Tactical Aircraft: DOD Needs to Better Inform Congress about Implications of Continuing F/A-22 Cost Growth
Released: 2003-03-13T00:00:00

Letter

Background

The F/A-22 is an air superiority aircraft with advanced features to make it less detectable to adversaries (stealth characteristics) and capable of high speeds for long ranges. It is being developed under contracts with Lockheed Martin Corporation for the aircraft and Pratt & Whitney Corporation for the engine.

Because of potential cost increases, the Air Force established a team—the Joint Estimating Team—to review the total estimated cost of the F/A-22 program in 1996. This team reported that the cost of the F/A-22 production program could grow by $13.1 billion from the amount planned. In response to identified cost growth, Congress, in the National Defense Authorization Act for Fiscal Year 1998 established cost limits for the development and production phases of the F/A-22 program. The current production cost limit is $37.5 billion. “Air superiority” is the degree of air dominance that allows the conduct of operations by land, sea, and air forces without prohibitive interference by enemy aircraft.

Defense (OSD) and the Air Force, disagreed over how many aircraft could be purchased for $43 billion. OSD believed that only 297 aircraft could be purchased for $43 billion while the Air Force believed 333 aircraft could be purchased for the same amount. DOD informed Congress of these divergent viewpoints in September 2001. The F/A-22 President’s Budget for fiscal year 2004 would transfer $876 million in production funding and reduce the number of aircraft to 276 to help fund estimated cost increases in development. As a result, the current production cost estimate is $42.2 billion, an amount that still exceeds the cost limit of $37.5 billion.

To fully offset the $13.1 billion in estimated cost growth, the Air Force and contractors designed cost reduction plans. Since 1997, the Air Force has been identifying and implementing these plans. (See appendix IV for a list of the major categories of cost reduction plans designed to offset the cost growth estimated in 1997.) A direct relationship cannot be established between the cost reduction plans and specific areas of cost growth. The reason is that the plans generally offset cost growth in broad areas by enhancing production technology, improving manufacturing techniques, and improving acquisition practices.

F/A-22 cost reduction plans are categorized as either “implemented” or “not yet implemented.” The Air Force’s and contractors’ criteria for determining if a cost reduction plan is implemented include whether the contractor has submitted a firm, fixed price proposal that recognizes the impact of the cost reduction; the impact of the reduction has been reflected in a current contract price or negotiated in an agreement; or the contractor has reduced the number of hours allocated to a task.

Currently, $14 billion in cost reduction plans is considered “implemented.”

Cost reduction plans are categorized as “not yet implemented” if the plans are well defined but none of the criteria listed above are met. Table 3 in appendix II shows the amounts the Air Force currently considers “implemented” and “not yet implemented.”

DOD’s F/A-22 Estimated Production Costs Exceed Cost Limitation

Over the last 6 years, $17.7 billion in estimated production cost growth has been identified during the course of two program reviews. As a result, the estimated cost of the production program currently exceeds the congressional cost limit despite the establishment of cost reduction plans designed to offset a significant amount of this estimated cost growth. The effectiveness of these cost reduction plans has varied.

DOD’s Estimates of Production Costs Have Risen

During a review in 1997, the Air Force estimated cost growth of $13.1 billion. The major contributing factors to this cost growth were inflation, increased estimates of labor costs and materials associated with the airframe and engine, and engineering changes to the airframe and engine. These factors made up about 75 percent of the cost growth identified in 1997. (See appendix III for a complete list of cost growth categories identified in 1997.)

In August 2001, DOD estimated an additional $5.4 billion in cost growth for the production of the F/A-22, bringing total estimated production costs to $43 billion. The major contributing factors to this cost growth were again due to increased labor costs and airframe and engine costs. These factors totaled almost 70 percent of the cost growth. According to program officials, major contractors’ and suppliers’ inability to achieve the expected reductions in labor costs throughout the building of the development and early production aircraft has been the primary reason for estimating this additional cost growth. (See appendix VI for a complete list of the categories and sources of cost growth identified in 2001.)

