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.” 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. 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.) 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. 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. 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. 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. 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. 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. The cost of the fiscal year 2005 production lot could increase because it is currently not included in plans to help control production costs.