DOD programs  are also faced with unexpected threats that must be addressed quickly and  have found ways to do so while acquiring operational assets with  procurements funds. If MDA requires more flexibility than other programs,  there should be a reasonable budgetary accommodation available other  than funding the entire budget with Research, Development, Test, and  Evaluation funds. More needs to be done to get a better balance between  flexibility and transparency. Thus, we continue to believe that decision  makers should be informed of the full cost of assets at the time DOD is  asking for approval to acquire them and that procurement funds are the  best way to provide that transparency.
DOD also did not concur with our fifth recommendation to conduct an  independent evaluation of ABL and KEI to inform the upcoming decisions  on these programs. It believes that MDA’s current integrated development  and decision-making approach should continue as planned. We continue  to believe that MDA would benefit from an independent evaluation of both  ABL and KEI. However, we do believe such an evaluation should be based  on the results of the key demonstrations planned for the elements in 2008  and 2009. We have modified our recommendation accordingly.
We are sending copies of this report to the Secretary of Defense and to the  Director, MDA. We will make copies available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you, or your staff, have any questions concerning this report, please  contact me at (202) 512-4841. Contact points for our offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. The major contributors are listed in appendix IV.
section_title: Appendix I: Comments from the Department of Defense
section_title: Appendix II: MDA Contracts
paragraphs: Like other government agencies, MDA acquires the supplies and services  needed to fulfill its mission by awarding contracts. Two types of contracts  are prevalent at MDA—contracts for support services and contracts for  hardware. The contractors that support MDA’s mission are commonly  known as support contractors, while the contractors that are responsible  for developing elements of the Ballistic Missile Defense System (BMDS)  are called prime contractors.
subsections: section_title: Support Contractors Are Key to BMDS Development
paragraphs: According to MDA’s manpower database, about 8,186 personnel  positions—not counting prime contractors—currently support the missile  defense program. These positions are filled by government civilian and  military employees, contract support employees, employees of federally  funded research and development centers (FFRDC), researchers in  university and affiliated research centers, and a small number of  executives on loan from other organizations. At least 94 percent of the  8,186 positions are paid by MDA through its research and development  appropriation. Of this 94 percent, only about 33 percent, or   2,578 positions, are set aside for government civilian personnel. Another  57 percent, or 4,368 positions, are support contractors that are supplied  by 44 different defense companies. The remaining 10 percent are positions  either being filled, or expected to be filled, by employees of FFRDCs and  university and affiliated research centers that are on contract or under  other types of agreements to perform missile defense tasks. Table 7  illustrates the job functions that contract employees carry out.
MDA officials explained that the utilization of support contractors is key  to its operation of the BMDS because it allows the agency to obtain  necessary personnel and develop weapon systems more quickly.  Additionally, the officials told us that its approach is consistent with  federal government policy on the use of contractors. MDA officials  estimate that while the average cost of the agency’s government employee  is about $140,000 per year, a contract employee costs about $175,000 per  year. Table 8 highlights the staffing levels for each BMDS element.
section_title: Most Prime Contractors Did Not Execute All Planned Work within Fiscal Year 2006 Cost and Schedule Budgets
paragraphs: Prime contractors developing elements of the Ballistic Missile Defense  System (BMDS) typically receive most of the funds MDA requests from  Congress each fiscal year. The efforts of prime contractors may be  obtained through a wide range of contract types. Because MDA is  requiring its prime contractors to perform work that includes enough  uncertainty that the cost of the work cannot be accurately estimated, all of  the agency’s prime contracts are cost reimbursement arrangements. Under  a cost reimbursement contract, a contractor is paid for reasonable,  allowable, and allocable costs incurred in performing the work directed by  the government to the extent provided in the contract. The contract  includes an estimate of the work’s total cost for the purpose of obligating  funds and establishes a ceiling cost that the contractor may not exceed  without the approval of the contracting officer.
Many of the cost reimbursement contracts awarded by MDA include an  award fee. Cost plus award fee contracts provide for a fee consisting of a  base amount, which may be zero, that is fixed at the inception of the  contract and an award amount, based upon a subjective evaluation by the  government, that is meant to encourage exceptional performance. The  amount of the award fee is determined by the government’s assessment of  the contractor’s performance compared to criteria stated in the contract.  This evaluation is conducted at stated intervals during performance, so  that the contractor can be periodically informed of the quality of its  performance and, if necessary, areas in which improvement are required.
