The special operations forces’ ASDS is a battery-powered, dry interior submersible that is carried to a deployment area by specially configured 688-class submarines. ASDS is intended to provide increased range, payload, on-station loiter time, endurance, and communication/sensor capacity over current submersibles. The 65-foot-long, 8-foot-diameter ASDS is operated by a two-person crew and includes a lock out/lock in diving chamber. SOCOM is the resource sponsor and provides the requirements and funding, and the Naval Sea Systems Command—the Navy’s technical expert for major undersea systems—is the program manager responsible for overseeing the prime contractor, Northrop Grumman Corporation. Over the years, the ASDS acquisition milestone decision authority has resided at various levels within DOD. In 1994, the Navy awarded a $70 million cost-plus incentive fee contract to Westinghouse Electric Corporation’s Oceanic Division in Annapolis, Maryland, for detailed design, construction, testing, documentation, refurbishment, and delivery of the first ASDS with the option to build one or two more systems. In 1996, Northrop Grumman bought this division and assumed responsibility for the Annapolis division’s performance on the ASDS contract. In December 2005, ASDS program management lead was reassigned to Northrop Grumman in Newport News, Virginia, which has greater technical experience in submarines, and Northrop Grumman Electronic Systems in Annapolis is assisting. The original program’s schedule called for delivery of the first boat in July 1997. However, numerous technical problems with key subsystems contributed to performance shortfalls, schedule delays, and cost increases. In August 2001, the Navy program office took what it called “conditional” preliminary acceptance of the first boat from Northrop Grumman under an agreement that all requirements needed for final acceptance would be completed within 1 year, requirements that the contractor was unable to accomplish. On June 26, 2003, the Navy elected to accept the ASDS boat in an “as is” condition, and incorporated additional waivers, deviations, and engineering change proposals into the contract. As a result, acceptance of the ASDS boat did not require any additional actions on the part of the contractor. Further, the Navy did not seek any consideration from the contractor because Navy officials believed at the time that the ASDS met virtually all of its requirements. By that time, the total costs for the ASDS development contract had already increased from $70 million to more than $340 million. In October 2003, following the Navy’s acceptance of ASDS, the Navy negotiated and signed a basic ordering agreement (BOA) with Northrop Grumman to provide a range of goods and services to support the ASDS program. For example, the BOA enabled the Navy to order engineering and design services; overhaul, repair, and inspection services; logistical support; and spare parts and materials for a 3-year period. The BOA was extended an additional year in 2006. To expedite the contracting process, the BOA established specific labor rates for different types of service, such as program office, technical, engineering, operations, and quality support. Through March 2007, the Navy issued 26 delivery orders with an estimated value of over $84 million. The duration of the current BOA extends through September 2007, and the Navy anticipates awarding a new BOA for another 2 years while overall ASDS performance is reevaluated. Under another BOA, Northrop Grumman is also providing ASDS engineering services, such as engineering changes and drawing updates, for Portsmouth Naval Shipyard. In assessing the ASDS program we drew heavily from our previous work on best practices in defense acquisitions. This work has shown that both a sound business case and effective contracting strategy are essential for success. A sound business case involves firm requirements and mature technologies, a knowledge-based acquisition strategy, realistic cost and schedule estimates, and sufficient funding. An effective contracting strategy involves selecting a contractor with proper expertise, choosing contracting approaches that effectively balance risk, and effectively managing and assessing contractor performance; all of which are intended to promote accountability for outcomes and protect the taxpayers’ interests. Critical flaws in the Navy’s initial business case contributed to ASDS’s acquisition challenges and increased the government’s risk. We have previously reported that the capabilities required of the boat outstripped the contractor’s resources in terms of technical knowledge, time, and money. The Navy’s overly optimistic assumptions about the contractor’s ability to readily incorporate existing submersible and commercial technology into the ASDS resulted in a mismatch between technologies and needed capabilities and an ill-advised decision to combine developmental and operational testing. Further information on the technical, cost, and management issues that undermined the ASDS’s initial business case may be found in appendix I. As existing problems mounted during development and new ones arose after acceptance, the Navy increasingly assumed responsibility for