Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges
Published: 2005-06-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2002, the Coast Guard began a multiyear, $19 billion to $24 billion acquisition program to replace or modernize its fleet of deepwater aircraft and cutters, so called because they are capable of operating many miles off the coast. For several years now, the Coast Guard has been warning that the existing fleet--especially cutters--was failing at an unsustainable rate, and it began studying options for replacing or modernizing the fleet more rapidly. Faster replacement is designed to avoid some of the costs that might be involved in keeping aging assets running for longer periods. This testimony, which is based both on current and past GAO work, addresses several issues related to these considerations: (1) changes in the condition of deepwater legacy assets during fiscal years 2000 through 2004; (2) actions the Coast Guard has taken to maintain and upgrade deepwater legacy assets; and (3) management challenges the Coast Guard faces in acquiring new assets, especially if a more aggressive schedule is adopted.
section_title: What GAO Found
paragraphs: Available Coast Guard condition measures indicate that the Coast Guard's deepwater legacy aircraft and cutters are generally declining, but these measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. GAO's field visits and interviews with Coast Guard staff, as well as reviews of other evidence, showed significant problems in a variety of the assets' systems and equipment. The Coast Guard has acknowledged that it needs to develop condition measures that more clearly demonstrate the extent to which asset conditions affect mission capabilities, but such measures have not yet been finalized or implemented. The Coast Guard has taken several types of actions to help keep the deepwater legacy assets operational, but these actions, while helpful, may not fully address mission capability issues and may require additional funding. For example, to help meet mission requirements, Coast Guard staff are performing more extensive maintenance between deployments, but even so, aircraft and cutters continue to lose mission capabilities. One Coast Guard command is using a new approach to help sustain the oldest class of cutters, but this approach will likely require additional funds--something not included thus far in Coast Guard budget plans or requests. If the Coast Guard adopts a more aggressive acquisition schedule, it will likely continue to face a number of challenges that have already affected its ability to effectively manage the Deepwater program. GAO has warned that the Coast Guard's acquisition strategy, which relies on a prime contractor ("system integrator") to identify and deliver the assets needed, carries substantial risks. In 2004, well into the contract's second year, key components for managing the program and overseeing the system integrator's performance had not been effectively implemented. While the Coast Guard has been addressing these problems--for example, putting more emphasis on competition as a means to control costs--many areas have not been fully addressed. A more aggressive acquisition schedule would only heighten the risks.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our preliminary observations on  the condition of deepwater legacy assets; actions the Coast Guard has  taken to maintain, upgrade, and better manage these assets; and  management challenges the Coast Guard faces in acquiring replacements  for them. Deepwater legacy assets consist mainly of aircraft and cutters  capable of operating further out to sea, but missions may begin at ports,  waterways, and coasts and extend seaward to wherever the Coast Guard is  required to take action. The Coast Guard uses these assets to perform a  variety of missions, such as interdicting illicit drug shipments or attempted  landings by illegal aliens, rescuing mariners in difficulty at sea, protecting  important fishing grounds, and responding to marine pollution. After the  events of September 11, 2001, these missions were expanded to include a  greater emphasis on ports, waterways, and coastal security. The Coast  Guard’s expanded responsibilities caused changes in how the deepwater  legacy assets are used—for example, in conducting more security  patrols—and they also created a need to make adjustments in mission  requirements for assets that would be updated or built as part of the long term acquisition program.
Many deepwater legacy assets are at or approaching the end of their  estimated service lives. In 2002, the Coast Guard began a multiyear  Integrated Deepwater System acquisition program to replace or modernize  the legacy assets. The Coast Guard’s new implementation plan estimates  the cost for the Deepwater program at $19 billion to $24 billion. From  fiscal years 2002 through 2005, the Coast Guard was appropriated nearly  $2.2 billion for the Deepwater program. This amount included close to  $1.3 billion for new acquisitions and $460.5 million for upgrades of the  legacy assets. Further, because the Coast Guard must continue to operate  the deepwater legacy assets until the new assets are acquired, the Coast  Guard has spent close to $594 million during fiscal years 2002 through  2004 to fund intermediate- and depot-level maintenance of these assets.
The Administration is requesting $966 million for the Deepwater program  for fiscal year 2006—$242 million more than Congress appropriated for the  program last year. Part of this request ($239.5 million) is for maintenance  and upgrades to some deepwater legacy assets and is predicated, in part,  on the Coast Guard’s assertion that its deepwater legacy assets are “failing  at an unsustainable rate.” Faced with this concern, the Coast Guard has  studied options for replacing deepwater legacy assets more rapidly than  initially planned and thereby avoiding some of the costs that might be  involved in upgrading these assets sufficiently to keep them running for  longer periods. In the coming years, both the Coast Guard and Congress  will likely be considering the advisability of such changes in the program.
The House Appropriations Committee recently requested information  from the Coast Guard about its revised Deepwater implementation plan.  Because the Coast Guard was unable to present information that the  Committee deemed satisfactory, the Committee recommended reducing  the Coast Guard’s fiscal year 2006 Deepwater budget request of $966  million by nearly 50 percent.  In late May, the Coast Guard submitted  documentation to the Committee in an effort to comply with it’s request.  As of early June 2005, the Coast Guard’s fiscal year 2006 appropriation was  still pending.
My testimony today addresses three issues related to these considerations:
Changes in the condition of deepwater legacy assets during fiscal years
Actions the Coast Guard has taken to maintain, upgrade, and better  manage deepwater legacy assets; and
Management challenges the Coast Guard faces in acquiring new assets,  especially if a more aggressive schedule is adopted.
