Funded at $8 billion to nearly $10 billion annually, MDA’s BMDS is the largest research development program in the Department of Defense’s budget. Since the 1980s, DOD has spent more that $100 billion on the development and early fielding of this system and it estimates that continued development will require an additional $50 billion between fiscal years 2008 and 2013. Since 2002, MDA has worked to fulfill its mission through its development and fielding of a diverse collection of land-, air-, sea-, and space-based assets. These assets are developed and fielded through nine BMDS elements and include the Airborne Laser (ABL); Aegis Ballistic Missile Defense (Aegis BMD); BMDS Sensors; Command, Control, Battle Management, and Communications (C2BMC); Ground-based Midcourse Defense (GMD); Kinetic Energy Interceptors (KEI); Multiple Kill Vehicles (MKV); Space Tracking and Surveillance System (STSS); and Terminal High Altitude Area Defense (THAAD). To develop a system capable of carrying out its mission, MDA, until December 2007, executed an acquisition strategy in which the development of missile defense capabilities was organized in 2-year increments known as blocks. Each block was intended to provide the BMDS with capabilities that enhanced the development and overall performance of the system. The first 2-year block, known as Block 2004, fielded a limited initial capability that included early versions of the GMD, Aegis BMD, Patriot Advanced Capability-3, and C2BMC elements. The agency’s second 2-year block– Block 2006– culminated on December 31, 2007 and fielded additional BMDS assets. This block also provided improved GMD interceptors, enhanced Aegis BMD missiles, upgraded Aegis BMD ships, a Forward-Based X-Band-Transportable radar, and enhancements to C2BMC software. On December 7, 2007, MDA’s Director approved a new block construct that will be the basis for all future development and fielding, which I will discuss in more detail shortly. To assess progress during Block 2006, we examined the accomplishments of nine BMDS elements that MDA is developing and fielding. Our work included examining documents such as Program Execution Reviews, test plans and reports, production plans, and Contract Performance Reports. We also interviewed officials within each element program office and within MDA functional directorates. In addition, we discussed each element’s test program and its results with DOD’s Office of the Director, Operational Test and Evaluation. In following up on transparency, accountability, and oversight issues raised in our March 2007 report, we held discussions with officials in MDA’s Directorate of Business Operations to determine whether its new block structure improved accountability and transparency of the BMDS. In addition, we reviewed pertinent sections of the U.S. Code to compare MDA’s current level of accountability with federal acquisition laws. We also interviewed officials from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and DOD’s Joint Staff to discuss the oversight role of the new Missile Defense Executive Board (MDEB). Additionally, we reviewed the MDEB charter to identify the oversight responsibility of the board. MDA made progress in developing and fielding the BMDS during 2007. Additional assets were fielded and/or upgraded, several tests met planned objectives, and other development activities were conducted. On the other hand, fewer assets were fielded than originally planned, some tests were delayed, and the cost of the block increased by approximately $1 billion. To stay within the revised budget despite increasing contractor costs, MDA deferred some budgeted work to future blocks. Such deferrals, coupled with a planning methodology used by some contractors that could obscure cost reporting, prevent us from determining the full cost of Block 2006. MDA was able to meet most test objectives despite delays in several elements’ test schedules. Neither we nor DOD could evaluate the aggregate performance of fielded assets because flight testing to date has not generated sufficient data. An evaluation of aggregate performance would also have to consider that (1) some parts in fielded interceptors identified as potentially problematic have not been replaced yet, and (2) tests done to date have been developmental in nature and do not provide sufficient realism for DOD to determine if the BMDS is suitable and effective for battle. During Block 2006, MDA increased its inventory of BMDS assets while enhancing the system’s performance. It fielded 14 additional Ground-based interceptors, 12 Aegis BMD missiles designed to engage more advanced threats, 4 new Aegis BMD destroyers, 1 new Aegis BMD cruiser, and 8 Web browsers and 1 software suite for C2BMC. In addition, MDA upgraded half of its Aegis BMD ship fleet, successfully conducted four Aegis BMD and two GMD intercept tests, and completed a number of ground tests to demonstrate the capability of BMDS components. Although MDA fielded an increased capability, it was