Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System's Success
Released: 2006-03-01T00:00:00

Letter

Background

The FCS concept is part of a pervasive change to what the Army refers to as the Future Force. The Army is reorganizing its current forces into modular brigade combat teams, meaning troops can be deployed on different rotational cycles as a single team or as a cluster of teams. The Future Force is designed to transform the Army into a more rapidly deployable and responsive force and to enable the Army to move away from the large division-centric structure of the past. Each brigade combat team is expected to be highly survivable and the most lethal brigade-sized unit the Army has ever fielded. The Army expects FCS-equipped brigade combat teams to provide significant warfighting capabilities to DOD’s overall joint military operations. The Army is implementing its transformation plans at a time when current U.S. ground forces are playing a critical role in the ongoing conflicts in Iraq and Afghanistan.

The FCS family of weapons includes 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions that will be linked by an information network. These vehicles, weapons, and equipment will comprise the majority of the equipment needed for a brigade combat team. The Army plans to buy 15 brigades worth of FCS equipment by 2025.

Elements of a Business Case

We have frequently reported on the importance of using a solid, executable business case before committing resources to a new product development. In its simplest form, this is evidence that (1) the warfighter’s needs are valid and can best be met with the chosen concept, and (2) the chosen concept can be developed and produced within existing resources—that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the product when needed.

At the heart of a business case is a knowledge-based approach to product development that demonstrates high levels of knowledge before significant commitments are made. In essence, knowledge supplants risk over time. This building of knowledge can be described as three levels or knowledge points that should be attained over the course of a program: First, at program start, the customer’s needs should match the developer’s available resources—mature technologies, time, and funding. An indication of this match is the demonstrated maturity of the technologies needed to meet customer needs.

Second, about midway through development, the product’s design should be stable and demonstrate that it is capable of meeting performance requirements. The critical design review is that point of time because it generally signifies when the program is ready to start building production- representative prototypes.

Third, by the time of the production decision, the product must be shown to be producible within cost, schedule, and quality targets and have demonstrated its reliability and the design must demonstrate that it performs as needed through realistic system level testing.

The three knowledge points are related, in that a delay in attaining one delays the points that follow. Thus, if the technologies needed to meet requirements are not mature, design and production maturity will be delayed.

Objectives, Scope, and Methodology

To develop the information on the Future Combat System program’s progress toward meeting established goals, the contribution of critical technologies and complementary systems, and the estimates of cost and affordability, we interviewed officials of the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Army G-8; the Office of the Under Secretary of Defense (Comptroller); the Secretary of Defense’s Cost Analysis Improvement Group; the Director of Operational Test and Evaluation; the Assistant Secretary of the Army (Acquisition, Logistics, and Technology); the Army’s Training and Doctrine Command; Surface Deployment and Distribution Command; the Program Manager for the Future Combat System (Brigade Combat Team); the Future Combat System Lead Systems Integrator; and other contractors. We reviewed, among other documents, the Future Combat System’s Operational Requirements Document, the Acquisition Strategy Report, the Baseline Cost Report, the Critical Technology Assessment and Technology Risk Mitigation Plans, and the Integrated Master Schedule. We attended and/or reviewed the results of the FCS System of Systems Functional Review, In- Process Reviews, Board of Directors Reviews, and multiple system demonstrations. In our assessment of the FCS, we used the knowledge- based acquisition practices drawn from our large body of past work as well as DOD’s acquisition policy and the experiences of other programs. We conducted the above in response to the National Defense Authorization Act of Fiscal Year 2006, which requires GAO to annually report on the product development phase of the FCS acquisition. We performed our review from June 2005 to March 2006 in accordance with generally accepted auditing standards.

Improved Business Case Is Needed for the FCS’s Success

An improved business case for the FCS program is essential to help ensure that the program is successful in the long run. The FCS is unusual in that it is developing 18 systems and a network under a single program office and lead system integrator in the same amount of time that it would take to develop a single system. It also started development with less knowledge than called for by best practices and DOD policy.