Two of the cost reimbursement contracts shown in table 9—MKV and  C2BMC—differ somewhat from other elements’ cost reimbursement  contracts. The MKV prime contract is an indefinite delivery/indefinite  quantity cost-reimbursement arrangement. This type of contract allows the  government to direct work through a series of task orders. Such a contract  does not procure or specify a firm quantity of services (other than a  minimum or maximum quantity). This contracting approach permits MDA  to order services as they are needed after requirements materialize and  provides the government with flexibility because the tasks can be aligned  commensurate with available funding. Since the MKV element is relatively  new to the BMDS, its funding is less predictable than other elements’ and  the ability to decrease or increase funding on the contract each year is  important to effectively manage the program.
The C2BMC element operates under an Other Transaction Agreement that  is not subject to many procurement laws and regulations. However, even  though an Other Transaction Agreement is not required to include all of  the standard terms and conditions meant to safeguard the government, the  C2BMC agreement was written to include similar clauses and provisions.  We found no evidence at this time that the C2BMC agreement does not  adequately protect MDA’s interests. MDA chose the Other Transaction  Agreement to facilitate a collaborative relationship between industry,  government, federally funded research and development centers, and  university research centers. Contract officials told us that a contract  awarded under the Federal Acquisition Regulation is normally regarded as  an arms-length transaction in which the government gives the contractor a  task that the contractor performs autonomously. While an important  purpose of an Other Transaction Agreement is to broaden DOD’s  technology and industrial base by allowing the development and use of  instruments that reduce barriers to participation in defense research by  commercial firms that traditionally have not done business with the  government, the agreements’ value in encouraging more collaborative  environments is also recognized. Table 9 outlines the contractual  instruments that MDA uses to procure the services of its prime  contractors.
subsections: section_title: Most Prime Contractors Exceed Their Fiscal Year 2006 Budgets
paragraphs: Excluding the C2BMC and MKV elements, MDA budgeted approximately  $3 billion for its prime contractors to execute planned work during fiscal  year 2006. To determine if these contractors are executing the work  planned within the funds and time budgeted, each BMDS program office  requires its prime contractor to provide monthly reports detailing cost and  schedule performance. In these reports, which are known as Contract  Performance Reports, the prime contractor makes comparisons that  inform the program as to whether the contractor is completing work at the  cost budgeted and whether the work scheduled is being completed on  time. If the contractor does not use all funds budgeted or completes more  work than planned, the report shows positive cost and/or schedule  variances. Similarly, if the contractor uses more money than planned or  cannot complete all of the work scheduled, the report shows negative cost  and/or schedule variances. A contractor can also have mixed performance.  That is, the contractor may spend more money than planned (a negative  cost variance) but complete more work than scheduled (a positive  schedule variance). Using data from Contract Performance Reports, a  program manager can assess trends in cost and schedule performance,  information that is useful because trends tend to persist. Studies have  shown that once a contract is 15 percent complete, performance metrics  are indicative of the contract’s final outcome.
We used contract performance report data to assess the fiscal year 2006  cost and schedule performance of prime contractors for seven of the nine  BMDS elements being developed by MDA. When possible, we also  predicted the likely cost of each prime contract at completion. Our  predictions of final contract cost are based on the assumption that the  contractor will continue to perform in the future as it has in the past. An  assessment of each element is provided below.
subsections: section_title: Aegis BMD Contractors End Fiscal Year 2006 Mostly within Cost and on Schedule
paragraphs: The Aegis BMD program has awarded a prime contract for each of its two  major components—the Aegis BMD Weapon System and the Standard  Missile-3. During fiscal year 2006, the work of both prime contractors cost  a little more than expected, but only the weapon system contractor was  slightly behind schedule.
Even though the weapon system contractor was unable to perform fiscal  year 2006 work at the planned cost, its cumulative cost performance  remains positive because of good performance in prior years. At year’s  end, the weapon system contract had a cumulative favorable cost variance  of $0.1 million, but an unfavorable cumulative schedule variance of   $0.8 million. As shown in figure 1, the contractor’s cost and schedule  performance fluctuated significantly throughout the year.
The decline in the Aegis BMD Weapon System contractor’s cost  performance began shortly after the contractor adjusted its cost and  schedule baseline in September 2005. At that time, the contractor  corrected its baseline to account for a December 2004 DOD budget cut.
