With this context in mind, I would like to turn now to recent trends in DOD’s contracting activities. If you would turn to slide 4, DOD’s spending on goods and services has increased by 88 percent since fiscal year 2000. In fiscal year 2005, DOD obligated nearly $270 billion on contracts for products, research and development efforts, and services, such as for information technology and management support. All indications are that this upward trend will continue. Aside from growth in dollar value, there have also been changes in what DOD is buying. DOD’s new weapon system programs are expected to be the most expensive and complex ever, and will consume an increasingly large share of DOD’s budget. To illustrate, in the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion. DOD is counting on these efforts to fundamentally transform military operations. The Army, for example, is undertaking the Future Combat Systems program—a family of weapons, including 18 manned and unmanned ground vehicles, air vehicles, sensors and munitions, that will be linked by an information network—to enable its combat force to become lighter, more agile, and more capable. Future Combat Systems’ procurement will represent 60 to 70 percent of Army procurement from fiscal years 2014 to 2022. The Army, however, is not alone in pursuing complex and costly systems. For example, the Air Force is modernizing its tactical aircraft fleet as part of the $200 billion Joint Strike Fighter program and the F-22A Raptor aircraft, which is expected to cost more than $65 billion. Similarly, the Navy’s Virginia class submarine is expected to cost about $80 billion, while the DDG-51 class of destroyer is expected to cost some $70 billion. DOD’s development of such systems requires more funds than may reasonably be expected to be available. For example, we testified in April 2006 that the Navy’s shipbuilding plan projects a supply of shipbuilding funds that will double by 2011 and will stay at high levels for years to follow. As overall obligations have increased, so has DOD’s reliance on the private sector to provide services to fulfill DOD’s missions and support its operations. In some cases, the growth in services reflects that DOD is using a different acquisition approach to support its missions. For example, DOD is now buying launch services, rather than rockets. Service contracts pose a number of challenges in terms of defining requirements, establishing expected outcomes, and assessing contractor performance. Additionally, in recent years, federal agencies including DOD have moved away from using in-house contracting capabilities and are making greater use of existing contracts awarded by other agencies. If you would turn now to slide 7, these interagency contracts are intended to leverage the government’s buying power; provide a faster and easier method for procuring commonly used goods and services, and reduce initial contracting administrative costs. DOD is the largest user of these interagency contracting vehicles, and their availability has enabled DOD to save time by paying other agencies to award and administer contracts for goods and services on its behalf. DOD, however, lacks complete information about purchases made through other agencies’ contracts. Moreover, our work and that of some agency inspectors general have uncovered instances of improper use of interagency contracts, including issuing orders that were outside the scope of the underlying contract, failing to follow procedures intended to ensure best pricing, and failing to establish clear lines of accountability and responsibility. Further, in some instances fee-for-service arrangements may have led to an inordinate focus on meeting customer demands at the expense of complying with sound contracting policy and required ordering procedures. These and other issues led us to designate management of interagency contracting a governmentwide high-risk issue in January 2005. Ensuring the proper use of interagency contracts must be viewed as a shared responsibility which requires that agencies clearly define responsibilities and adopt clear, consistent, and enforceable policies and processes that balance the need for customer service with the requirements of contract regulations. At the same time that the amount, nature, and complexity of contract activity has increased, DOD’s acquisition workforce has remained relatively unchanged in size and faces certain skill gaps and serious succession planning challenges. DOD’s acquisition workforce must have the right skills and capabilities if it is to effectively implement best practices and properly manage the goods and services it buys. We noted in a report issued in 2003, and again in July 2006, however, that procurement reforms, changes in staffing levels, workload, and the need for new skill sets have placed unprecedented demands on the acquisition workforce. Moreover, DOD’s current civilian acquisition workforce level reflects the considerable downsizing that occurred in the 1990s. DOD’s approach to acquisition workforce reduction during the 1990s was not oriented toward shaping the makeup of the workforce; rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and buyouts to achieve reductions. Indeed, during our work on the early phases of DOD downsizing, some DOD officials voiced concerns about what was perceived to be a lack of attention to identifying and maintaining a balanced, basic level of skills needed to maintain in-house capabilities. I would like to turn now to briefly discuss some of DOD’s practices in three areas—(1) competition and sound pricing; (2) incentivizing contractors; and (3) contract oversight—that increase risks and undermine DOD’s ability to establish sound business arrangements. Our work has identified a number of issues related to competition and pricing in DOD’s efforts to obtain needed goods and services. Under the Competition in Contracting Act of 1984, DOD contracting officers are, with certain exceptions, to solicit offers and award contracts using full and open competition, in which all responsible sources are permitted to compete. As shown on slide 10, DOD reports that only forty-one percent of its contract obligations in fiscal year 2005 were made on contracts that were awarded using full and open competition. The impact of not using full and open competition is reflected in one recent example involving the Army’s award of sole-source contracts for security guards. In this case, we found that the Army devoted twice as many contract dollars—nearly $495 million—to sole-sourced contracts for security guards at 46 of 57 Army installations, despite the Army’s recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005); and GAO, Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured Incentives, GAO-06-409T (Washington, D.C.: April 5, 2006). Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance, such as evaluating contractor performance on award-fee criteria that are not directly related to key acquisition outcomes (e.g., meeting cost and schedule goals and delivering desired capabilities to the warfighter); paying contractors a significant portion of the available fee for what award-fee plans describe as “acceptable, average, expected, good, or satisfactory” performance, which sometimes did not require meeting the basic requirements of the contract; and giving contractors at least a second opportunity to earn initially unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD’s expectations. On slide 15, we have included four cases in which contractors that were behind schedule and over cost were paid between 74 and 100 percent of the available award fee. Despite paying billions of dollars in award and incentive fees, DOD has not compiled data or developed performance measures to evaluate the validity of its belief that award and incentive fees improve contractor performance and acquisition outcomes. DOD’s strategies for incentivizing its contractors, especially on weapon system development programs, are symptomatic of a lack of discipline, oversight, transparency, and accountability in DOD’s acquisition process. I would like to briefly discuss the third element of sound business arrangements, DOD’s oversight of its service contracts. Government monitoring and inspection of contractor activity, if not done well, can contribute to a lack of accountability and poor acquisition outcomes. In 2005, we reported that DOD’s monitoring of nearly a third of the 90 service contracts we reviewed was insufficient. In these cases, we identified a number of contributing factors, including DOD’s failure to assign government performance monitors and the fact that personnel are usually assigned such duties on a part-time basis and not evaluated on how well they performed their duties. DOD and senior military acquisition policy officials acknowledged that the priority of contracting offices is awarding contracts, not ensuring that trained performance monitors are assigned early so that contract oversight can begin upon contract award. Ultimately, however, if appropriate monitoring is not being done, DOD is at risk for paying contractors more than the value of the services they performed. In closing, these three illustrative business arrangement issues, along with those we have identified in DOD’s acquisition and business management processes, present a compelling case for change. In short, it takes a myriad of things to go right for acquisitions to be successful, but only a few things to go wrong to cause major problems.