While Progress Has Been Made, Requirements Still Remain Uncertain

The Army has made significant progress defining FCS’s system of systems requirements, particularly when taking into account the daunting number of them involved—nearly 11,500 at this level. Yet system-level requirements are not yet stabilized and will continue to change, postponing the needed match between requirements and resources. Now, the Army and its contractors are working to complete the definition of system level requirements, and the challenge is in determining if those requirements are technically feasible and affordable. Army officials say it is almost certain that some FCS system-level requirements will have to be modified, reduced, or eliminated; the only uncertainty is by how much. We have previously reported that unstable requirements can lead to cost, schedule, and performance shortfalls. Once the Army gains a better understanding of the technical feasibility and affordability of the system- level requirements, trade-offs between the developer and the warfighter will have to be made, and the ripple effect of such trade-offs on key program goals will have to be reassessed. Army officials have told us that it will be 2008 before the program reaches the point which it should have reached before it started in May 2003 in terms of stable requirements.

FCS Success Hinges on Numerous Undemonstrated Technologies and Complementary Programs

Development of concrete program requirements depends in large part on stable, fully mature technologies. Yet, according to the latest independent assessment, the Army has not fully matured any of the technologies critical to FCS’s success. Some of FCS’s critical technologies may not reach a high level of maturity until the final major phase of acquisition, the start of production. The Army considers a lower level of demonstration as acceptable maturity, but even against this standard, only about one-third of the technologies are mature. We have reported that going forward into product development without demonstrating mature technologies increases the risk of cost growth and schedule delays throughout the life of the program. The Army is also facing challenges with several of the complementary programs considered essential for meeting FCS’s requirements. Some are experiencing technology difficulties, and some have not been fully funded. These difficulties underscore the gap between requirements and available resources that must be closed if the FCS business case is to be executable.

Technology readiness levels (TRL) are measures pioneered by the National Aeronautics and Space Administration and adopted by DOD to determine whether technologies were sufficiently mature to be incorporated into a weapon system. Our prior work has found TRLs to be a valuable decision-making tool because they can presage the likely consequences of incorporating a technology at a given level of maturity into a product development. The maturity levels range from paper studies (level 1), to prototypes tested in a realistic environment (level 7), to an actual system proven in mission operations (level 9). Successful DOD programs have shown that critical technologies should be mature to at least a TRL 7 before the start of product development.

In the case of the FCS program, the latest independent technology assessment shows that none of the critical technologies are at TRL 7, and only 18 of the 49 technologies currently rated have demonstrated TRL 6, defined as prototype demonstration in a relevant environment. None of the critical technologies may reach TRL 7 until the production decision in fiscal year 2012, according to Army officials. Projected dates for FCS technologies to reach TRL 6 have slipped significantly since the start of the program. In the 2003 technology assessment, 87 percent of FCS’s critical technologies were projected to be mature to a TRL 6 by 2005. When the program was looked at again in April 2005, 31 percent of the technologies were expected to mature to a TRL 6 by 2005, and all technologies are not expected to be mature to that level until 2009.

FCS Acquisition Strategy Will Demonstrate Design Maturity After Production Begins

The knowledge deficits for requirements and technologies have created enormous challenges for devising an acquisition strategy that can demonstrate the maturity of design and production processes. Several efforts within the FCS program are facing significant problems that may eventually involve reductions in promised capabilities and may lead to cost overruns and schedule delays. Even if requirements setting and technology maturity proceed without incident, FCS design and production maturity will still not be demonstrated until after the production decision is made. Production is the most expensive phase in which to resolve design or other problems.

The Army’s acquisition strategy for FCS does not reflect a knowledge- based approach. Figure 1 shows how the Army’s strategy for acquiring FCS involves concurrent development, design reviews that occur late, and other issues that are out of alignment with the knowledge-based approach outlined in DOD policy.

Ideally, the preliminary design review occurs at or near the start of product development. Doing so can help reveal key technical and engineering challenges and can help determine if a mismatch exists between what the customer wants and what the product developer can deliver. An early preliminary design review is intended to help stabilize cost, schedule, and performance expectations. The critical design review ideally occurs midway into the product development phase. The critical design review should confirm that the system design is stable enough to build production-representative prototypes for testing.

The FCS acquisition schedule indicates several key issues: The program did not have the basic knowledge needed for program start in 2003. While the preliminary design review normally occurs at or near the start of product development, the Army has scheduled it in fiscal year 2008, about 5 years after the start of product development.

Instead of the sequential development of knowledge, major elements of the program are being conducted concurrently.