unable to deliver all assets originally planned for Block 2006. The Sensors element was the only Block 2006 element to meet all of its original goals set in March 2005 while the remaining elements––GMD, Aegis BMD, C2BMC––were unable to meet all of their original quantity goals. Sensors delivered a second FBX-T in January 2007 while the GMD element fielded 14 of 15 Ground- Based interceptors originally planned during Block 2006. Last year, we reported that MDA delayed the partial upgrade of the Thule early warning radar—one of GMD’s original goals-- until a full upgrade could be accomplished. Additionally, the Aegis BMD element delivered 4 additional Destroyers and 1 new Cruiser as originally planned, but did not meet its original goal for missile deliveries––delivering 12 of 19 SM-3 missiles planned for the block. C2BMC also did not deliver two of the three software suites originally planned for Block 2006. MDA’s Block 2006 program of work culminated with higher than anticipated costs. In March 2007, we reported that MDA’s cost goal for Block 2006 increased by approximately $1 billion because of greater than expected GMD operations and sustainment costs and technical problems. If the contractors continue to perform as they did in fiscal year 2007, we estimate that at completion, the cumulative overrun in the contracts could be between about $1.9 billion and $2.8 billion. To stay within its revised budget, MDA deferred some work it expected to accomplish during the block. When work is deferred, its costs are no longer accounted for in the original block. In other words, if work planned and budgeted for Block 2006 was deferred to Block 2008, that work would be counted as a Block 2008 cost. Because MDA did not track the cost of the deferred work, the agency could not make an adjustment that would have matched the cost with the correct block. Consequently, we were unable to determine the full cost of Block 2006. Another reason why it is difficult to determine the actual cost of Block 2006 is a planning methodology employed by MDA prime contractors that can obscure the full cost of work. Contractors typically divide the total work of a contract into small efforts in order to define them more clearly and to ensure proper oversight. Work is planned into types of work packages including: (1) level of effort– work that contains tasks of a general or supportive nature and does not produce a definite end product and (2) discrete—work that has a definable end product or event. When work is discrete, delivery of the end product provides a sound basis for determining actual contractor performance. When discrete work is instead planned as level of effort, the contractor’s performance becomes less transparent because work is considered complete when the time planned for it has expired, whether or not the intended product has been completed. Earned value management does not recognize such variances in completing scheduled work and to the extent more work has to be done to complete the product, additional costs could be incurred that are not yet recognized. Many of MDA’s prime contractors plan a large percentage of their work as level of effort. MDA officials agree that its contractors have improperly planned discrete work as level of effort, and are taking steps to remedy the situation. We also observed that while several contractors had difficulty with controlling costs, during fiscal year 2007, MDA awarded approximately 90 percent or $579 million of available award fee to its prime contractors. In particular, contractors developing the ABL and Aegis BMD Weapon System were rated as performing very well in the cost and/or program management elements and received commensurate fees, even though earned value management data showed that their cost and schedule performance was declining. Although DOD guidance discourages the use of earned value performance metrics in award fee criteria, MDA includes this––one of many factors for consideration in rating contractors’ performance––in several of its award fee plans. The agency recognizes that there is not always a good link between its intentions for award fees and the amount of fee being earned by its contractors. In an effort to rectify this problem, the agency has begun to revise its award fee policy to align agency practices more closely with DOD’s current policy that better links performance with award fees. Most test objectives were achieved during 2007, although several BMDS programs experienced setbacks in their test schedules. The MKV, KEI, and Sensors elements were able to execute all scheduled activities as planned. The Aegis BMD, THAAD, ABL, STSS, and C2BMC elements experienced test delays, but all were able to achieve their primary test objectives. GMD successfully completed an intercept with an operationally representative interceptor and a radar characterization test. A second intercept test employing the SBX radar has been delayed because a target malfunction delayed the execution of the first intercept test.