My testimony is based on past and current work for this subcommittee and  other congressional committees. Our current work included analyzing data  and condition measures used by the Coast Guard for determining  deepwater legacy assets’ condition, reviewing Coast Guard actions to  maintain and upgrade the legacy assets, meeting with operations and  maintenance staff covering each type of deepwater legacy aircraft and  each class of deepwater legacy cutter, assessing the improvements the  Coast Guard is making in its management of the Deepwater acquisition.  We will be following up this testimony with a written report that will  contain additional, detailed information related to the condition of  deepwater legacy assets, and the actions the Coast Guard is taking to  maintain and upgrade them. As part of the follow-on report, we will also  further examine the Coast Guard’s management of the Deepwater program  and follow up on recommendations made in a prior GAO report. Our work  was carried out in accordance with generally accepted governmental  auditing standards.
In summary, our work thus far shows the following:
Coast Guard condition measures show that the deepwater legacy assets  generally declined between fiscal years 2000 and 2004, but the Coast  Guard’s available condition measures are inadequate to capture the full  extent of the decline in the condition of deepwater assets with any degree  of precision. While there is no systematic, quantitative evidence sufficient  to demonstrate that deepwater legacy assets are “failing at an  unsustainable rate” as the Coast Guard has asserted, this does not mean  that the assets are able to perform their missions safely, reliably, and at  levels that meet or exceed Coast Guard standards. Evidence we gathered  in ways other than reviewing condition measures, such as interviewing  Coast Guard operations and maintenance staff, showed significant  problems in a variety of the assets’ systems and equipment that will need  to be addressed if the assets are to continue performing their missions at  or near current levels until replacement assets become operational. These  problems are not necessarily reflected in the condition measures. For  example, the Coast Guard’s HH-65 helicopter consistently exceeded the  Coast Guard’s primary condition measure during fiscal years 2000 through  2004, yet its engine is being replaced because it lacks sufficient power to  meet mission requirements. The Coast Guard has acknowledged that it  needs measures that more clearly demonstrate the extent to which asset  conditions affect mission capabilities, but such measures have not yet  been finalized or implemented.
The Coast Guard has taken several types of actions to keep existing assets  operational, but these actions, while helpful, may not fully address mission  capability issues and may require additional funding. The Coast Guard  now compiles information that can be used to better identify and prioritize  the maintenance or upgrade projects that need to be done to keep existing  assets operating. Coast Guard personnel, according to evidence obtained  during our site visits, are also performing more maintenance on these  assets than they have in the past—for example, spending additional time  on maintenance when cutters are in port between deployments. These  additional maintenance efforts are likely helping to prevent a more rapid  decline in the condition of these assets, but it is important to note that  even so, cutters and aircraft are still losing mission capabilities because of  equipment and system failures. The Coast Guard’s Pacific Area Command,  which is heavily dependent on deteriorating 378-foot cutters, is attempting  to use new strategies to help sustain the operation of these cutters through  2016, when they are currently scheduled to be fully replaced with newer  cutters. According to the Pacific Area Commander, however, doing so is  likely to require an additional infusion of funds—something the Coast  Guard has so far not included in its budget requests or plans. Finally, in an  effort to address our recommendations for developing a more proactive  approach for prioritizing the maintenance and capability enhancement  projects needed on its legacy assets, the Coast Guard is developing a new  system for providing more objective data on where to best spend budget  dollars to achieve the greatest enhancements in mission capabilities.
The Coast Guard’s fiscal year 2006 budget request of $966 million for the  Deepwater program reflects significant revisions to the program’s  requirements, capabilities, and schedule in light of the homeland security  mission. We have not yet analyzed the likely cost and schedule impact of  these revisions. However, if a more aggressive acquisition schedule is  adopted, the Coast Guard would likely continue to face a number of  management challenges that have already affected its ability to effectively  administer the Deepwater program. From the outset, we have expressed  concern about the risks involved with the Coast Guard’s acquisition  strategy, which involves relying on a prime contractor (or “system  integrator”) to identify the assets needed, using tiers of subcontractors to  design and build the actual assets. Last year, we reported that well into the  contract’s second year, key components needed to manage the program  and oversee the system integrator’s performance had not been effectively  implemented. We made a number of recommendations in the areas of  program management, contractor accountability, and cost control through  competition. While the Coast Guard agreed with nearly all of these  recommendations and has initiated actions to address these problems, we  remain concerned that the program still carries major and inherent risks.  Most of our recommendations have not been fully addressed. Recent  information shows continued challenges in the areas of overall system  integration, cost and schedule management, and integrated product teams,  which consist of contractor and government personnel and are the Coast  Guard’s principal tool for managing the Deepwater program. In our  opinion, the uncertainties associated with the proposed revisions to the  Deepwater program only heighten these risks.
subsections: section_title: Background
paragraphs: As the lead federal agency for maritime homeland security within the  Department of Homeland Security, the Coast Guard is responsible for  homeland and nonhomeland security missions, including ensuring security  in ports and waterways and along coastlines, conducting search and  rescue missions, interdicting drug shipments and illegal aliens, enforcing  fisheries laws, and responding to reports of pollution. The deepwater fleet,  which consists of 186 aircraft and 88 cutters of various sizes and  capabilities, plays a critical role in all of these missions. As shown in  table 1, the fleet includes fixed-wing aircraft, helicopters, and cutters of  varying lengths.
Some Coast Guard deepwater cutters were built in the 1960s.  Notwithstanding extensive overhauls and other upgrades, a number of the  cutters are nearing the end of their estimated service lives. Similarly, while  a number of the deepwater legacy aircraft have received upgrades in  engines, operating systems, and sensor equipment since they were  originally built, they too have limitations in their operating capabilities.
In 1996, the Coast Guard began developing what came to be known as the  Integrated Deepwater System acquisition program as its major effort to  replace or modernize these aircraft and cutters. This Deepwater program  is designed to replace some assets—such as deteriorating cutters—with  new cutters and upgrade other assets—such as some types of  helicopters—so they can meet new performance requirements.