The critical design review is scheduled in fiscal year 2010, just 2 years after the scheduled preliminary review and the planned start of detailed design. The timing of the design reviews is indicative of how late knowledge will be attained in the program, assuming all goes according to plan.

The critical design review is also scheduled just 2 years before the initial FCS low-rate production decision in fiscal year 2012, leaving little time for product demonstration and correction of any issues that are identified at that time.

The FCS program is thus susceptible to late-cycle churn, which refers to the additional—and unanticipated—time, money, and effort that must be invested to overcome problems discovered late through testing.

FCS’s Higher Costs May Result in Funding Challenge

The total cost for the FCS program, now estimated at $160.7 billion (then year dollars), has climbed 76 percent from the Army’s first estimate. Because uncertainties remain regarding FCS’s requirements and the Army faces significant challenges in technology and design maturity, we believe the Army’s latest cost estimate still lacks a firm knowledge base. Furthermore, this latest estimate does not include complementary programs that are essential for FCS to perform as intended, or all of the necessary funding for FCS spin-outs. The Army has taken some steps to help manage the growing cost of FCS, including establishing cost ceilings or targets for development and production; however, program officials told us that setting cost limits may result in accepting lower capabilities.

As FCS’s higher costs are recognized, it remains unclear whether the Army will have the ability to fully fund the planned annual procurement costs for the FCS current program of record. FCS affordability depends on the accuracy of the cost estimate, the overall level of development and procurement funding available to the Army, and the level of competing demands.

At the start of product development, FCS program officials estimated that the program would require about $20 billion in then-year dollars for research, development, testing, and evaluation and about $72 billion to procure the FCS systems to equip 15 brigade combat teams. At that time, program officials could only derive the cost estimate on the basis of what they knew then—requirements were still undefined and technologies were immature. The total FCS program is now expected to cost $160.7 billion in then-year dollars, a 76 percent increase. Table 1 summarizes the growth of the FCS cost estimate.

According to the Army, the current cost estimate is more realistic, better informed, and based on a more reasonable schedule. It accounts for the restructure of the FCS program and its increased scope, the 4-year extension to the product development schedule, the reintroduction of four systems that had been previously deferred, and the addition of a spin-out concept whereby mature FCS capabilities would be provided, as they become available, to current Army forces. It also reflects a rate of production reduced from an average of 2 brigade combat teams per year to an average of 1.5 brigades per year. Instead of completing all 15 brigades by 2020, the Army would complete production in 2025. This cost estimate has also benefited from progress made in defining system of systems requirements.

Figure 2 compares the funding profiles for the original program and for the latest restructured program.

The current funding profile is lower than the original through fiscal year 2013, but is substantially higher than the original after fiscal year 2013. It still calls for making substantial investments before key knowledge has been demonstrated. Stretching out FCS development by 4 years freed up about $9 billion in funding through fiscal year 2011 for allocation to other Army initiatives. Originally, FCS annual funding was not to exceed $10 billion in any one year. Now, the cost estimate is expected to exceed $10 billion in each of 9 years. While it is a more accurate reflection of program costs than the original estimate, the latest estimate is still based on a low level of knowledge about whether FCS will work as intended. The cost estimate has not been independently validated, as called for by DOD’s acquisition policy. The Cost Analysis Improvement Group will not release its updated independent estimate until spring 2006, after the planned Defense Acquisition Board review of the FCS program.

The latest cost estimate does not include all the costs that will be needed to field FCS capabilities. For instance, Costs for the 52 essential complementary programs are separate, and some of those costs could be substantial. For example, the costs of the Joint Tactical Radio System Clusters 1 and 5 programs were expected to be about $32.6 billion (then-year dollars).

Some complementary programs, such as the Mid-Range Munition and Javelin Block II, are currently not funded for their full development. These and other unfunded programs would have to compete for already tight funding.

Procurement of the spin-outs from the FCS program to current Army forces is not yet entirely funded. Procuring the FCS items expected to be spun out to current forces is expected to cost about $19 billion, and the needed installation kits may add $4 billion. Adding these items brings the total required FCS investment to the $200 billion range.

Through fiscal year 2006, the Army will have budgeted over $8 billion for FCS development. Through fiscal year 2008, when the preliminary design review is held, the amount budgeted for FCS will total over $15 billion. By the time the critical design review is held in 2010, about $22 billion will have been budgeted. By the time of the production decision in 2012, about $27 billion will have been budgeted.