Cost Reduction Plans Achieve Varied Results

The effectiveness of cost reduction plans has varied. The Air Force was able to implement cost reduction plans and offset cost growth in the first four production lot contracts awarded. Air Force projections for cost reduction plans show that expected offsets are also planned for the future production lot contracts to enable the production program to be completed within the current production cost estimate. However, the Air Force has not fully funded production improvement programs (PIPs), which are designed to offset cost growth by improving production processes. Consequently, planned offsets may not be achieved in the amount expected.

Implemented Cost Reduction Plans Are Offsetting Cost Growth

The Air Force was able to implement cost reduction plans and offset cost growth in the first four production contracts awarded. The total offsets for these contracts slightly exceeded earlier projections by about $0.5 million. Table 1 compares previous planned offsets with implemented cost reduction plan offsets in the first four production contracts.

Cost reduction plans exist but have not yet been implemented for subsequent production lots planned for fiscal years 2003 through 2010 because contracts for these production lots have not yet been awarded. If implemented successfully, the Air Force expects these cost reduction plans to achieve billions of dollars in offsets to estimated cost growth and allow the production program to be completed within the current production cost estimate of $43 billion. However, as we noted earlier in this report, this amount exceeds the congressionally imposed production cost limit of $37.5 billion.

Not Fully Funding Production Improvement Programs May Reduce Expected Offsets

A production improvement program is a type of cost reduction plan whereby the government must make an initial investment to realize savings. The earlier the Air Force implements PIPs, the greater the impact on the cost of production. Examples of PIPs previously implemented by the Air Force include manufacturing process improvements for avionics, improvements in the fabrication and assembly processes for the airframe, and the redesign of several components to enable lower production costs.

The Air Force reduced the funding available for investment in PIPs because of cost growth in production lots 1 and 2. The Air Force subsequently used funding that it planned to invest in PIPs to cover the cost growth in production lots 1 and 2. As a result, there has not been as much funding available for investment in these PIPs as planned. Figure 1 shows that funding was reduced $61 million in fiscal year 2001 and $26 million in fiscal year 2002.

It is unlikely that the Air Force will achieve the estimated $3.7 billion in cost growth offsets from the implementation of these PIPs if investment continues to be less than planned. Figure 2 shows the remaining planned investment in PIPs through fiscal year 2006 and the $3.7 billion in estimated cost growth that can potentially be offset through fiscal year 2010 if the Air Force invests as planned in these PIPs.

In the past, Congress has been concerned about the Air Force’s practice of requesting fiscal year funding for these PIPs but then using part of that funding for F/A-22 airframe cost increases. Recently, Congress directed the Air Force to submit a request if it plans to use PIP funds for an alternate purpose.

Estimated Production Costs Are Likely to Increase

We found indications that, in the future, F/A-22 production costs are likely to increase more than the latest $5.4 billion in cost growth recently estimated by the Air Force and OSD. First, the current OSD production estimate does not include all costs. Second, schedule delays in developmental testing could delay the start of a multiyear contract designed to help control production costs. Third, as a result of schedule delays that have already occurred, the Air Force has already delayed the awarding of this contract to fiscal year 2006. As a consequence, the aircraft planned for fiscal year 2005 are not currently included in any agreements with the contractor that are designed to help control production costs. Last, we found several risk factors that may increase future production costs, including the dependency of certain cost reduction plans on congressional action and a reduction in funding for support costs.

Current OSD Production Cost Estimate Does Not Include All Costs

OSD’s latest cost estimate does not include costs identified by the Air Force during the development of the Air Force’s current F/A-22 acquisition plan. The Air Force developed this acquisition plan after OSD completed its estimate. Table 2 shows some areas of additional costs that the Air Force believes the program will incur.

According to an OSD official, these additional costs should be considered in any future OSD production cost estimate, which would increase OSD’s estimate by $1.29 billion.