The Deepwater program represents a unique approach to a major  acquisition in that the Coast Guard is relying on a prime contractor—the  system integrator—to identify and deliver the assets needed to meet a set  of mission requirements the Coast Guard has specified. In 2002, the Coast  Guard awarded a contract to Integrated Coast Guard Systems (ICGS) as  the system integrator for the Deepwater program. ICGS has two main  subcontractors—Lockheed Martin and Northrop Grumman—that in turn  contract with other subcontractors. The resulting program is designed to  provide an improved, integrated system of aircraft, cutters, and unmanned  aerial vehicles to be linked effectively through systems that provide  command, control, communications, computer, intelligence, surveillance,  reconnaissance, and supporting logistics. We have been reviewing the  Deepwater program for several years. In recent reports we have pointed  out difficulties the Coast Guard has been having in managing the  Deepwater program and ensuring that the acquisition schedule is up to  date and on schedule.
The existing schedule calls for acquisition of new assets under the Coast  Guard’s Deepwater program to occur over an approximately 20-year  period. By 2007, for example, the Coast Guard is to receive the first  National Security Cutter, which will have the capability to conduct military  missions related to homeland security. Plans call for 6 to 8 of these cutters  to replace the 12 existing 378-foot cutters. However, in order to carry out  its mission effectively, the Coast Guard will also need to keep all of the  deepwater legacy assets operational until they can be replaced or  upgraded.
section_title: Deepwater Legacy Assets Show General Decline in Condition, but Current Measures Do Not Capture True Extent
paragraphs: Coast Guard condition measures show that the deepwater legacy assets  generally declined between 2000 and 2004, but the Coast Guard’s available  condition measures are inadequate to capture the full extent of the decline  in the condition of deepwater assets with any degree of precision. Other  evidence we gathered, such as information from discussions with  maintenance personnel, point to conditions that may be more severe than  the available measures indicate. The Coast Guard acknowledges that it  needs better condition measures but has not yet finalized or implemented  such measures.
subsections: section_title: Coast Guard’s Condition Measures Show General Decline in Deepwater Assets, with Some Fluctuations
paragraphs: During fiscal years 2000 through 2004, the Coast Guard’s various condition  measures show a general decline, although there were year-to-year  fluctuations (see table 2). For deepwater legacy aircraft, a key summary  measure of the condition—the availability index (the percentage of time  aircraft are available to perform their missions)—showed that except for  the HU-25 medium-range surveillance aircraft, the assets continued to  perform close to or above fleet availability standards over the 5-year  period. In contrast, other condition measures for aircraft, such as cost per  flight hour and labor hours per flight hour, generally reflected some  deterioration. For cutters, a key summary measure of condition—percent  of time free of major casualties—fluctuated but generally remained well  below target levels. The number of major casualties generally rose from  fiscal years 2000 through 2003, and then dropped slightly in fiscal year  2004.
Another, albeit less direct, measure of an asset’s condition is deferred  maintenance—the amount of scheduled maintenance that must be  postponed on an asset in order to pay for unscheduled repairs. Such  deferrals can occur when the Coast Guard does not have enough money to  absorb unexpected maintenance expenditures and still perform all of its  scheduled maintenance, thus creating a backlog. For example, in spring  2004, while on a counter-drug mission, the 210-foot cutter Active  experienced problems in the condition of its flight deck that were to be  corrected during its scheduled depot-level maintenance. However,  because of a shortage of maintenance funds, the maintenance was  deferred and the flight deck not repaired. As a result, the cutter lost 50  percent of its patrol time, since the required support helicopters could not  take off from or land on it.
As table 3 shows, deferred maintenance does not show a clear pattern  across all classes of deepwater legacy assets. For the deepwater legacy  aircraft, the overall amount of estimated deferred maintenance increased  each year during fiscal years 2002 through 2004, from $12.3 million to  about $24.6 million. However, most of the increase came for one type of  asset, the HH-60 helicopter, and the increase came mainly from shortening  the interval between scheduled depot-level maintenance from 60 months  to 48 months—thereby increasing the scheduled maintenance workload—  and not from having to divert money to deal with unscheduled  maintenance. For the deepwater cutters, the amount of estimated deferred  maintenance increased from fiscal year 2002 to 2003, but then dropped  significantly in fiscal year 2004. The decrease in fiscal year 2004 came  mainly because (1) the Coast Guard ceased maintenance on an icebreaker,  thus freeing up some maintenance funds; and (2) the Coast Guard also  received additional operational and maintenance funding, allowing it to  deal with both scheduled and unscheduled maintenance. Thus, the drop in  the estimate of deferred maintenance costs for fiscal year 2004 is not  necessarily an indicator that the condition of the legacy assets was  improving; it could result from the Coast Guard having more money to  address the maintenance needs.
section_title: Current Condition Measures Not Robust Enough to Clearly Link Condition with Effect on Mission Capabilities
paragraphs: At the time we began our work, the Coast Guard’s condition measures  were not sufficiently robust to systematically link assets’ condition with  degradation in mission capabilities. As we discussed with Coast Guard  officials, without such condition measures, the extent and severity of the  decline in the existing deepwater legacy assets and their true condition  cannot be fully determined. As a result, the picture that emerges regarding  the condition of the deepwater legacy assets based on current Coast  Guard condition measures should be viewed with some caution. While  there is no systematic, quantitative evidence sufficient to demonstrate that  deepwater legacy assets its deepwater legacy assets are “failing at an  unsustainable rate” as the Coast Guard has asserted, this does not mean  the assets are in good condition or have been performing their missions  safely, reliably and at levels that meet or exceed Coast Guard standards.  We identified two factors that need to be considered to put these  condition measures in proper context.