The affordability of the FCS program depends on several key assumptions. First, the program must proceed without exceeding its currently projected costs. Second, the Army’s annual procurement budget—not including funds specifically allocated for the modularity initiative—is expected to grow from between $11 billion to $12 billion in fiscal year 2006 to at least $20 billion by fiscal year 2011. The large annual procurement costs for FCS are expected to begin in fiscal year 2012, which is beyond the current Future Years Defense Plan period (fiscal years 2006-2011). FCS procurement will represent about 60-70 percent of Army procurement from fiscal years 2014 to 2022. This situation is typically called a funding bow wave. As it prepares the next Defense Plan, the Army will face the challenge of allocating sufficient funding to meet the increasing needs for FCS procurement in fiscal years 2012 and 2013. If all the needed funding cannot be identified, the Army will have to consider reducing the FCS procurement rate or delaying or reducing items to be spun out to current Army forces. However, reducing the FCS procurement rate would increase the FCS unit costs and extend the time needed to deploy FCS-equipped brigade combat teams.

FCS Business Arrangements

Given the risks facing the FCS program, the business arrangements made for carrying out the program will be critical to protecting the government’s interests. To manage the program, the Army is using a lead system integrator (LSI), Boeing. As LSI, Boeing carries greater responsibilities than a traditional prime contractor. The Army is in the process of finalizing a new Federal Acquisition Regulation (FAR)-based contract in response to concerns that the previous Other Transaction Agreement was not the best match for a program of FCS’s size and risks. This contract will establish the expectations, scope, deliverables, and incentives that will drive the development of the FCS.

Program Management with A Lead System Integrator

From the outset of the FCS program, the Army has employed a management approach that centers on the LSI. The Army did not believe it had the resources or flexibility to field a program as complex as FCS under the aggressive timeline established by the then-Army Chief of Staff. Although there is no complete consensus on the definition of LSI, generally, it is a prime contractor with increased responsibilities. These responsibilities may include greater involvement in requirements development, design and source selection of major system and subsystem subcontractors. The government has used the LSI approach on other programs that require system-of-systems integration. The FCS program started as a joint Defense Advanced Research Projects Agency and Army program in 2000. In 2002, the Army competitively selected Boeing as the LSI for the concept technology demonstration phase of FCS. The Army’s intent is to maintain the LSI for the remainder of FCS development.

Boeing and the Army established a relationship to work in what has become known as a “one-team” management style with several first tier subcontractors to develop, manage, and execute all aspects of the FCS program. For example, Boeing’s role as LSI extends beyond that of a traditional prime contractor and includes some elements of a partner to the government in ensuring the design, development, and prototype implementation of the FCS network and family of systems. In this role, Boeing is responsible for (1) engineering a system of systems solution, (2) competitive selection of industry sources for development of the individual systems and subsystems, and (3) integrating and testing these systems to satisfy the requirements of the system of systems specifications. Boeing is also responsible for the actual development of two critical elements of the FCS information network—the System of Systems Common Operating Environment and the Warfighter-Machine Interface.

The Army participates in program decisions such as make/buy and competitive selection decisions, and it may disapprove any action taken under these processes. The decision structure of the program is made up of several layers of Integrated Product Teams. These teams are co-chaired by Army and LSI representatives. Government personnel participate in each of the integrated product teams. This collaborative structure is intended to force decision making to the lowest level in the program. Decisions can be elevated to the program manager level, and ultimately the Army has final decision authority. The teams also include representation of the Army user community, whose extensive presence in the program is unprecedented.

The advantages of using an LSI approach on a program like FCS include the ability of the contractor to know, understand, and integrate functions across the various FCS platforms. Thus, the LSI has the ability to facilitate movement of requirements and make trade-offs across platforms. This contrasts with past practices of focusing on each platform individually. However, the extent of contractor responsibility in so many aspects of the FCS program management process, including responsibility for making numerous cost and technical tradeoffs and for conducting at least some of the subcontractor source selections, is also a potential risk. As an example, many of the subcontractor source selections are for major weapon systems that, in other circumstances, would have been conducted by an Army evaluation team, an Army Contracting Officer and a senior- level Army source selection authority. These decisions, including procurement decisions for major weapons systems, are now being made by the LSI with Army involvement. This level of responsibility, as with other LSI responsibilities in the program management process, requires careful government oversight to ensure that the Army’s interests are adequately protected now and in the future.

