Cutters, patrol boats, airplanes, and helicopters are all critical to meeting the Coast Guard’s deepwater missions that are beyond the range of shore- based small boats. These missions include actions such as enforcing fisheries laws, intercepting drug smugglers and illegal immigrants, and conducting search and rescue missions far out at sea. Many of the Coast Guard’s current cutters were built in the 1960s, and many of the aircraft in the 1970s and 1980s. Although these ships and aircraft have been upgraded in a number of ways since being acquired, the Coast Guard has documented a number of performance and support problems, such as the following: poor sensors and night operations capability on both aircraft and cutters, limited ability of cutters and aircraft to operate effectively together, inadequate communications, and high operating and maintenance costs. In a November 1995 mission analysis report, the Coast Guard cited its rapidly aging deepwater fleet as a justification to begin a project for acquiring new ships and aircraft. In 1998, we reported that the service life of the Coast Guard’s deepwater ships and aircraft might be much longer than the Coast Guard originally estimated in its 1995 analysis. We recommended that the Coast Guard develop additional information on the remaining service life of ships and aircraft. In 1998, the Coast Guard determined that the service life of the various aircraft classes could be extended by about 11 to 28 years over original estimates, assuming that increased maintenance and upgrades occur. In addition, by January 2001, the Coast Guard had issued an updated analysis that extended the service life of two of the four ship classes by an additional 5 years, assuming that increased maintenance and upgrades occur. The Coast Guard provided this information to its contractors so that they could use it in developing their proposals. In December 1999, an interagency task force on the roles and missions of the Coast Guard reported that recapitalization of the Coast Guard’s deepwater capability is a near-term national priority and endorsed the Deepwater Project’s process and timeline. Although our earlier work took issue with the Coast Guard’s initial analysis of how soon its deepwater assets would need to be replaced, we do not now take issue with the Coast Guard’s position that it needs to modernize these assets, especially due to the additional studies completed since our 1998 report. Our congressional directive in this report has been to examine the acquisition approach. The acquisition approach for the Deepwater Project is innovative. Rather than using the traditional approach of replacing an individual class of ships or aircraft, the Coast Guard has adopted a “system-of-systems” approach intended to integrate ships, aircraft, sensors, and communication links together as a system to accomplish mission objectives more effectively. The Coast Guard expects this approach will both improve the effectiveness of deepwater operations and reduce operating costs. The project has two basic phases—a design phase (called “concept exploration” and known as phase 1) and a final proposal preparation and procurement phase (called “demonstration and validation/full-scale development” and known as phase 2). Phase 1 began in March 1998. As part of this phase, the Coast Guard contracted with three competing teams of contractors to conceive and begin designing a proposed deepwater system. Each proposal is to be based on meeting a set of performance specifications developed by the Coast Guard. Each team was instructed to develop its proposal on a funding stream of $300 million for the first year and $500 million annually until the project is completed. These amounts are in constant 1998 dollars; actual funding would be higher to account for inflation. Phase 1 ends with each team’s development of a proposed deepwater concept, the functional design for which will be 80-percent complete. In phase 2, which begins in June 2001, the Coast Guard plans to issue a request for proposals (RFP) to the three industry teams to develop final proposals. The current schedule calls for these proposals to be completed and submitted to the Coast Guard during the last quarter of fiscal year 2001. The Coast Guard will evaluate which proposal provides best value for the government as gauged mainly by a combination of improvements in operational effectiveness and minimizing total ownership costs. Other evaluation factors include the technical feasibility of the proposed design and the management capability of the systems integrator. When the deepwater contract is awarded early in 2002, the contract will actually be between the Coast Guard and the prime contractor, known as the “systems integrator,” of the winning contracting team. This systems integrator will be responsible for ensuring that each ship, aircraft, or other equipment is delivered on time and in accordance with agreed to prices. The systems integrator will also be called on to deliver the complete deepwater system in compliance with the Coast Guard’s system performance specifications. The Coast Guard adopted this approach because it does not believe it has the technical expertise or the resources to be a systems integrator. Also, the