The first factor deals with limitations in the measures themselves. Simply  put, the Coast Guard’s measures of asset condition do not fully capture the  extent of the problems. As such, they may understate the decline in the  legacy assets’ condition. More specifically, Coast Guard measures focus on  events, such as flight mishaps or equipment casualties, but do not measure  the extent to which these and other incidents degrade mission capabilities.  Here are two examples in which the Coast Guard’s current measures are  not sufficiently robust to systematically capture degradation in mission  capabilities:
The surface search radar system on the HC-130 long-range surveillance  aircraft, called the APS-137 radar, is subject to frequent failures and is  quickly becoming unsupportable, according to Coast Guard staff with  whom we met. Flight crews use this radar to search for vessels in trouble  and to monitor ships for illegal activity, such as transporting illicit drugs or  illegal immigrants. When the radar fails, flight crews are reduced to  looking out the window for targets, greatly reducing mission efficiency  and effectiveness. A flight crew in Kodiak, Alaska, described this situation  as being “like trying to locate a boat looking through a straw.” Mission  capability degradations such as these are not reflected in the Coast  Guard’s current condition measures.
The 378-foot cutter Jarvis recently experienced a failure in one of its two  main gas turbines shortly after embarking on a living marine resources and  search and rescue mission. While Jarvis was able to accomplish its given  mission, albeit at reduced speeds, this casualty rendered the cutter unable  to respond to any emergency request it might have received—but did not  in this case—to undertake a mission requiring higher speeds, such as drug  interdiction. The Coast Guard condition measures are not robust enough  to capture these distinctions in mission capability.
The second factor that needs to be kept in mind is the compelling nature  of the other evidence we gathered apart from the Coast Guard’s condition  measures. This evidence, gleaned from information collected during our  site visits and discussions with maintenance personnel, indicated  deteriorating and obsolete systems and equipment as a major cause of the  reduction in mission capabilities for a number of deepwater legacy aircraft  and cutters. Such problems, however, are not captured by the Coast  Guard’s condition measures. One example of this involves the HH-65  short-range recovery helicopter. While this helicopter consistently  exceeded availability standards established by the Coast Guard over the  5-year period we examined, it is currently operating with underpowered  engines that have become increasingly subject to power failures. As a  result, Coast Guard pilots employ a number of work arounds, such as  dumping fuel or leaving the rescue swimmer on scene if the load becomes  too heavy. Further, because of increasing safety and reliability problems,  the Coast Guard has also implemented a number of operational  restrictions—such as not allowing the helicopter to land on helipads—to  safeguard crew and passengers and prevent mishaps until all of the fleet’s  engines can be replaced.
The Coast Guard has recently recognized the need for improved measures  to more accurately capture data on the extent to which its deepwater  legacy assets are degraded in their mission capabilities, but as of April  2005, such measures had not yet been finalized or implemented.  Subsequent to our inquiries regarding the lack of condition and mission  capability measures, Coast Guard naval engineers reported that they had  begun developing a “percent of time fully mission capable” measure to  reflect the degree of mission capability, as well as measures to track cutter  readiness. We agree that measures like this are needed—and as soon as  possible. Further, current plans call for the measure, if approved, to be  used for cutters, but not for aircraft. Consequently, even if this measure  were to be implemented across the Coast Guard, there would still be no  measure to address degradation in mission capabilities for aircraft. We will  be exploring this issue further in our follow-on report.
section_title: Actions to Maintain, Upgrade, and Better Manage Deepwater Legacy Assets Are Under Way, but Condition Issues Remain
paragraphs: The Coast Guard has taken several actions to maintain, upgrade, and  better manage its deepwater legacy assets. These include establishing a  compendium of information for making decisions regarding maintenance  and upgrades; performing more extensive maintenance between  deployments; applying new business rules and strategies, at the Pacific  Area Command, to better sustain the 378-foot high-endurance cutters  through 2016; and exploring additional strategies for prioritizing the  maintenance and capability enhancement projects needed on its legacy  assets in an effort to provide more objective data on where to best spend  budget dollars to achieve the greatest enhancements in mission  capabilities. These additional efforts are likely helping to prevent a more  rapid decline in the condition of these assets, but condition problems  continue, and the efforts will likely involve additional costs.
subsections: section_title: Compendium of Needs Is Being Compiled and Used
paragraphs: Since 2002, the Coast Guard has annually issued a Systems Integrated  Near Term Support Strategy compendium. Among other things, this  compendium consolidates information needed to make planning and  budgeting decisions regarding maintenance and upgrades to sustain legacy  assets. Its purpose is to serve as a tool for senior Coast Guard  management in setting priorities and planning budgets. From this strategic  document, the Coast Guard has identified a number of upgrades to  improve the capabilities of the deepwater legacy aircraft and cutters. The  most recent compendium (for fiscal year 2006) lists more than $1 billion  worth of upgrades to the deepwater legacy assets. The planned upgrades  identified in the compendium that have been approved and received initial  funding account for an estimated $856 million the Coast Guard anticipates  it will need to complete those projects. The approved upgrades for  deepwater legacy assets are shown in table 4.