Additional Program Delays May Further Delay Multiyear Procurement

If the F/A-22’s developmental testing program experiences additional delays, there is a greater risk that operational testing, full-rate production, and multiyear procurement will be delayed as a result. Delays in production and multiyear procurement would likely increase production costs. The Air Force has not addressed ongoing problems with the developmental testing and therefore remains at high risk for further schedule delays.

For example, in March 2002, we reported that the Air Force’s plan to complete the developmental airframe testing necessary for the start of operational testing was at high risk because (1) the planned number of test objectives per flight-hour was not being achieved and (2) most of the planned flight-test program was essentially being performed by only one test aircraft rather than the three originally planned. Air Force officials told us they understood that completing the tests as scheduled with only one development test aircraft was high risk. As a result of this strategy, in late 2001, the Air Force delayed the F/A-22’s schedule, including the start of a multiyear contract designed to save production costs.

Acquisition Plan Contains Gap in Methods to Control Costs

The cost of the fiscal year 2005 production lot could increase because it is currently not included in plans to help control production costs. In late 1996, as part of a major program review, the Air Force and major F/A-22 contractors entered into a Target Price Curve agreement designed to help reduce production costs and ensure production affordability. The agreement established production cost goals for the first five production lots (fiscal years 1999-2003) and provided the contractors with incentives if they achieved these cost goals. Previously, the Air Force planned to transition directly to multiyear procurement starting with the next production lot. However, since the Air Force delayed the start of multiyear procurement from fiscal year 2004 to fiscal 2006, fiscal 2005 is now not covered by either the agreement with the contractor or the planned multiyear procurement contract. Therefore, there is less assurance that the cost of the fiscal year 2005 production lot will match the current estimate for this production lot. If a method to help control costs is not implemented for the fiscal year 2005 production lot, the cost of this production lot could increase more than expected.

Other Factors Could Increase Future Production Costs

We found several additional risk factors that may increase production costs in the future. As we have also previously reported, the Air Force is depending on both multiyear procurement and the Joint Strike Fighter initiatives to achieve offsets to estimated cost growth. Multiyear procurement, because of the cost reductions available through long-term commitments such as a 5-year contract, make it possible for the contractors and subcontractors to charge lower prices for the aircraft being procured. Joint Strike Fighter-related savings are planned because the Air Force plans to use many of the same contractors and subcontractors as with the Joint Strike Fighter in the F/A-22 program, thereby lowering overhead rates and increasing buying power.

Even though the Air Force is depending on both the multiyear procurement and Joint Strike Fighter initiatives to achieve offsets to estimated cost growth, approval to proceed with multiyear procurement is determined from the availability of funding. Thus, if entry into a multiyear procurement contract does not occur as planned, offsets from the implementation of multiyear procurement cannot be achieved. Similarly, the success of the Joint Strike Fighter cost reduction plan is dependent on the schedule of the Joint Strike Fighter program and the quantity of the aircraft procured, which are determined by Congress and OSD. In an earlier report, we cautioned that if the Joint Strike Fighter program were not approved or were delayed, then the F/A-22 production program would not achieve the estimated cost reductions.

Furthermore, the Air Force reduced estimated funding for F/A-22 support costs by $1.8 billion in its latest production cost estimate. Support costs are for such items as spare components for the aircraft and engines, spare engines, and equipment used to support and maintain aircraft. F/A-22 program officials explained that the latest support costs estimate is a detailed, requirements-based estimate that is more accurate than previous estimates, but they could not provide us with the detailed rationale for this new estimate. At the same time, we also observed that the Air Force added about $1.8 billion to the estimated production costs associated with the aircraft and engine. If it is determined the F/A-22 program will require the same level of support cost funding identified by the Defense Acquisition Board’s review, the production cost estimate will increase.

