The F-35 program has begun planning and funding the development of new capabilities, known as follow-on modernization, but our ongoing work indicates that DOD’s current plan for managing the development of these new capabilities may limit transparency and oversight. The current F-35 development program is projected to end in 2017, when Block 3F developmental flight testing is complete, with a total development cost of $55 billion. The first increment of follow-on modernization, known as Block 4, is expected to add new capabilities and correct deficiencies of 9 capabilities carried over from the current development program such as the prognostics health management system down-link and communication capabilities. Although the requirements are not yet final and no official cost estimate has been developed for Block 4, DOD’s fiscal year 2017 budget request indicates that the department expects to spend nearly $3 billion on these development efforts over the next 6 years (see figure 1). Our preliminary analysis indicates that F-35 Block 4 development costs of this magnitude would exceed the statutory and regulatory thresholds for what constitutes a major defense acquisition program (MDAP), and it would be larger than many of the MDAPs in DOD’s current portfolio. However, in August 2015, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued an Acquisition Decision Memorandum directing the F-35 program office to manage Block 4 development under the existing F-35 acquisition program baseline and not as a separate incremental acquisition program. As a result, DOD will not hold a Milestone B review—the decision point in which program officials would present a business case in order to initiate system development. A Milestone B review would also set in motion oversight mechanisms including an acquisition program baseline; Nunn-McCurdy unit cost growth thresholds; and periodic reporting of the program’s cost, schedule, and performance progress. These mechanisms form the basic business case and oversight framework to ensure that a program is executable and that Congress and DOD decision makers are informed about the program’s progress. Best practices recommend an incremental approach in which new development efforts are structured and managed as separate acquisition programs and that a business case should match requirements with resources—proven technologies, sufficient engineering capabilities, time, and funding—before undertaking a new product development. Because DOD does not yet have approved requirements and is not planning to hold a Milestone B review, its approach for Block 4 modernization will not require the program to have such important cost, schedule, and performance reporting and oversight mechanisms in place. Based on our ongoing work, we have concerns about DOD’s approach to Block 4 that are partly rooted in our assessment of a similar case with the F-22 modernization program. In March 2005 we found that the Air Force was managing its multi-billion dollar F-22 modernization efforts as part of the program’s existing acquisition baseline and had not established a separate knowledge-based business case. As a result, the F-22 baseline and schedule were adjusted to reflect the new timeframes and additional costs, comingling the funding and some content for the baseline development and modernization efforts—some content that had not been achieved under the baseline program were deferred into the modernization program. When the content, scope, and phasing of modernization capabilities changed over time, it appeared that the F-22 program was fraught with new schedule delays and further cost overruns. The comingling of modernization efforts with the existing baseline reduced transparency and Congress could not distinguish the new costs associated with modernization funding from cost growth in the original baseline. We recommended that the Air Force structure and manage F- 22 modernization as a separate acquisition program with its own business case—matching requirements with resources—and acquisition program baseline. Eventually, the department separated the F-22 modernization program from the baseline program with a Milestone B review, in line with our recommendation, which increased transparency and better facilitated oversight. The department has the opportunity to apply similar lessons learned to the F-35 Block 4 program. Although the estimated F-35 program’s total acquisition costs have decreased since 2014, the program continues to face affordability challenges. As of March 2016, DOD’s estimated total acquisition cost for the F-35 program is $379 billion, or $12.1 billion less than it reported in 2014. The program will require an average of $12.7 billion per year to complete the procurement of aircraft through 2038 (see figure 2). The program expects to reach peak production rates for U.S. aircraft in 2022, at which point DOD expects to spend more than $14 billion a year on average for a decade. At the same time, DOD will be operating and sustaining an increasing number of fielded F-35 aircraft. DOD officials we spoke with for our September 2014 report, stated that the current F-35 sustainment strategy with cost estimates around $1 trillion is not affordable. When acquisition and sustainment funds are combined, annual funding requirements could easily approach $30 billion in some years. Our preliminary results indicate that affordability challenges will compound as the program competes with other large acquisition programs including the long range strike bomber, KC-46A Tanker, Ohio Class Submarine Replacement and the DDG-51 Class Destroyer. In recent years, affordability challenges, in part, have forced the Air Force to defer F-35 aircraft procurements to later years. Since 2014, the Air Force has deferred 45 aircraft between 2017 and 2021 to later years. This will likely require the military service to make unplanned investments in extending the service life of their current fighter aircraft. The cost of extending the lives of current fighter aircraft and acquiring other major weapon systems, while continuing to produce and field new F-35 aircraft, poses significant affordability risks in a period of austere defense budgets. The F-35 program is nearing the completion of the initial developmental test program with about 20 percent of its flight sciences and mission systems testing remaining; however our ongoing work indicates that the remaining testing is likely to be challenging as it will require complex missions and stressing environments. Developmental flight testing is separated into