Coast Guard believes that a team of contractors led by a systems integrator would provide the best method of acquiring a set of ships, aircraft, and other equipment and would optimize improvements in operational effectiveness and total ownership costs. This contracting approach could thus result in a long-term contractual arrangement with a single contractor and its team of subcontractors. The Coast Guard plans to have an initial 5-year contract with the systems integrator. The systems integrator would receive a base award for management and system integration services. Assuming the project proceeds as planned, task and delivery orders for deepwater equipment would be issued by the Coast Guard in accordance with the systems integrator’s implementation schedule. If the performance of the systems integrator is satisfactory for each award-term contract, the Coast Guard plans to award follow-on, award-term contracts (as many as five for successive 5-year, award-term contracts) with the same systems integrator. The Coast Guard plans to negotiate prices with the systems integrator on the follow-on contracts. The Congress is at a critical juncture with the Deepwater Project because the success of the contracting approach rests heavily on the Coast Guard being able to count on sustained funding of about $500 million (in 1998 dollars) for 20 years or more. The contracting approach the Coast Guard has selected is not easily adaptable to lower levels of funding without stretching the schedule and increasing costs. However, there are signs that funding levels may be lower than the planned amount. Although the administration’s budget request for the Deepwater Project for fiscal year 2002 will be about 10 percent less than the project’s planned first-year funding, the average shortfall for fiscal years 2003 to 2006 is about 20 percent. Moreover, much of the funding for fiscal year 2002 is from the Western Hemisphere Drug Elimination Act (P.L. 105-277), a source that will not be available after this year unless the act is extended. Capital funding for the Coast Guard is in competition with many other potential uses of federal funds within the Coast Guard itself, DOT as a whole, and other federal agencies. To accommodate the Deepwater Project, the Coast Guard is proposing to limit spending on its other ongoing capital projects to levels far below where they have been in decades. Given these various budgetary pressures, it appears advisable to have contractors develop their plans around a lesser amount. The Coast Guard’s approach, however, is inextricably tied to the more optimistic option. In using a lower, more realistic funding level aligned with OMB budget projections, the Coast Guard could lessen the risk of future cost increases, schedule stretch-outs, and low system performance levels. The contract approach that the Coast Guard has decided to use for the Deepwater Project depends on a large, sustained, and stable funding stream over the next 2 to 3 decades. The approach is based on acquiring ships and aircraft on the contractor’s proposed schedule so that they will form a “system of systems.” Substantial funding shortfalls cannot only affect the ships and aircraft scheduled for acquisition in the short term; but, they can also set off ripples affecting the acquisition of deepwater equipment for years to come. Adjustments that may be needed include revising the implementation plan for delivering equipment, renegotiating prices for deepwater equipment, and negotiating new cost and performance baselines with the systems integrator. Such adjustments would not only be costly; but, they could also slow the schedule to the point that (1) total ownership costs would rise and (2) advantages projected in the contractor’s proposal, such as improvements in operational effectiveness, would not materialize. At the extreme, funding shortfalls would affect the Coast Guard’s ability to proceed with the contract as well as the agency’s ability to perform its deepwater missions. The decision on funding the Deepwater Project rests ultimately with the Congress, but because this decision has yet to be made, we used the administration’s budget proposal for the Coast Guard (as contained in the budget documents prepared by OMB) as a starting point for analyzing the funding issue. OMB’s budget targets for fiscal years 2002 through 2006 do not propose specific amounts for the Deepwater Project; rather, they provide a single amount for all Coast Guard capital projects. As table 1 shows, this overall total ranges from $659 million (in-year-of expenditure dollars) in fiscal year 2002 to $719 million in fiscal year 2006. Because the Coast Guard has many other capital projects under way besides the Deepwater Project, it must decide how this money will be allocated among them. After receiving the budget targets from OMB in early March 2001, the Coast Guard estimated that the amount available for the Deepwater Project would range from $338 million (in year-of-expenditure dollars) in fiscal year 2002 to $547 million in fiscal year 2006. If the Coast Guard proceeds with its current plans in issuing the RFP, contractors will be instructed to develop plans around a much higher funding stream than is available under the OMB budget targets.