DOD Has Not Fully Informed Congress about Potential Impact of Reduced Offsets to Estimated Cost Growth

DOD has not fully informed Congress about specifics related to the total cost of the F/A-22 production program or the quantity of aircraft that can be purchased within the cost limitation. DOD uses selected acquisition reports and the President’s budget submissions to inform Congress about weapon systems programs. Since 1999, neither the F/A-22 selected acquisition reports nor the President’s annual budget submissions to Congress have included details about the amount of cost reduction plans identified to offset cost growth. More importantly, these documents have not included the potential cost of the F/A-22 production program if cost reduction plans do not offset cost growth as planned. From 1996 to 1998, selected acquisition reports did inform Congress about the potential cost of production if cost reduction plans did not offset cost growth as planned. If cost growth is not offset as planned, the cost of F/A-22 production could be several billion dollars higher than currently estimated.

Furthermore, recent documentation, including the latest selected acquisition report (December 2001) and Fiscal Year 2003 President’s Budget submission have also not provided Congress with information about the quantity of aircraft DOD believes can be procured under the existing production cost limitation. Even though the production cost limitation remains, as adjusted, at $37.5 billion, the official documentation provided to Congress to date has not provided the number of aircraft that can be purchased for this amount. Even at the higher cost estimate of $43 billion, OSD and the Air Force have not been able to agree on the aircraft quantity that can be purchased. In July 2001, we projected that the Air Force would have to buy 85 fewer F/A-22s rather than the 333 that it planned to buy to stay within the cost limit.

Conclusions

Despite the success of early cost reduction plans, we identified estimated cost growth beyond the amounts recognized by the Air Force and DOD.

Therefore, it is important for the Air Force to take advantage of every opportunity to offset cost growth. PIPs can be an important mechanism for offsetting this cost growth. However, the Air Force is not investing funding as planned in F/A-22 PIPs designed to offset estimated cost growth. The failure to invest in PIPs at the planned level will likely not allow estimated cost growth to be offset as planned and therefore may affect the quantity of aircraft that can be acquired.

The F/A-22 production program has experienced a number of schedule delays and problems that have increased the estimated costs of a program that already requires a significant investment. DOD has not fully informed Congress about the amount of cost reduction plans identified to offset cost growth, the potential cost of production if cost reduction plans are not as effective as planned, or the quantity of aircraft that can be produced within the production cost limit. Congress would be able to utilize this information to help exercise proper program oversight.

Recommendations for Executive Action

For the Air Force to achieve planned offsets to estimated cost growth, we recommend that the Secretary of the Air Force make the funding of PIPs at the planned level a priority.

To ensure proper congressional oversight of the F/A-22 program, we also recommend that the Secretary of Defense provide Congress with documentation showing that funding for PIPs is being invested at the planned level each fiscal year, and if not, explaining the reasons why and the potential consequences of not fully investing and potentially not offsetting cost growth as planned; reflecting the potential cost of F/A-22 production if cost reduction plans do not offset cost growth as planned; and reflecting the quantity of aircraft DOD believes can be procured with the existing production cost limit.

Agency Comments and Our Evaluation

In written comments on a draft of this report, DOD stated that it did not concur with either of our recommendations. Regarding our first recommendation on making investments in PIPs a priority, DOD said that while it believes that PIP investments in general are a good idea, the Department intends to implement PIPs on a case-by-case basis, using expected return-on-investment criteria. DOD also commented that our report does not provide evidence that investments in PIPs reduce costs.

Our recommendation that the Air Force make the funding of PIPs at the planned level a priority is based on evidence from both the Air Force and OSD that investment in PIPs at the planned level will generate a significant return-on-investment. In addition, during the course of our review, Air Force officials told us they planned to make up for not fully investing in PIPs during the last 2 fiscal years by investing more in subsequent years in order to achieve the planned savings. The Air Force’s plan appears to recognize that it has moved beyond a case-by-case approach. Our recommendation would support such a plan. Finally, the reluctance to embrace PIPs in DOD’s comments appears to be contrary to the position taken within the Department. The potential benefits of investing in PIPs continue to be highlighted in high-level F/A-22 meetings and correspondence to Congress. A September 2001 letter to Congress from the Under Secretary of Defense for Acquisition, Technology and Logistics estimates that the quantity of F/A-22 aircraft will need to be reduced, but more aircraft can be procured if cost reduction plans (which include PIPs) prove more successful than OSD’s estimates. We believe our recommendation to make the funding of PIPs at the planned level a priority puts DOD in a better position to enhance the affordability of the F/A-22. Conversely, by not funding PIPs at the planned level, DOD may lose opportunities to create greater production efficiencies and as a result, have to acquire fewer aircraft.