resolving them. This responsibility required additional time and money over the targets that had been established by the ASDS development contract. Since accepting the ASDS in June 2003, SOCOM has continued to invest millions of dollars to fix both old and new problems. The prime contractor has had little incentive to control costs given the Navy’s choice of certain cost-reimbursable contract types. Navy officials say they accept more risk of performance because ASDS relies on new, highly technical subsystems that are inherently risky. The Navy’s risk also increased because it authorized work before reaching agreement on key contract terms and conditions and failed to finalize them in a timely manner, indicating a lack of discipline in the contracting process. Resolving the flawed initial business case required additional time and money, far exceeding the target cost and delivery time frames established under the ASDS September 1994 development contract. For example, the development contract was awarded for about $70 million with an expected delivery date of the first ASDS boat in July 1997. When the contractor proved unable to meet these time frames, the Navy found itself having to rebaseline the program in 1998 and 1999, more than doubling the estimated development cost and extending the delivery schedule by more than 2 years. Ultimately the development cost almost quintupled. During the course of ASDS’s development, the Navy gradually assumed responsibility for addressing ASDS’s technical problems by awarding separate contracts to other organizations to develop key components. The contractor’s lack of expertise in key technologies, such as the propeller and battery, contributed to the Navy’s decision to seek outside expertise to develop alternative solutions. More information on these actions is provided in appendix I. The Navy finally accepted the first ASDS boat in June 2003 in an “as is” condition. Since the June 2003 acceptance, however, SOCOM has continued to invest millions of dollars to address old and new technical and reliability issues. Through March 2007, the Navy has issued delivery orders with an estimated value of about $84 million under the BOA with Northrop Grumman. Much of the funding has been for efforts to correct design deficiencies and to improve ASDS’s reliability. Arrangements that appropriately share risk, incentivize performance, and provide for accountability promote successful acquisition outcomes. The government can choose from a range of contract types available to it that gives it flexibility to acquire goods and services. The selection of contract type is generally a matter of risk allocation: fixed-price contracts place the risks associated with performing the contract on the contractor; cost-type contracts share the risk between the contractor and the government. The risk associated with performance shifts between the parties depending on the type of cost contract selected. In selecting the contract type, the government must consider the difficulty of providing the goods and services in the time allocated for contract performance. For example, when the risks are minimal or can be predicted with an acceptable degree of certainty, such as when the government and the contractor have sufficient knowledge of the effort required, then the government uses a fixed-price contract, and the contractor has full responsibility for the performance costs and the resulting profit or loss. In contrast, when the extent of product knowledge is more limited, the government uses a cost- reimbursable contract; the government assumes more risk and may try to motivate the contractor’s performance by using various incentive or award fee provisions. Our review found that nearly all of the $84 million in design, integration, and reliability improvement work authorized under the Navy’s October 2003 BOA with Northrop Grumman used some form of a cost-reimbursable contract. About 6 percent were conducted under a fixed-price type arrangement. Of the first 18 delivery orders issued through early May 2005, 14 were either cost-plus fixed fee or labor-hour orders. Cost-plus fixed fee arrangements negotiate the fee at the inception of the contract and do not vary with the actual costs incurred by the contractor. Labor-hour contracts provide for direct labor hours at specified fixed rates that include wages, overhead, general, and administrative expenses. As profit and other expenses are already included in the rates charged to the government, the orders provided no profit incentive for the contractor to control costs or work efficiently. Correspondingly, our analysis found that the ASDS contractor often exceeded the initial estimates of the time and cost required to complete the work: 12 of the 26 delivery orders issued under the BOA exceeded the initial cost estimates, while the delivery schedule was extended on 20 of the 26 orders. Figure 1 shows the value of all delivery orders and subsequent modifications by contract type through March 2007, based on the year the order was initially issued. Navy officials told us that they chose cost-plus fixed fee or labor-hour orders, in part, because ASDS relied on many new and highly technical subsystems that were inherently risky.