However, it did not make adjustments to the baseline to incorporate new  work that the government directed. This caused the contractor’s cost  performance to decline significantly because although the cost of the new  effort was being reported, the baseline included no budget for the work.  Recognizing that the contract baseline still needed to be replanned, the  Director issued approval to restructure the program and rebaseline the  contract in December 2005. To accommodate the work added to the  contract, MDA and the contractor realigned software deliveries for Block  2006. The contractor completed the rebaselining effort in April 2006, and  since then the contractor has performed within budgeted cost and  schedule. Based on the contractor’s fiscal year 2006 cost performance, we  estimate that at completion the contract may cost from $0.1 to $4.7 million  more than anticipated.
section_title: Aegis BMD SM-3 Contractor Overruns Cost Budget, but Is Ahead of Schedule
paragraphs: For fiscal year 2006, the Standard Missile-3 contractor incurred an  unfavorable cost variance of $7.8 million and a favorable schedule  variance of $0.7 million. Even though the contractor was unable to  complete fiscal year 2006 work within the funds budgeted, it ended the  year with a cumulative positive cost variance of $3.1 million. The  cumulative positive cost variance was the result of the contractor  performing 2005 work at $10.9 million less than budgeted. In addition,  although the contractor performed work ahead of schedule in fiscal year  2006, it was unable to overcome a negative schedule variance of   $9.6 million created in 2005 caused by delayed hardware deliveries and  delayed test events.  The contractor ended fiscal year 2006 with a  cumulative $8.9 million negative schedule variance. Figure 2 shows  cumulative variances at the beginning of fiscal year 2006 year along with a  depiction of the contractor’s cost and schedule performance throughout  the fiscal year.
The unfavorable cost variance for fiscal year 2006 was caused by  performance issues associated with the third stage rocket motor, the  kinetic warhead and the missile’s guidance system. In addition, production  costs associated with the Solid Divert and Attitude Control System were  higher than anticipated. If the contractor continues to perform as it did in  fiscal year 2006, we estimate that at completion the contract could cost  from $1.9 million less than expected to $2.7 million more than expected.
section_title: ABL Continues to Experience Cost and Schedule Growth
paragraphs: Our analysis of ABL’s Contract Performance Reports indicates that the  prime contractor’s cost and schedule performance continued to decline  during fiscal year 2006. The contractor overran its fiscal year 2006 budget  by $54.8 million and did not perform $26.4 million of work on schedule. By  September 2006, this resulted in an unfavorable cumulative cost variance  of $77.9 million and an unfavorable cumulative schedule variance of   $50 million. Figure 3 shows the decline in cost and schedule performance  for the ABL prime contractor throughout fiscal year 2006.
During the fiscal year, the ABL contractor needed additional time and  money to solve technical challenges associated with the element’s Beam  Control/Fire Control component. Software, integration, and testing  difficulties caused significant delays with the component. Software  problems were caused by the incorporation of numerous changes, basic  logic errors, and differences between the environment of the software  development laboratory and the environment aboard the aircraft.  Integration and testing of the complex system and hardware failures also  contributed to the delays. Together, according to ABL’s program manager,  these problems caused the contractor to experience about a 3 1/2 month  schedule delay that in turn delays the program’s lethality demonstration  from 2008 to 2009. Also, if the contractor’s cost performance continues to  decline as it did in fiscal year 2006, we estimate that at completion the  contract could overrun its budget by about $112.1 million to $248.3 million.
section_title: Limited Contractor Data Prevented Analysis of C2BMC Contractor Performance
paragraphs: We were unable to fully evaluate the contractor’s performance for the  C2BMC program because the contractor did not report all data required to  conduct earned value analysis for 7 months of the fiscal year. During fiscal  year 2006, the C2MBC contractor ended the Block 2004 increment or Part  3 of its Other Transaction Agreement and began work on its Block 2006  program of work, referred to as Part 4 of the agreement. The contractor  completed its Block 2004 program of work (Part 3) in December 2005 and  was awarded the Block 2006 increment (Part 4) on December 28, 2005.  However, budget cuts prompted the program to reduce the C2BMC  enhancements planned for Block 2006 and revise its agreement with the  contractor. Shortly after, the program received additional funds which led  to a re-negotiation of the Part 4 agreement. The new scope of work  included enhancements that could not be completed within available  funding. In March 2006, the program began to replan its Block 2006  increment of work (Part 4) and suspended earned value management  reporting. During the replan, which occurred throughout most of fiscal  year 2006, the contractor reported only actual cost data in lieu of  comparing actual costs to budgeted cost. The cost of the revised  agreement on the Block 2006 increment of work was negotiated in  October 2006.