Regarding our second recommendation related to providing documentation to Congress on cost reduction plans, the implications of not investing in PIPs as planned, and the aircraft quantities that can be acquired within the existing production cost limit, DOD stated that our recommendation is inconsistent with its decision to use a “buy-to-budget” approach for the F/A-22 (buying the highest quantity of aircraft possible each year on the basis of appropriated funding each year). DOD also stated that providing this information to Congress would not provide a reliable projection of the number of aircraft possible because (1) there are other factors that affect cost and (2) the projected savings are uncertain and may not materialize as the estimator expects.

We continue to believe that the Secretary of Defense should provide Congress with this documentation. As we have discussed in this and several earlier reports, we agree that there are indeed many factors that can cause F/A-22 production costs to rise. And, as we have also noted, projected offsets generated by PIPs and other cost reduction plans are uncertain and may not all materialize, even if investments are made as planned. Shifts in these realities are frequent and create a constantly changing picture of F/A-22 production costs, offsets, and aircraft quantities. This is particularly the case when PIP investments are not made as planned. Hence, it is important that updated and accurate information be regularly and routinely made available to Congress as the picture changes. DOD’s argument that it is implementing a “buy-to-budget” approach makes our recommendation more compelling because aircraft quantities planned each fiscal year can change in the few months between when fiscal year funding is appropriated and when a production contract is negotiated with the prime contractor and awarded. Providing visibility to the projection of how many aircraft can be acquired within the cost limitation would enhance program oversight.

DOD has several extant reporting options that can be used to provide this information. A new report is not required. For example, DOD could return to its former practice of using annual selected acquisition reports to inform Congress about the potential cost of production if cost reduction plans do not offset cost growth as planned. This information was included in these reports from 1996 to 1998. In addition, the President’s Budget submission could be used as a vehicle to provide Congress with updated information about the quantity of aircraft DOD believes can be acquired under the existing production cost limitation. Finally, requests to reprogram PIP investment funds could be expanded to include this information along with justification for PIP reprogramming.

Scope and Methodology

To identify the F/A-22 production cost growth, we examined documents related to the Joint Estimating Team’s review completed in January 1997 and received clarification on some review conclusions from the F/A-22 program office. We also reviewed documentation and discussed with program officials the results of the 2001 F/A-22 Defense Acquisition Board’s review that estimated $5.4 billion more in production cost growth.

To evaluate the planned effectiveness of cost reduction plans designed to offset production cost growth, we assessed the reliability of a contractor’s and the Air Force’s database on cost reduction plans to ensure that the data were complete, sufficient, and relevant to our work. We reviewed information from this database on implemented and not yet implemented cost reduction plans. We compared estimated cost reduction plan offsets from fiscal years 2000 and 2002 to determine current versus planned estimated offsets for F/A-22 production lots. We also analyzed cost information from the Air Force to determine the amount of planned and actual funding invested in PIPs designed to offset estimated cost growth by improving production processes.

To identify areas where additional production cost growth has occurred and may occur, we reviewed several aspects of the F/A-22 program that were likely to contribute to future cost growth. We examined previous and current OSD and Air Force production cost estimates, expected delays in the F/A-22 program’s completion of operational testing, aircraft unit price estimates and controls, and funding for support costs.

To evaluate the degree to which DOD has informed Congress about the potential cost of F/A-22 production, we examined the content of recent official documentation (selected acquisition reports and President’s budgets) provided to Congress and compared them with required content and content that would be expected considering the congressionally imposed F/A-22 production cost limitation.

In performing our work, we obtained information or interviewed officials from the Office of the Secretary of Defense, Washington D.C.; the F/A-22 Program Office, Wright-Patterson Air Force Base, Ohio; and the Defense Contract Management Agency, Marietta, Georgia. We performed our work from March 2002 through February 2003 in accordance with generally accepted government auditing standards.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this report. At that time, we will send copies to interested congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. We will also 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.