two key areas referred to as flight sciences and mission systems. Developmental flight science testing is done to verify the aircraft’s basic flying capabilities, while mission systems testing is done to verify that the software and systems that provide warfighting capabilities function properly and meet requirements. The F-35 program is nearing the completion of developmental flight testing with only 20 percent of its total planned test points remaining. Before completing the remaining high speed and high altitude flight science testing, Lockheed Martin officials noted that they will incorporate a pressure relief valve into the aircraft’s fuel system to allow the aircraft to fly at altitudes and speeds that are currently restricted due to fuel pressure concerns. As we have reported in the past, DOD is developing, testing, and fielding mission systems capabilities in software blocks (see figure 3). The full warfighting capability for the F-35 is to be attained with the completion of Block 3F, the final software block in the current development program. As indicated by the percent of test points completed, all of the blocks leading up to 3F have been completed, although they experienced delays in getting to this point. Block 3F has completed 18 percent of its test points. Our preliminary findings show that the program completed all of the mission systems software testing planned in 2015, but completion of Block 3F testing could be challenging given the complexity of the missions and the stressing environments that remain to be tested. Program officials believe that the completion of 3F developmental testing could be delayed by about 2-3 months. As of December 2015, our preliminary analysis of program data indicated that Block 3F testing could be delayed by as much as 6 months if the program performs at the same rate it has in the past and is executed according to the current plan with no additional test point growth. Delays could be exacerbated by the current mission system software stability issues and large number of remaining weapon delivery accuracy events that must take place. Our preliminary work indicates that in 2015 program officials continued to address many of the key technical risks that we have highlighted in the past—including an engine seal and the helmet mounted display—and they identified some new risks. Problems with the engine seal were addressed through a design change that was incorporated into production, and as of September 2015, 69 of 180 engines had undergone retrofits. A new helmet—known as the Gen III helmet—that is intended to address shortfalls in night vision capability, among others, was developed and delivered to the program in 2015. Developmental testing of the new helmet is mostly complete, with final verification testing planned in 2016. The program also identified new risks with the ejection seat and cracking in the F-35C wing structure. Program officials discovered that pilots less than 136 pounds could possibly suffer neck injuries during ejection. Officials noted that although the problem was discovered during testing of the new helmet, the helmet’s weight was not the root cause. The program is exploring a number of possible solutions to ensure pilot safety. In addition, program officials discovered cracking in the wing structure of the F-35C structural test aircraft during durability testing. Structural testing was halted for about 3 months, and Lockheed Martin officials we spoke with stated that a long-term fix had not been identified. Although improvements have been made, ALIS continues to pose technical risks. Recognizing that a fully functional ALIS is critical to the program’s overall success, in October 2015, the F-35 executive program officer testified before Congress that ALIS is one of the most significant technical and schedule risks to the program. ALIS is a complex system of systems that supports operations, mission planning, supply-chain management, maintenance, and other processes. In the past, we have reported that ALIS software has not been delivered on time and has not functioned as expected when it is delivered. In addition to continuing software problems, our ongoing work indicates that the F-35 program faces other key challenges related to ALIS. For example, some equipment management data is inaccurate or incomplete and engine health information is not included in the current version of ALIS. In addition, the system may not be deployable and does not have a backup in case the hardware system was to fail. Our ongoing work has shown that the F-35 airframe and engine contractors continue to report improved efficiency and supply chain performance, and program data indicates that reliability and maintainability are also improving. Since 2011, a total of 154 aircraft have been delivered to DOD and international partners, 45 of which were delivered in 2015. As Lockheed Martin continues to deliver more aircraft, the number of hours needed to manufacture each aircraft continues to decline. Although prior to 2015 Lockheed Martin had only delivered one aircraft on or ahead of its contracted delivery date, the contractor has been making progress and in 2015 the contractor was able to deliver 15 of the 45 aircraft on time or early. Other manufacturing data are also trending in a positive direction. For example, scrap, rework, and repair hours, and time spent on work conducted out of sequence continue to decrease. Although it has improved, Lockheed Martin’s supply chain continues to deliver parts late to production, resulting in inefficiencies and requiring workarounds. Engine manufacturing deliveries remain steady and 218 engines have been delivered to date. The labor hours required for assembling engines has remained steady and very little additional efficiency is expected. As a result, Pratt & Whitney is looking for additional ways to save cost. Scrap, rework, and repair costs have remained steady over the last year and engineering design changes is relatively low and continues to decrease. Pratt & Whitney is conducting production reviews of its supply chain and is managing supplier quality initiatives to address shortfalls, according to officials. Our ongoing work shows that although the program has made progress in improving some reliability and maintainability measures, the program continues to fall short in some measures as shown in figure 4. While the metrics in most areas were trending in the right direction, the F- 35 program office’s own assessment indicated that as of August 2015 the F-35 fleet was falling short of reliability and