Among the projects already begun is the re-engining of the HH-65  helicopters to increase the helicopter’s power and capabilities. The Coast  Guard is also upgrading several other aviation systems in an effort to  improve aircraft capabilities. Enhancements are also planned for certain  classes of deepwater cutters. For example, during this fiscal year, the  Coast Guard is to begin a maintenance effectiveness project on the 210 foot and 270-foot cutters. This project includes replacing major  engineering subsystems with the goal of extending the cutters’ service  lives until their replacement by the Offshore Patrol Cutter. Of the $856  million total estimated costs needed for the planned upgrades to the  deepwater legacy assets listed above, $215 million has been allocated  through fiscal year 2005 and the Coast Guard has requested another $217.3  million in its fiscal year 2006 budget. The remaining estimated costs of  $423.7 million would have to be funded beyond fiscal year 2006.
section_title: Increasing Amounts of Maintenance Are Being Performed, but Loss of Mission Capabilities Continues
paragraphs: Coast Guard personnel consistently reported to us that crew members  have to spend increasingly more time between missions to prepare for the  next deployment. For example, to prevent further corrosion-related  problems, air station maintenance personnel at the locations we visited  said they have instituted additional measures, such as washing and  applying fluid film to the aircraft prior to each deployment. Similar  accounts were told by personnel working on cutters. For example, officers  of the 270-foot cutter Northland told us that because of dated equipment  and the deteriorating condition of its piping and other subsystems, crew  members have to spend increasingly more time and resources while in  port to prepare for their next deployment. While we could not verify these  increases in time and resources because the Coast Guard does not capture  data on these additional maintenance efforts, the need for increasing  amounts of maintenance was a message we consistently heard from the  operations and maintenance personnel with whom we met.
Such efforts are likely helping to prevent a more rapid decline in the  condition of these deepwater legacy assets, but it is important to note that  even with the increasing amounts of maintenance, these assets are still  losing mission capabilities because of deteriorating equipment and system  failures. For example, in fiscal year 2004, one 378-foot cutter lost 98  counterdrug mission days because of a number of patrol-ending  casualties—including the loss of ability to raise and lower boats and run  major electrical equipment—requiring $1.2 million in emergency  maintenance. Another 378-foot cutter lost 27 counterdrug mission days in  the fall of 2004 when it required emergency dry-dock maintenance because  of hydraulic oil leaking into the reduction gear.
section_title: New Initiative for Maintaining 378-Foot Cutters Is Under Way
paragraphs: One effort is under way at the Coast Guard’s Pacific Area Command to  improve maintenance practices for the 378-foot cutters. Pacific Area  Command officials have recognized that a different approach to  maintaining and sustaining legacy cutters may be needed and, as a first  step, they have undertaken an initiative applying what they refer to as  “new business rules and strategies” to better maintain the 378-foot high endurance cutters through 2016. Under the original Deepwater proposal,  the final 378-foot cutter was to be decommissioned in 2013, but by 2005,  that date had slipped to 2016. To help keep these cutters running through  this date, Pacific Area Command officials are applying such rules and  strategies as (1) ensuring that operations and maintenance staffs work  closely together to determine priorities, (2) recognizing that maintaining  or enhancing cutter capabilities will involve trade-off determinations, and  (3) accepting the proposition that with limited funding not all cutters will  be fully capable to perform all types of missions. Pacific Area Command  officials believe that in combination, these principles and strategies will  result in more cost-effective maintenance and resource allocation  decisions—recognizing that difficult decisions will still have to be made to  balance maintenance and operations.
The Pacific Area Command’s new initiative has the potential for assisting  the Coast Guard in making more informed choices regarding the best use  of their resources, but the approach will likely require that the Coast  Guard allocate additional maintenance funds.  In particular, the Pacific  Area Commander told us that in order for the 378-foot cutters to be  properly maintained until their replacements become operational; the  Coast Guard will have to provide additional funding for sustaining the 378 foot cutters. So far, the Coast Guard’s budget plans or requests do not  address this potential need.
section_title: Coast Guard is Developing a Strategy to Better Prioritize Upgrades and Maximize Asset Capabilities
paragraphs: In the past, we have recommended that the Coast Guard develop a long term strategy to set and assess levels of mission performance. We found  this was an important step for the Coast Guard to take because it links  mission performance levels to measurable outputs and goals so that the  Coast Guard can better decide how limited budget dollars should be spent.  The Coast Guard has recently begun to apply the principles behind such a  strategy to (1) better prioritize the projects needed to upgrade legacy  assets that will be part of the Deepwater program and (2) obtain the  greatest overall mix of capabilities for its assets within its budget in order  to maximize mission performance.  The tool it is developing is called the  Capital Asset Management Strategy (CAMS).
CAMS, once fully implemented, is expected to help the Coast Guard to  better manage its assets by linking funding decisions to asset condition.  Unlike the Coast Guard’s current compendium, CAMS is designed to  provide analyses on the capability trade-offs for upgrades and  maintenance projects across asset classes, thereby allowing the Coast  Guard to determine which combination of projects will provide the most  capability for the dollars invested.  For example, when trying to decide  among potential project upgrades such as a HC-130 weather radar  replacement, an HH-65 sliding cabin door replacement, or a 110-foot patrol  boat fin stabilizer replacement, CAMS, once fully implemented, could  provide the program managers with a recommended mix of project  upgrades that would achieve the greatest capability enhancements based  on the available budget.
CAMS analyses are to be based on legacy asset condition and readiness  data, asset retirement and replacement timelines, asset degradation  estimates, project production rates, cost data, and mission utility rankings.  Mission utility rankings will grade an asset’s importance to specific  missions, such as search and rescue or counterdrug operations.  Rankings  may also be assigned to an asset’s critical subsystems, or may be altered  based on an asset’s geographic location.  For example, a 378-foot cutter  may be critical to the success of fisheries patrols in the Pacific, but may  not be as important for alien/migrant interdiction operations in the  Caribbean.  In addition, the Coast Guard plans to rank its missions based  on their relative importance. Each of these elements is to form the basis  for recommendations regarding which combination of upgrade and  maintenance projects will provide the greatest enhancements to fleet  capabilities.
CAMS recommendations are not intended to be a replacement for the  budget development process, but rather are to augment the information  currently provided to decision-makers and be reviewed by several internal  Coast Guard officials before final funding decisions are made. Further, in  order to prevent user “gaming”—making assumptions in such a way as to  assure a positive recommendation or outcome for a particular project—  the Coast Guard is developing a series of job aids, manuals and training  courses to ensure data consistency.