Please contact me at (202) 512-4841 or Catherine Baltzell at (202) 512-8001 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VII.

Appendix I: Comments from the Department of Defense

Appendix II: Amounts Associated with Cost Reduction Plan Categories

F/A-22 cost reduction plans are categorized as either “implemented” or “not yet implemented.” The Air Force and contractors’ criteria for determining if a cost reduction plan is implemented include (1) whether the contractor has submitted a firm-fixed price proposal that recognizes the impact of the cost reduction, (2) whether the impact of the reduction has been reflected in a current contract price or negotiated in an agreement, or (3) whether the contractor has reduced the number of hours allocated to a task.

Cost reduction plans are categorized as “not yet implemented” if the plans are well defined but none of the criteria listed above are met.

Appendix III: F/A-22 Estimated Production Cost Growth in 1997

Based on a plan to procure 438 aircraft.

Appendix IV: Cost Reduction Plan Categories and Planned Offsets to Estimated Cost Growth

Dollars in billions

Appendix V: Estimated F/A-22 Production Cost Growth in 2001

Cost growth as a percentage $4.60 0.95 0.50 0.25 0.20 69 14 8 4 3 0.14 $6.64 (0.80)

Appendix VI: Estimated Cost Reduction Plan Offsets for Future Production Lot Contracts

Appendix VII: GAO Staff Acknowledgments

Acknowledgments

Catherine Baltzell, Marvin Bonner, Edward Browning, Gary Middleton, Sameena Nooruddin, Robert Pelletier, and Don M. Springman made key contributions to this report.

Related GAO Products

Tactical Aircraft: F-22 Delays Indicate Initial Production Rates Should Be Lower to Reduce Risks. GAO-02-298. Washington, D.C.: March 5, 2002.

Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs within the Congressional Limitation. GAO-01-782. Washington, D.C.: July 16, 2001.

Tactical Aircraft: F-22 Development and Testing Delays Indicate Need for Low-Rate Production. GAO-01-310. Washington, D.C.: March 15, 2001.

Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional Limitation. GAO/NSIAD-00-178. Washington, D.C.: August 15, 2000.

Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs. GAO/T-NSIAD-00-200. Washington, D.C.: June 15, 2000.

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2001. GAO/OCG-00-8. Washington, D.C.: March 31, 2000.

F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are Avoided. GAO/NSIAD-00-68. Washington, D.C.: March 14, 2000.

Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals. GAO/T-NSIAD-00-58. Washington, D.C.: December 7, 1999.

Fiscal Year 2000 Budget: DOD’s Procurement and RDT&E Programs. GAO/NSIAD-99-233R. Washington D.C.: September 23, 1999.

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000. GAO/OCG-99-26. Washington, D.C.: April 16, 1999.

Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering and Manufacturing Development Programs. GAO/T-NSIAD-99-113. Washington, D.C.: March 17, 1999.

F-22 Aircraft: Issues in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-99-55. Washington, D.C.: March 15, 1999.

F-22 Aircraft: Progress of the Engineering and Manufacturing Development Program. GAO/T-NSIAD-98-137. Washington D.C.: March 25, 1998.

F-22 Aircraft: Progress in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-98-67. Washington, D.C.: March 10, 1998.

Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program. GAO/NSIAD-97-156. Washington, D.C.: June 4, 1997.

Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections. GAO/T-NSIAD-97-103. Washington, D.C.: March 5, 1997.

F-22 Restructuring. GAO/NSIAD-97-100BR. Washington, D.C.: February 28, 1997.

Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced. GAO/NSIAD-95-59. Washington, D.C.: April 19, 1995.

Tactical Aircraft: F-15 Replacement Issues. GAO/T-NSIAD-94-176. Washington, D.C.: May 5, 1994.

Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned. GAO/NSIAD-94-118. Washington, D.C.: March 25, 1994.