As the lead federal agency for maritime homeland security within the Department of Homeland Security, the Coast Guard is responsible for homeland and nonhomeland security missions, including ensuring security in ports and waterways and along coastlines, conducting search and rescue missions, interdicting drug shipments and illegal aliens, enforcing fisheries laws, and responding to reports of pollution. The deepwater fleet, which consists of 186 aircraft and 88 cutters of various sizes and capabilities, plays a critical role in all of these missions. As shown in table 1, the fleet includes fixed-wing aircraft, helicopters, and cutters of varying lengths. Some Coast Guard deepwater cutters were built in the 1960s. Notwithstanding extensive overhauls and other upgrades, a number of the cutters are nearing the end of their estimated service lives. Similarly, while a number of the deepwater legacy aircraft have received upgrades in engines, operating systems, and sensor equipment since they were originally built, they too have limitations in their operating capabilities. In 1996, the Coast Guard began developing what came to be known as the Integrated Deepwater System (IDS) acquisition program as its major effort to replace or modernize these aircraft and cutters. This Deepwater program is designed to replace some assets—such as deteriorating cutters—with new cutters and upgrade other assets—such as some types of helicopters—so they can meet new performance requirements. The Deepwater program represents a unique approach to a major acquisition in that the Coast Guard is relying on a prime contractor—the system integrator—to identify and deliver the assets needed to meet a set of mission requirements the Coast Guard has specified. In 2002, the Coast Guard awarded a contract to Integrated Coast Guard Systems (ICGS) as the system integrator for the Deepwater program. ICGS has two main subcontractors—Lockheed Martin and Northrop Grumman—that in turn contract with other subcontractors. Rather than using the traditional approach of replacing classes of ships or aircraft through a series of individual acquisitions, the Coast Guard chose to employ a “system of systems” acquisition strategy that would replace its deteriorating deepwater assets with a single, integrated package of new or modernized assets. This system-of-systems approach is designed to provide an improved, integrated system of aircraft, cutters, and unmanned aerial vehicles to be linked effectively through systems that provide command, control, communications, computer, intelligence, surveillance, reconnaissance, and supporting logistics. The Deepwater program’s three overarching goals are to maximize operational effectiveness, minimize total ownership cost, and satisfy the customer—the operational commanders, aircraft pilots, cutter crews, maintenance personnel, and others who will use the assets. The revised Deepwater schedule calls for acquisition of new assets under the Coast Guard’s Deepwater program to occur over an approximately 20- year period at an estimated cost of $19 billion to $24 billion. By 2007, for example, the Coast Guard is to receive the first 418-foot National Security Cutter, which will have the capability to conduct military missions related to homeland security. Current plans call for 6 to 8 of these cutters to replace the 12 existing 378-foot cutters. However, in order to carry out its mission effectively, the Coast Guard will also need to keep all of the legacy assets operational until they can be replaced or upgraded. We have been reviewing the Deepwater program for several years, pointing out difficulties and expressing concern over a number of facets of the program. In our 2001 report, we identified several areas of risk for Deepwater. First, the Coast Guard faced potential risk in the overall management and day-to-day administration of the contract. At the time, we reported on the major challenges such as developing and implementing plans for establishing effective human capital practices, having key management and oversight processes and procedures in place, and tracking data to measure system integrator performance. In addition, we expressed concerns about the potential lack of competition during the program’s later years and the reliance on a single system integrator for procuring the Deepwater assets. We also reported there was little evidence that the Coast Guard had analyzed whether the approach carried any inherent risks for ensuring the best value to the government and, if so, what to do about them. We reviewed the program again in 2004 and found many of the same concerns. Specifically, we reported that key components needed to manage the program and oversee the system integrator’s performance had not been effectively implemented. The Coast Guard’s primary tool for overseeing the system integrator, the integrated product teams (IPTs) were struggling to effectively collaborate and accomplish their missions because of changing membership, understaffing, insufficient training, and inadequate communication among members. Also, the Coast Guard had not adequately addressed the frequent turnover of personnel in the program and the transition from existing assets to those assets that will be part of the Deepwater program moving forward. Further, the Coast Guard’s assessment of the system integrator’s performance in the first year