Started in 1996, the Coast Guard’s Deepwater Capability Replacement Project is potentially the most significant and largest acquisition project in the agency’s history. The Coast Guard’s deepwater missions—that is, those missions beyond the normal operating range of shore-based small boats—include such actions as enforcing fisheries laws, intercepting drug smugglers, and conducting search and rescue operations far out at sea. Cutters, patrol boats, airplanes, and helicopters are all critical to meeting these responsibilities. Through the Deepwater Project, the Coast Guard is considering how to best meet these missions in the future—and in the process, how to replace or modernize this fleet of ships and aircraft. The Coast Guard’s preliminary estimates put the Deepwater Project’s cost at $9.8 billion over a 20-year period. The Coast Guard’s deepwater missions are met by four classes of ships and four classes of aircraft, including the Coast Guard’s largest cutters, airplanes, and helicopters. (See table 1.1.) The ships and aircraft are spread throughout the maritime areas of the nation, including the Pacific and Atlantic coasts, Alaska, Guam, and Hawaii. The Coast Guard uses its deepwater ships and aircraft to carry out a number of maritime missions and responsibilities. On the basis of data for fiscal year 1997, the primary missions are in search and rescue operations and three categories of law enforcement: protecting fisheries, interdicting illegal migrants at sea, and controlling the flow of drugs. Together, these activities account for about 80 percent of the operational hours of deepwater ships and 50 percent of the operational hours of aircraft. (See fig. 1.1.) Usage varies considerably by the type of ship or aircraft. For example, 378-foot cutters are used mainly in fisheries enforcement, while 110-foot patrol boats are used mainly in search and rescue activities and drug control efforts. HC-130 aircraft have their greatest usage in fisheries enforcement, and helicopters spend much of their time in search and rescue activities and drug control activities. Appendix I provides a more detailed breakout for the usage of each type of ship and aircraft. The Coast Guard estimates that it spent about $589 million to operate its deepwater ships and about $662 million to operate its deepwater aircraft in fiscal year 1997. The costs are broken out into three major areas: direct expenditures (e.g., the personnel costs of ship and aircraft operators), direct support expenditures (e.g., the cost of maintenance), and overhead (e.g., the cost of training). Direct expenditures account for the largest portion of operating costs. (See fig. 1.2.) Appendix II provides more detailed information on the cost to operate and maintain each type of ship and aircraft. The Deepwater Capability Replacement Project is intended as an integrated system of ships, aircraft, command, control, communications, intelligence, surveillance, and reconnaissance equipment to replace or modernize the Coast Guard’s current assets. According to the Coast Guard’s justification for the project, the existing deepwater ships and aircraft are at or approaching the end of their service life. The agency hopes to replace or upgrade them and end up—through the use of innovative technology, such as satellites—with a smaller number of ships and aircraft. By doing so, the Coast Guard hopes to lower total ownership costs by acquiring a system of assets that requires fewer staff to operate and maintain. As presented, the project will potentially be the largest procurement effort in the Coast Guard’s history. As it proceeds with the Deepwater Project, the Coast Guard will be required to follow the acquisition process outlined in Office of Management and Budget (OMB) Circular A-109, which is the principal guidance for acquiring major systems in the federal government. To avoid the problems commonly experienced in acquiring major systems, such as cost overruns and delays, OMB Circular A-109 specifies five major phases that agencies must complete when making large acquisitions: (1) determine mission needs, (2) identify and explore alternative design concepts, (3) demonstrate alternative design concepts, (4) undertake full-scale development and limited production, and (5) commit to full production. To secure the involvement of the agency’s top management in reviewing a project’s progress, problems, and risks, Circular A-109 establishes a key decision point between each phase. The Coast Guard has already moved beyond the first phase of the A-109 process: it has examined mission needs as they relate to the need to replace or modernize its fleet of deepwater ships and aircraft. This first phase is critical because it justifies the project and identifies the deficiencies that need to be resolved. The Department of Transportation (DOT), the Coast Guard’s parent agency, does not allow its agencies to request funds for a project unless DOT has reviewed and approved a well-documented statement of mission needs. In the first phase of the Circular A-109 process, the Coast Guard assembled and obtained DOT’s approval of a Mission Needs Statement. This statement is based on the Coast Guard’s Deepwater Mission Analysis Report (DMAR), which was issued in November 