section_title: GMD Contractor Continues to Spend More Money and Time than Budgeted
paragraphs: The GMD prime contractor’s cost performance continued to decline  during fiscal year 2006, but its fiscal year schedule performance improved.  By September 2006, the cumulative cost of all work completed was   $1.06 billion more than expected and in fiscal year 2006 alone, work cost  about $347 million more than budgeted. The contractor was able to  complete $90.2 million of fiscal year 2006 work ahead of schedule; but the  cumulative schedule variance continued to be negative at $137.8 million.  Figure 4 depicts the cost and schedule performance for the GMD  contractor during fiscal year 2006. Based on its fiscal year 2006  performance, the GMD contractor could overrun the total budgeted cost of  the contract by about $1.5 to $1.9 billion.
The GMD program recently finished rebaselining its contract to reflect a  significant program realignment to reduce program risk and to execute the  program within available funding. While the new baseline was being  implemented, earned value metrics, according to program officials, were  significantly distorted because progress was measured against a plan of  work that the program was no longer following. The contractor is in the  process of developing a new contract baseline that incorporates the  program’s new scope, schedule, and budget. By the end of September  2006, phase one of the new baseline covering fiscal year 2006-2007 efforts  had been implemented and validated through Integrated Baseline Reviews  of the prime contractor and its major subcontractors. Implementation of  the phase 2 baseline covering the remaining contract effort was completed  in October 2006 with the final integrated baseline reviews of the prime and  major subcontractors completed by mid-December 2006.
Based on the data provided by the contractor during fiscal year 2006,  technical and quality issues with the exoatmospheric kill vehicle (EKV)  are the leading contributors to cost overruns and schedule slips for the  GMD program. In fiscal year 2006, EKV related work cost $135.2 million  more than budgeted. Quality problems identified after faulty parts had  been incorporated into components required rework and forced the  subcontractor to increase screening tests to identify defective parts.
Development issues with two boosters being developed to carry the  exoatmospheric kill vehicles into space also increased costs during fiscal  year 2006. The element’s Orbital Boost Vehicle experienced cost growth  totaling $15.0 million while the Boost Vehicle+ booster experienced  growth of $74.1 million. The Orbital Boost Vehicle’s cost grew as the need  for more program management, systems engineering, and production  support was required to work an extended delivery schedule. The Boost  Vehicle+ contractor incurred additional costs as a result of its efforts to  redesign the booster’s motors. For example, the contractor spent  additional time preparing drawings and providing technical oversight of  suppliers.
The contractor also experienced cost growth as it readied the Sea-based   X-Band radar for deployment. Maintenance, repair, and certification  problems cost more than expected. In addition to making changes that an  independent review team suggested were needed before the radar was  made operational, the contractor had to repair an unexpected ballast leak  requiring the installation of hydraulic valves and other engineering  changes.
GMD’s cumulative negative schedule variance is primarily caused by a  subcontractor needing more time than planned to manufacture  exoatmospheric kill vehicles. In addition, the prime contractor delayed  planned tests because test interceptors were being produced at a slower  rate. According to program officials, variances improved during fiscal year  2006 as the subcontractor delivered components on schedule.
section_title: KEI Contractor Makes Progress during Fiscal Year 2006
paragraphs: In July 2005, the KEI program modified its prime contract to require that  the KEI element be capable of intercepting enemy missiles in the  midcourse of their flight. Consequently, the program is rebaselining its  prime contract to better align its cost and schedule objectives with the  new work content. During fiscal year 2006, the contractor’s work cost  approximately $0.6 million less than expected and the contractor  completed about $0.6 million of work ahead of schedule. Cumulatively, the  contractor’s cost performance has been positive, with all work to date  being performed for $3.6 million less than budgeted. However, by year’s  end, the cumulative schedule variance was a negative $5.3 million. We  cannot estimate whether the total contract can be completed within  budgeted cost because the contract is only 6 percent complete and trends  cannot be developed until at least 15 percent of the contract is completed.  Figure 5 highlights the contractor’s performance during fiscal year 2006.