Coast Guard officials expect to have the CAMS fully implemented by  September 2005 and intend to use it while developing the Coast Guard’s  fiscal year 2008 budget submission. Although it is too soon to assess the  effectiveness of CAMS, we view this approach as a good faith effort  toward knowledge-based budgeting for legacy asset sustainment.
section_title: Management Challenges Faced in Acquiring New Assets Remain Significant
paragraphs: Since the inception of the Deepwater program, we have expressed  concerns about the degree of risk in the acquisition approach and the  Coast Guard’s ability to manage and oversee the program. Last year, we  reported that, well into the contract’s second year, key components  needed to manage the program and oversee the system integrator’s  performance had not been effectively implemented. We also reported that  the degree to which the program was on track could not be determined,  because the Coast Guard was not updating its schedule. We detailed  needed improvements in a number of areas, shown in table 5. These  concerns have a direct bearing on any consideration to increase the  program’s pace. Because the Coast Guard was having difficulty managing  the Deepwater program at the pace it had anticipated, increasing the pace  by attempting to speed the acquisition would only complicate the problem.
The Coast Guard agreed with nearly all of our recommendations and has  made progress in implementing some of them. In most cases, however,  while actions are under way, management challenges remain that are  likely to take some time to fully address.
subsections: section_title: Improvement of Program Management and Contractor Oversight Is Mixed
paragraphs: We have seen mixed success in the Coast Guard’s efforts to improve  management of the program and contractor oversight. All four areas of  concern—improving integrated project teams (IPT) , ensuring adequate  staff for the program, planning for human capital requirements for field  units receiving new assets, and updating the program’s schedule—have yet  to be fully addressed.
subsections: section_title: Strengthening Integrated Product Teams
paragraphs: Although the Deepwater program has made some efforts to improve the  effectiveness of IPTs, we continue to see evidence that more  improvements are needed for the teams to do their jobs effectively. These  teams, the Coast Guard’s primary tool for managing the program and  overseeing the contractor, are generally chaired by a subcontractor  representative and consist of members from subcontractors and the Coast  Guard. The teams are responsible for overall program planning and  management, asset integration, and overseeing delivery of specific  Deepwater assets. Since our March 2004 report, the teams have been  restructured, and 20 teams have charters setting forth their purpose,  authority, and performance goals. And new, entry-level training is being  provided to team members.
Despite this progress, however, the needed changes are not yet sufficiently  in place. A recent assessment by the Coast Guard of the system  integrator’s performance found that roles and responsibilities in some  teams continue to be unclear. Decision making is to a large extent  stovepiped, and some teams still lack adequate authority to make  decisions within their realm of responsibility. One source of difficulty for  some team members has been the fact that each of the two major  subcontractors has used its own databases and processes to manage  different segments of the program. Decisions on air assets are made by  Lockheed Martin, while decisions regarding surface assets are made by  Northrop Grumman. This approach can lessen the likelihood that a  “system of systems” outcome will be achieved. Officials told us that more  attention is being paid to taking a systemwide approach and that the Coast  Guard has emphasized the need to ensure that the two major  subcontractors integrate their management systems.
section_title: Ensuring Adequate Staffing for the Deepwater Program
paragraphs: The Coast Guard has taken steps to more fully staff the Deepwater  program, with mixed effects. In February 2005, the Deepwater program  executive officer approved a revised human capital plan. The plan  emphasizes workforce planning, including determining needed knowledge,  skills, and abilities and developing ways to leverage institutional  knowledge as staff rotate out of the program. This analysis is intended to  help determine what gaps exist between needed skills and existing skills  and to develop a plan to bridge these gaps. The Coast Guard has also taken  some short-term steps to improve Deepwater program staffing, hiring  contractors to assist with program support functions, shifting some  positions from military to civilian to mitigate turnover risk, and identifying  hard-to-fill positions and developing recruitment plans specifically for  them. Finally, the Deepwater program and the Coast Guard’s acquisition  branch have begun using an automated system for forecasting military  rotation cycles, a step Deepwater officials believe will help with long range strategic workforce planning and analysis.
Despite these actions, however, vacancies remain in the program, and  some metrics that may have highlighted the need for more stability in the  program’s staff have been removed from the new human capital plan. As  of January 2005, 244 positions were assigned to the program, but only 206  of these were filled, a 16 percent vacancy rate. A year ago, 209 staff were  assigned to the program. Further, the new human capital plan removes a  performance goal that measured the percentage of billets filled at any  given time. Coast Guard officials acknowledged that the prior plan’s goal  of a 95 percent or higher fill rate was unduly optimistic and was a poor  measure of the Coast Guard’s ability to meet its hiring goals. For example,  billets for military personnel who plan to rotate into the program in the  summer are created at the beginning of the budget year, leading the metric  to count those positions as vacant from the beginning of the budget year  until summer. Other performance metrics that were included in the prior  plan to measure progress in human capital issues have also been removed.  For example, to help ensure that incoming personnel received acquisition  training and on-the-job training, a billet was included in the prior plan to  serve as a floating training position that replacement personnel could use  for a year before the departure of military incumbents. This position was  never funded, and the new plan removes the billet.
section_title: Improving Communication with Personnel Who Will Use the New Assets
paragraphs: The Coast Guard recognizes the critical need to inform the operators who  are to use the Deepwater assets of progress in the program, and officials  stated that, on the basis of our recommendations, they have made a  number of improvements in this area. A November 2004 analysis of the  Deepwater program’s communication process, conducted in coordination  with the National Graduate School, found that the communication and  feedback processes were inadequate. Emphasis has now been placed on  outreach to field personnel, with a multipronged approach involving  customer surveys, face-to-face meetings, and presentations. We have not  yet evaluated the effectiveness of the new approach.