1995. The DMAR determined that the Coast Guard’s ships and aircraft were aging and that future demand exceeded the number of operational hours provided by the ships and aircraft. The DMAR also determined that capability improvements were needed in such matters as speed, boarding capacity, and the ability to classify targets. The DMAR concluded that as a result of these findings, there was a need to begin a project for acquiring new ships and aircraft. The Coast Guard is now in the second phase, or concept exploration, of the Circular A-109 process. During this phase, the Coast Guard or its contractors will develop key program documents, such as project baselines, requirements documents, acquisition plans, and evaluation criteria. Alternative concepts for correcting the deficiencies identified in the DMAR must also be explored as part of this step. For this acquisition, the Coast Guard is using a novel systems approach to examining its mission, its existing assets, and how best to accomplish its mission. Rather than using the traditional approach of considering the replacement of an individual class of ships or aircraft, the Coast Guard will use a “system of systems” approach that integrates ships, aircraft, sensors, and communication links together as a system to accomplish mission objectives. Through this approach, the Coast Guard hopes to avoid “stovepiping” the acquisition of ships and aircraft, which has led to a situation where they could not operate optimally together. According to the Coast Guard, the process incorporates multiple controls, which will maximize existing resources in an efficient manner. These controls include the use of multiple teams of contractors in a competitive environment to identify the most cost-effective set of equipment. Also, the Coast Guard has hired an independent contractor, who is prohibited from gaining any potential production contracts, to provide a check on the results from the industry teams. From August 1998 through December 1999, the Coast Guard will pay three teams of contractors to develop competing proposals for the Deepwater Project. Their development contracts, costing about $7 million each, call for the contractor teams to develop a proposal for maximizing the Coast Guard’s ability to carry out its missions while minimizing total ownership costs. The proposals could include replacing existing ships, aircraft, and other equipment; upgrading them; or some combination of the two. Besides submitting their proposals, the contractors will be required to provide other products such as cost estimates for implementing their proposals, a schedule for acquiring or upgrading any new ships and aircraft, and an implementation plan for integrating the new or upgraded equipment into the Coast Guard. Once the contractors submit their initial proposals, the Coast Guard will go through a series of steps designed to refine its concept of the system of systems. When the Coast Guard has selected a system that it wants from the proposals submitted, it will ask the contractors to submit additional final proposals for the system for the Coast Guard to evaluate. At the end of this process, the Coast Guard intends to award a contract to one of the contractor teams to build the system, which the Coast Guard calls the Integrated Deepwater System. The initial procurement of ships and/or aircraft is anticipated to begin in fiscal year 2002. In August 1996, the Coast Guard estimated that the cost of the Deepwater Project would range from $7.25 billion to as much as $15 billion. This estimate was based on replacing the existing fleet of 92 ships and 209 aircraft currently involved in deepwater missions. The Coast Guard cautioned that the estimate reflected a rough order of magnitude and that future estimates would be more accurate as the types and numbers of ships and aircraft are determined. The agency suggested that its estimate may portray the worst-case scenario because, through the use of technology, the Coast Guard intends to reduce the number of ships and aircraft required. When the Coast Guard supplied guidance for contractors to use in deciding how to develop proposals for the new system, it proposed a budget target that was consistent with the August 1996 estimate. For planning purposes, the Coast Guard told contractor teams to develop proposals that assume a cost of $9.8 billion over a 20-year period, or roughly $500 million a year starting in fiscal year 2002. The agency cautioned, however, that funding levels are ultimately contingent upon congressional approval. The Coast Guard is planning for substantial funding increases for the Deepwater Project over the next 4 years. In fiscal year 1998, the Coast Guard spent $5 million on the Deepwater Project. The Coast Guard estimates that this cost will grow to an estimated $500 million by fiscal year 2002. (See table 1.2.) The Subcommittee on Transportation, Senate Committee on Appropriations, asked us to review the Deepwater Project’s justification and the planning process that the Coast Guard was following. We focused our review on the following questions: To what extent does the current justification for the Deepwater Project accurately depict the Coast Guard’s need to modernize or replace its ships and aircraft?