of the contract lacked rigor, and the factors that formed the basis for the award fee determination were supported only by subjective performance monitor comments and not by quantifiable measures. This resulted in the system integrator receiving a high performance rating and an award fee of $4.0 million out of a maximum of $4.6 million despite documented problems in schedule, performance, cost controls, and contract administration. At the time of our March 2004 report, the Coast Guard had begun to develop models to measure the extent to which Deepwater was achieving operational effectiveness and reduced total ownership cost, but it had not made a decision as to which specific suite of models would be used. Further, Coast Guard officials were not able to project a time frame for when the Coast Guard would be able to hold the contractor accountable for progress toward the goals of maximizing operational effectiveness, minimizing total ownership cost, and customer satisfaction. Furthermore, the Coast Guard had not measured the extent of competition among suppliers of Deepwater assets or held the system integrator accountable for taking steps to achieve competition. The Coast Guard’s lack of progress on these issues has contributed to our concerns about the Coast Guard’s ability to rely on competition as a means to control future programmatic costs. Finally, we found that the Coast Guard had not updated the Deepwater integrated acquisition schedule despite numerous changes, making it difficult to determine the degree to which the program was on track with its original plan. In response to these concerns, we made a number of recommendations to improve Deepwater management and oversight of the system integrator. The Coast Guard welcomed our observations and concurred with our recommendations and has begun to take actions to address them. Coast Guard condition measures show that the condition of most deepwater legacy assets generally declined between 2000 and 2004, but the Coast Guard’s available measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision and are insufficient for determining the impact on mission capabilities. Further, other evidence we gathered, such as information from discussions with maintenance and operations personnel, points to conditions that may be more severe than the available measures indicate. The Coast Guard acknowledges that it needs better condition measures, but it has not yet finalized or implemented such measures. The Coast Guard anticipates having the new measures finalized by the end of 2005. During fiscal years 2000 through 2004, the Coast Guard’s various condition measures showed a general decline, although there were year-to-year fluctuations (see table 2). For deepwater legacy aircraft, a key summary measure of the condition—the availability index (the percentage of time aircraft are available to perform their missions)—showed that except for the HU-25 medium-range surveillance aircraft, the assets continued to perform close to or above fleet availability standards over the 5-year period. In contrast, other condition measures for aircraft, such as cost per flight hour and labor hours per flight hour, generally reflected some deterioration. For cutters, a key summary measure of condition—percent of time free of major casualties—fluctuated but generally remained well below target levels. The number of major casualties generally rose from fiscal years 2000 through 2003 and then dropped slightly in fiscal year 2004. (Appendix II provides further details on condition measures for each of the deepwater legacy aircraft and cutters.) Another, albeit less direct, measure of an asset’s condition is deferred maintenance—the amount of scheduled maintenance on an asset that must be postponed in order to pay for unscheduled repairs. Such deferrals can occur when the Coast Guard does not have enough money to absorb unexpected maintenance expenditures and still perform all of its scheduled maintenance, thus creating a backlog. For example, in spring 2004, while on a counterdrug mission, the 210-foot cutter Active experienced problems in the condition of its flight deck that were to be corrected during its scheduled depot-level maintenance. However, because of a shortage of maintenance funds, the maintenance was deferred and the flight deck was not repaired. As a result, the cutter lost all shipboard helicopter capability, significantly degrading mission readiness. As table 3 shows, deferred maintenance does not show a clear pattern across all classes of deepwater legacy assets. For the deepwater legacy aircraft, the overall amount of estimated deferred maintenance increased each year during fiscal years 2002 through 2004, from $12.3 million to about $24.6 million. However, most of the increase came for one type of asset, the HH-60 helicopter, and the increase came mainly from deferring maintenance past the 48-month interval requirement—thereby increasing the scheduled maintenance workload—and not from having to divert money to deal with unscheduled maintenance. For the deepwater cutters, the amount of estimated deferred maintenance increased from fiscal year 2002 to 2003, but then it dropped significantly in fiscal year 2004. The decrease in fiscal year 2004 came mainly because the Coast Guard received supplemental funding allowing it to address both scheduled and unscheduled maintenance.