maintainability expectations in 9 of 19 areas. The program has time to improve. As of August 2015, the F-35 fleet had only flown a cumulative total of 35,940 hours of the 200,000 cumulative flight hours required for system maturity. Similarly, although engine reliability improved significantly in 2015, the engine was still not performing at expected levels. In 2014, Pratt and Whitney data indicated that engine reliability—measured as mean flight hours between failure (design controllable)—was very poor and we reported in April 2015 that the engine would likely require additional design changes and retrofits. While Pratt & Whitney has implemented a number of design changes that have resulted in significant reliability improvements, the F-35A and F-35B engines are still at about 55 percent and 63 percent, respectively, of where the program expected them to be at this point. Program and contractor officials continue to identify ways to further improve engine reliability. In conclusion, our preliminary results indicate that, although the F-35 development program is nearing completion, the program is not without risks. The remaining significant and complex 3F mission systems software developmental testing, continuing issues with ALIS, and new issues with the ejection seat and F-35C wing structures pose ongoing risks. Going forward, the program will likely continue to experience affordability and oversight challenges. DOD expects that beginning in 2022 it will need more than $14 billion a year on average for a decade to procure aircraft. It is unlikely that the program will be able to receive and sustain such a high level of funding over this extended period, especially given DOD’s competing resources such as the long range strike bomber and KC-46A tanker. DOD’s plan to manage Block 4 under the current acquisition program baseline presents oversight challenges because key reporting requirements and oversight mechanisms will not be initiated; therefore, the two efforts will be comingled. Without setting up the modernization as a separate program with its own baseline and regular reporting as best practices recommend, it will be difficult for Congress to hold DOD accountable for achieving F-35 Block 4 cost, schedule, and performance goals. It also makes it easier to re-categorize work planned for the baseline program as modernization. In light of our ongoing work, we are not making any recommendations to DOD at this time. We plan to issue our final report in April 2016. Chairman Turner, Ranking Member Sanchez, and members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have. We look forward to continuing to work with the Congress as we to continue to monitor and report on the progress of the F-35 program. For further information on this statement, please contact Michael Sullivan at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement are Travis Masters, Peter Anderson, Jillena Roberts, and Megan Setser. 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Summary: With estimated acquisition costs of nearly $400 billion, the F-35 Joint Strike Fighter—also known as the Lightning II — is DOD's most costly acquisition program. Since 2001, GAO has reported extensively on the F-35 program's cost, schedule, and performance problems. The program plans to begin increasing production rates over the next few years. The National Defense Authorization Act for Fiscal Year 2015 contains a provision for GAO to annually review the F-35 acquisition program. Today's testimony is based on ongoing work for the first report under this mandate, which GAO expects to issue in April 2016.This testimony focuses on GAO's preliminary observations regarding the F-35 program's (1) future modernization (2) affordability, remaining development, and ongoing manufacturing plans. GAO analyzed program documentation including management reports, test data and results, and internal DOD program analyses. GAO collected data on F-35 development and test progress, and analyzed total program funding requirements. GAO also collected and analyzed production and supply chain performance data, and interviewed DOD, program, and contractor officials. In light of its ongoing work, GAO is not making any recommendations at this time. GAO's ongoing work on the F-35 Joint Strike Fighter (F-35) program shows that the Department of Defense (DOD) has begun planning and funding significant new development work to add to the F-35's capabilities, an effort known as Block 4. The funding needed for this effort is projected to be nearly $3 billion over the next 6 years (see figure below), which would qualify it as a major defense acquisition program in its own right. DOD does not currently plan to manage Block 4 as a separate program with its own acquisition program baseline but rather as part of the existing baseline. As a result, Block 4 will not be subject to key statutory and regulatory oversight requirements, such as providing Congress with regular, formal reports on program cost and schedule performance. A similar approach was initially followed on the F-22 Raptor modernization program, in which the funding and content were comingled making it difficult to separate the performance and cost of the modernization from the baseline program. Best practices recommend an incremental approach in which new development efforts are structured and managed as separate acquisition programs with their own requirements and acquisition program baselines. The F-22 eventually adopted such an approach. If the Block 4 effort is not established as a separate acquisition program, cost, schedules, and the scope of the baseline and modernization efforts will be comingled. Therefore, it will be difficult for Congress to hold DOD accountable for achieving its cost, schedule, and performance requirements. GAO's ongoing work indicates that although the F-35 total program acquisition costs have decreased since 2014, the program continues to face significant affordability challenges. DOD plans to begin increasing production and expects to spend more than $14 billion annually for nearly a decade on procurement of F-35 aircraft. Currently, the program has around 20 percent of development testing remaining, including complex mission systems software testing, which will be challenging. Program officials continued to address many of the key technical risks, but the Autonomic Logistics Information System continues to be a challenge. At the same time, the contractors that build the F-35 airframes and engines continue to report improved manufacturing efficiency and supply chain performance.