The KEI prime contractor was able to perform within its budgeted costs  during fiscal year 2006 as a result of its efficient use of test resources.  Although the contractor improved its negative schedule variance over the  course of the year, its cumulative schedule variance remains unfavorable  because requirements changes have delayed the development of the  element’s design and of manufacturing processes. Schedule delays caused  the program to postpone its element-level System Design Review originally  scheduled for July 2007. However, the contractor asserts that there is no  impact to the booster flight test currently scheduled for fiscal year 2008.
section_title: Lack of Reporting Limits Knowledge of MKV Contractor’s Performance
paragraphs: Our analysis of the performance of the contractor developing the MKV  element was limited because MDA suspended contract performance  reporting in February 2006 as the program transitioned from an advanced  technology development program to a system development program. The  transition prompted MKV to establish a new contract baseline. Although  the contractor could begin reporting after the baseline is in place, it is not  issuing Contract Performance Reports until an Integrated Baseline Review  is completed. Until that time, the contractor is measuring its progress  against an integrated master schedule.
section_title: Sensors’ FBX-T Contractor Meets Fiscal Year Cost and Schedule Objectives
paragraphs: As of September 2006, the Sensor’s contractor had underrun its fiscal year  2006 budget by $3.8 million and it was ahead in completing $5.4 million of  scheduled work. Considering prior years performance, the contractor is  performing under budget with a favorable cumulative cost variance of  $20.2 million and ahead of schedule with a favorable cumulative schedule  variance of $26.6 million. Judging from the contractor’s cost and schedule  performance in fiscal year 2006, we estimate that at the contract’s  completion, the contractor will underrun the budgeted cost of the contract  by between $26.3 million and $44.9 million. Figure 6 shows the favorable  trend in FBX-T 2006 performance.
According to program officials, the cumulative favorable cost variance is  driven by reduced cost in radar hardware and manufacturing created by  machine process improvements and staffing efficiencies. The favorable  cumulative schedule variance primarily results from a positive $17 million  cumulative schedule variance brought forward from fiscal year 2005 that  was created when the contractor began manufacturing radars 2 through   4 ahead of schedule.
section_title: STSS Contractor Performance Declines during the Year
paragraphs: The STSS contractor’s cost and schedule performance continued to  degrade during fiscal year 2006. During the fiscal year, the contractor  overran budgeted costs by about $66.8 million and was unable to complete  $84.1 million of work as scheduled. Combining the contractor’s  performance during fiscal year 2006 with its performance in prior years,  the contract has a cumulative unfavorable cost variance of approximately  $163.7 million and a cumulative negative schedule variance of   $104.4 million. If the contractor’s performance continues to decline, the  contract could exceed its budgeted cost at completion by $567.3 million to  $1.4 billion. Figure 7 depicts the cumulative cost and schedule  performance of the STSS prime contractor.
Quality issues at the payload subcontractor and technical difficulties  encountered by the prime contractor during payload integration and  testing contributed to the STSS element’s cumulative unfavorable cost and  schedule variances. The first satellite’s payload experienced hardware  failures when tested in a vacuum and at cold temperatures, slowing  integration with the first satellite. Integration issues were also discovered  as the payload was tested at successively higher levels of integration.  According to program officials, the prime contractor tightened its  inspection and oversight of the subcontractor responsible for integrating  and testing the satellite payloads. Also, a re-education effort was  undertaken to ensure that all personnel on the program knew and  understood program instructions. Although the prime contractor  continued to experience negative variances during the fiscal year, it should  be noted that the subcontractor’s performance with respect to the second  payload improved as the result of these added steps. However, the  degradation of the prime contractor’s performance offset the improved  performance of the subcontractor.
section_title: THAAD Contractor’s Performance Erodes in Fiscal Year 2006
paragraphs: During fiscal year 2006, the THAAD contractor expended more money and  time than budgeted to accomplish planned work. During fiscal year 2006,  the contractor incurred a negative cost variance of $87.9 million, which  boosted the cumulative negative cost variance to $104.2 million. Similarly,  the contractor did not complete $37.9 million of work scheduled for fiscal  year 2006 on time. However, because the contractor completed prior  years’ work ahead of schedule, the cumulative negative schedule variance  was $28 million. Based on fiscal year performance, we estimate that at  completion the contract could exceed its budgeted cost by between   $134.7 million and $320.2 million.
The THAAD prime contractor’s negative cost variance for the fiscal year  can be attributed to the increased cost of missile manufacturing, re- designs, and rework, as well as launcher hardware design, integration  difficulties, and software problems. However, the contractor is performing  well in regard to the radar portion of the contract, which is offsetting a  portion of the negative cost variance.