Thus far, the Army has been very involved in the management of the program and in overseeing the LSI. It is important that as the program proceeds, the Army continue to be vigilant about maintaining control of the program and that organizational conflicts of interest are avoided, such as can arise when the LSI is also a supplier. As discussed in the next section, the Army intends the new contract to provide additional protection against potential conflicts.

Contracting Arrangements

The Army and Boeing entered into a contractual instrument called an Other Transaction Agreement (OTA). The purpose of the OTA was to encourage innovation and to use its wide latitude in tailoring business, organizational, and technical relationships to achieve the program goals. The original OTA was modified in May 2003 and fully finalized in December 2003 for the Systems Development and Demonstration phase of the FCS program. The latest major modification to the OTA, to implement the 2004 program restructuring, was finalized in March 2005.

As you know, questions have been raised about the appropriateness of the Army’s use of an OTA for a program as large and risky as FCS. The Airland Subcommittee held a hearing in March 2005 which addressed this among other issues. In particular, concern has been raised about the protection of the government’s interests under the OTA arrangement and the Army’s choice to not include standard FAR clauses in the OTA. In April 2005, the OTA was modified by the Army to incorporate the procurement integrity, Truth in Negotiations, and Cost Accounting Standards clauses.

In April 2005, the Secretary of the Army decided that the Army should convert the OTA to a FAR-based contract. A request for proposals was issued by the Army on August 15, 2005. An interim letter contract was issued on September 23, 2005. The Systems Development and Demonstration work through September 2005 will be accounted for under the OTA and all future work under the FAR-based contract. Boeing/SAIC and all of the FCS subcontractors were to submit a new certifiable proposal for the remainder of Systems Development and Demonstration and that will be the subject of negotiations with the Army. The Army expects the content of the program—its statement of work—will remain the same and they do not expect the cost, schedule, and performance of the overall Systems Development and Demonstration effort to change materially. The target date for completion of the finalized FAR contract is March 28, 2006. In the coming months, we will be taking a close look at the new contract as part of our continuing work on FCS that is now mandated by the Defense Authorization Act for Fiscal Year 2006.

The FAR-based contract is expected to include standard FAR clauses, including the Truth in Negotiations and Cost Accounting Standards clauses. The letter contract includes Organizational Conflict of Interest clauses whereby Boeing and SAIC can not compete for additional FCS subcontracts. Also, other current subcontractors can compete for work only if they do not prepare the request for proposals or participate in the source selection process.

The last major revision of the OTA in March 2005 had a total value of approximately $21 billion. Through September 2005 the Army and LSI estimate that about $3.3 billion will be chargeable to the OTA. The FAR based contract will cover all activity after September 2005 and is expected to have a value of about $17.4 billion. Both the OTA and the FAR-based contract will be cost plus fixed fee contracts with additional incentive fees. According to the Army, the fee arrangement is designed to address the unique relationship between the Army and the LSI and to acknowledge their “shared destiny” by providing strategic incentives for the LSI to prove out technologies, integrate systems, and move the program forward to production, at an affordable cost and on schedule. In the OTA, the annual fixed fee was set at 10 percent of estimated cost and the incentive fee available was 5 percent.

The Army plans to change the fee structure for the FCS program in the new contract. The request for proposals for the new contract proposed a 7 percent fixed fee and an 8 percent incentive fee. The OTA established 10 distinct events where LSI performance will be evaluated against pre- determined performance, cost, and schedule criteria. (Those events are expected to be retained in the FAR contract.) One event has already occurred—the System of Systems Functional Requirements Review was held in August 2005. The next event is called the Capabilities Maturity Review and it is expected to occur in June or July 2006. As the details are worked out, it is important that the new contract encourage meaningful demonstrations of knowledge and to preserve the government’s ability to act on knowledge should the program progress differently than planned.

Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or members of the Subcommittee may have.

Contacts and Staff Acknowledgements

For future questions about this statement, please contact me at (202) 512- 4841. Individuals making key contributions to this statement include Robert L. Ackley, Lily J. Chin, Noah B. Bleicher, Marcus C. Ferguson, William R. Graveline, Guisseli Reyes, Michael J. Hesse, John P. Swain, Robert S. Swierczek, and Carrie R. Wilson.

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