Human capital requirements for the Deepwater program—such as crew  numbers and schedules, training, and support personnel—will have an  increasing impact on the program’s ability to meet its goals as the pace at  which assets are delivered to field units picks up. Recent assessments by  Coast Guard performance monitors show this to be an area of concern.Coast Guard officials have expressed concern about whether the system  integrator is appropriately considering human capital in systems  engineering decisions. The system integrator is required to develop a  workforce management plan for Deepwater, as well as “human factors  engineering” plans for each Deepwater asset and for the overall system of  systems. The Coast Guard rejected the contractor’s workforce  management plan and several of the proposed human factors engineering  plans as being inadequate. The rejections were due, in part, to the lack of  an established and integrated system-level engineering approach that  shows how issues relating to human capabilities and limitations of actually  performing with the system will be approached. One performance monitor  noted that, as of late 2004, requirements for staffing and training of  maintenance facilities and organizations had yet to be determined.  According to the Coast Guard, emphasis on a contractor’s approach to  addressing human capital considerations is necessary to ensure that  Deepwater goals are met, especially as they pertain to operational  effectiveness and total ownership cost.
section_title: Updating the Acquisition Schedule
paragraphs: The Coast Guard has recently undertaken efforts to update the original  2002 Deepwater acquisition schedule—an action that we suggested in our  June 2004 report. The original schedule had milestone dates showing  when work on an asset would begin and when delivery would be expected,  as well as the integrated schedules of critical linkages between assets, but  we found that the Coast Guard was not maintaining an updated and  integrated version of the schedule. As a result, the Coast Guard could not  demonstrate whether individual components and assets were being  integrated and delivered on schedule and in critical sequence. As recently  as October 2004, Deepwater performance monitors likewise expressed  concern that the Coast Guard lacked adequate visibility into the program’s  status and that lack of visibility into the schedules for component-level  items prevented reliable forecasting and risk analysis. The Coast Guard  has since taken steps to update the outdated schedule and has indicated  that it plans to continue to update the schedule each month for internal  management purposes and semiannually to support its budget planning  efforts. We think this is an important step toward improving the Coast  Guard’s management of the program because it provides a more tangible  picture of progress as well as a baseline for holding contractors  accountable. We will continue to work closely with the Coast Guard to  ensure progress is made and to monitor how risks are mitigated.
section_title: Procedures for Ensuring System Integrator Accountability Are More Rigorous, but Concerns Remain
paragraphs: We have seen progress in terms of the rigor with which the Coast Guard is  periodically assessing the system integrator’s performance, but concerns  remain about the broader issues of accountability for achieving the  overarching goals of minimizing total ownership costs and maximizing  operational effectiveness.
subsections: section_title: Improving Criteria for Assessing Performance
paragraphs: Improvements continue to be made to the criteria for assessing the system  integrator’s performance. In March 2004, we reported that the process for  assessing performance against specific contract tasks lacked rigor. The  criteria for doing so have since been revised to more clearly reflect those  that are objective, (that is, measured through automated tools against  established metrics), and those that are subjective, meaning the narrative  comments by Coast Guard performance monitors. Weights have been  assigned to each set of evaluation factors, and the Coast Guard continues  to refine the distribution of the weights to reach an appropriate balance  between automated results and the eyewitness observations of the  performance monitors. Coast Guard officials told us that they have also  provided additional guidance and training to performance monitors. We  found that efforts have been made to improve the consistency of the  format used for their input in assessments of the system integrator’s  performance. Coast Guard officials said that they are continuing to make  improvements to ensure that performance monitors’ relevant observations  are appropriately considered in making award fee determinations.
It is important to note that although performance monitor comments are  considered subjective, they are valuable inputs to assessing the system  integrator’s performance, particularly when they are tied to measurable  outcomes. It will be necessary for the Coast Guard to continue refining the  award fee factors as the program progresses. In some cases, we noted that  the performance monitors’ assessments differed vastly from the results of  automated, data-driven assessments. For example, while schedule  management is discussed in the Coast Guard’s most recent assessment of  the system integrator’s performance as a major area of challenge and risk,  the objective measure showed 100 percent compliance in this area.  Another metric assesses the extent to which integrated product teams  consider the impact of their decisions on the overall cost and effectiveness  of the Deepwater program. Performance monitors reported that because  system-level guidance had not been provided to the teams responsible for  specific assets, they had a limited ability to see the whole picture and  understand the impact of decisions on total ownership costs and  operational effectiveness. However, the automated measure was again  100 percent compliance. Coast Guard officials said that, in some cases, the  data-driven metrics do not accurately reflect the contractor’s performance.  For the next award fee assessment, Deepwater officials plan to revise the  metrics and place more weight on the performance monitors’ input, while  ensuring that it is based on measurable outcomes.
section_title: Holding the System Integrator Accountable for Effectiveness of Project Teams
paragraphs: Changes have been made to the award fee metrics that place additional  emphasis on the system integrator’s responsibility for making integrated  project teams effective. Award fee criteria now incorporate specific  aspects of how the integrator is managing the program, including  administration, management commitment, collaboration, training, and  empowerment of these teams. However, as discussed above, concerns  remain about whether the teams are effectively accomplishing their goals.
section_title: Evaluation of Operational Effectiveness and Total Ownership Cost
paragraphs: While the Coast Guard has developed models to measure the system  integrator’s performance in operational effectiveness and total ownership  costs, concrete results have not yet emerged. Minimizing total ownership  costs and maximizing operational effectiveness are two of the overarching  goals of the Deepwater program. The system integrator’s performance in  these two areas will be a critical piece of information when the Coast  Guard makes a decision about whether to award the contractor the first  contract option period of 5 years. Initial decision making is to start next  year.