The program’s negative schedule variance is largely driven by the missile,  the launcher, and systems tests. The negative missile variance is mainly  caused by problems with the Divert Attitude Control System and delays in  activation of a test facility.
section_title: Appendix III: Scope and Methodology
paragraphs: To examine the progress MDA made in fiscal year 2006 toward its Block  2006 goals, we examined the efforts of individual programs, such as the  GMD program, that are developing BMDS elements under the management  of MDA. The elements included in our review collectively accounted for   72 percent of MDA’s fiscal year 2006 research and development budget  request. We evaluated each element’s progress in fiscal year 2006 toward  Block 2006 schedule, testing, performance, and cost goals. In making this  comparison, we examined System Element Reviews, test and production  schedules, test reports, and MDA briefing charts. We developed data  collection instruments, which were submitted to MDA and each element  program office, to gather detailed information on completed program  activities including tests, prime contracts, and estimates of element  performance. In addition, we visited an operational site at Vandenberg Air  Force Base, California; and we visited MDA contractor facilities including  Orbital Sciences Corporation in Chandler, Arizona; Raytheon in Tucson,  Arizona; and Lockheed Martin in Sunnyvale, California. To understand  performance issues, we talked with officials from MDA’s System’s  Engineering and Integration Directorate. We also discussed fiscal year  2006 progress and performance with officials in MDA’s Agency Operations  Office, each element program office, as well as the office of DOD’s  Director, Operational Test and Evaluation, DOD’s office of Program  Analysis and Evaluation, and DOD’s Operational Test Agency. To assess  each element’s progress toward its cost goals, we reviewed Contract  Performance Reports and, when available, the Defense Contract  Management Agency’s analyses of these reports. We also interviewed  officials from the Defense Contract Management Agency. We applied  established earned value management techniques to data captured in  Contract Performance Reports to determine trends and used established  earned value management formulas to project the likely costs of prime  contracts at completion. We reviewed each element’s prime contract and  also examined fiscal year 2006 award fee plans and award fee letters.
In assessing MDA’s flexibility, transparency, and accountability, we  interviewed officials from the Office of the Under Secretary of Defense’s  Office for Acquisition, Technology, and Logistics. We also examined  Government Auditing Standards, a Congressional Research Service report,  U.S. Code Title 10, DOD acquisition system policy, and the Statement of  Federal Financial Accounting Standards Number 4.
To determine the progress MDA has made in ensuring quality, we talked  with officials from MDA’s Office of Safety, Quality, and Mission Assurance.  We also held discussions with MDA’s Office of Agency Operations, and  discussed quality issues at contractor facilities including Orbital Sciences  Corporation in Chandler, Arizona; Raytheon in Tucson, Arizona; and  Lockheed Martin in Sunnyvale, California.
To ensure that MDA-generated data used in our assessment are reliable,  we evaluated the agency’s management control processes. We discussed  these processes with MDA senior management. In addition, we confirmed  the accuracy of MDA-generated data with multiple sources within MDA  and, when possible, with independent experts. To assess the validity and  reliability of prime contractors’ earned value management systems and  reports, we interviewed officials and analyzed audit reports prepared by  the Defense Contract Audit Agency. Finally, we assessed MDA’s internal  accounting and administrative management controls by reviewing MDA’s  Federal Manager’s Financial Integrity Report for Fiscal Years 2003, 2004,  2005, and 2006.
Our work was performed primarily at MDA headquarters in Arlington,  Virginia. At this location, we met with officials from the Aegis Ballistic  Missile Defense Program Office; Airborne Laser Program Office;  Command, Control, Battle Management, and Communications Program  Office; Multiple Kill Vehicle Program Office; MDA’s Agency Operations  Office; MDA’s Office of Quality, Safety, and Mission Assurance; DOD’s  office of the Director, Operational Test and Evaluation; DOD’s office of  Program Analysis and Evaluation; and the Office of the Under Secretary of  Defense for Acquisition, Technology and Logistics. We held a  teleconference with officials from DOD’s Operational Test Agency, also in  Arlington, Virginia. In addition, we met with officials in Huntsville,  Alabama, including officials from the Ground-based Midcourse Defense  Program Office, the Terminal High Altitude Area Defense Project Office,  the Kinetic Energy Interceptors Program Office, and the Defense Contract  Management Agency.
We conducted our review from June 2006 through March 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the individual named above, Barbara Haynes, Assistant  Director; LaTonya Miller; Ivy Hubler; Steven Stern; Meredith Allen;   Sigrid McGinty; Tony Beckham; and Adam Vodraska made key  contributions to this report.