With regard to the operational effectiveness of the program, measuring the  system integrator’s impact has yielded limited results to date because few  of the new assets are operational. The Coast Guard has developed  modeling capabilities to simulate the effect of the new capabilities on its  ability to meet its missions. However, until additional assets become  operational, progress toward this goal will be difficult to determine.
With regard to total ownership costs, the Coast Guard does not plan to  implement our recommendation. It has not adhered to its original plan, set  forth in the Deepwater program management plan, of establishing as its  baseline a cost not to exceed the dollar value of replacing the assets under  a traditional approach (e.g., on an asset-by-asset basis rather than a  system-of-systems approach). Although a cost baseline consistent with the  program management plan’s approach was initially established, this  number has not been rebaselined, as has the system integrator’s cost  estimate baseline, and is not being used to evaluate the contractor’s  progress in holding total ownership costs down. In practice, the baseline  being used to measure total ownership cost is the system integrator’s own  cost estimate. As we reported in March 2004, we believe that measuring  the system integrator’s cost growth compared with its own cost proposal  will tell the government nothing about whether it is gaining efficiencies by  turning to the system of systems concept.
section_title: Establishing Criteria and Documenting Changes to the Baseline
paragraphs: Coast Guard officials stated that the contract total ownership cost and  operational effectiveness baseline is adjusted based on approved decision  memorandums from the Agency Acquisition Executive, the Vice  Commandant of the Coast Guard.
section_title: Coast Guard Has Taken Steps to Hold the System Integrator Accountable for Competition
paragraphs: The Coast Guard reported taking steps to address our recommendations  concerning cost control through competition. Our recommendations  pertained to competition among second-tier suppliers and notification of  “make” decisions.
Competition among second-tier suppliers. Coast Guard officials told us  that in making the decision about whether to award the first contract  option, the government will specifically examine the system integrator’s  ability to control costs by assessing the degree to which competition is  fostered at the major subcontractor level. The evaluation will consider the  subcontractors’ project management structure and processes to control  costs, as well as how market surveys of similar assets and major  subsystems are implemented. The Coast Guard is focusing its attention on  those areas that were priced after the initial competition for the  Deepwater contract was completed, such as the HH-65 re-engining and the  C-130J missionization. For example, a new process implemented for the  C-130J missionization was a requirement for competition in subcontracting  and government approval of all subcontracts exceeding $2 million in order  for the Coast Guard to monitor the integrator’s competition efforts.
Notification of make decisions. According to the Federal Acquisition  Regulation, the prime contractor is responsible for managing contract  performance, including planning, placing, and administering subcontracts  as necessary to ensure the lowest overall cost and technical risk to the  government. When “make-or-buy programs” are required, the government  may reserve the right to review and agree on the contractor’s make-or-buy  program when necessary to ensure negotiation of reasonable contract  prices, among other things. We recommended that the Coast Guard be  notified of make decisions over $5 million in order to facilitate controlling  costs through competition. We suggested the $5 million threshold because  Lockheed Martin, one of the major subcontractors, considers that amount  to be the threshold for considering its suppliers major. The Coast Guard  has asked the system integrator, on a voluntary basis, to provide  notification one week in advance of a make decision of $10 million or  more based on the criteria in the Federal Acquisition Regulation.According to Coast Guard officials, to date, no make decision has  exceeded $10 million since the request was made. The details  implementing this recommendation have not yet been worked out, such as  specifically who in the Coast Guard will monitor the subcontractors’ make  decisions to ensure that the voluntary agreement is complied with.
section_title: Concluding Observations
paragraphs: Our work to date suggests the costly and important Deepwater program  will need constant monitoring and management attention to successfully  accomplish its goals. In this respect, we identified three points that should  be kept in mind in considering how to proceed with the program.
First, the need to replace or upgrade deteriorating legacy assets is  considerable. While the Coast Guard is making progress on developing  (1) measures that better demonstrate how the deteriorating condition of  the legacy assets impact on mission capabilities and (2) a strategy to better  prioritize upgrades and maximize capabilities, it is clear that the  deepwater legacy assets are insufficient for meeting all of the Coast  Guard’s missions.
Second, although the need to replace and upgrade assets is strong, there  still are major risks in the Coast Guard’s acquisition approach. The cost  increases and schedule slippages that have already occurred are warning  signs. We will continue to work with the Coast Guard to determine how  best to manage these risks so that the Deepwater missions can be  accomplished in the most cost-effective way.
Third, there are signs that as the Deepwater program moves ahead, the  Coast Guard will continue to report more problems with sustaining  existing assets, together with the attendant need for additional infusions of  funding to deal with them. Some of these problems, such as those on the  378-foot cutters, are included in the compendium the Coast Guard uses to  set sustainment priorities and plan budgets, but the Coast Guard has not  allocated funds because the problems pertain to assets that are among the  first to be replaced. However, projects to address these problems are  nevertheless likely to be needed. We will continue to work with the Coast  Guard to determine if there is a more systematic and comprehensive  approach to keeping the Congress abreast of the potential bill for  sustaining these assets.
Mr. Chairman and Members of the Subcommittee, this completes my  prepared statement. I would be happy to respond to any questions that you  or other Members of the Subcommittee may have at this time.
section_title: Contacts and Acknowledgements
paragraphs: For information about this testimony, please contact Margaret Wrightson,  Director, Homeland Security and Justice Issues, at (415) 904-2200, or  wrightsonm@gao.gov. Other individuals making key contributions to this  testimony include Steven Calvo, Jerry Clark, Christopher Conrad,  Adam Couvillion, Michele Fejfar, Geoffrey Hamilton, Julie Leetch,  Michele Mackin, Christopher Miller, Stan Stenersen, and Linda Kay  Willard.
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