The F-35 program has begun planning and funding the development of new capabilities, known as follow-on modernization, but our ongoing work indicates that DOD’s current plan for managing the development of these new capabilities may limit transparency and oversight. The current F-35 development program is projected to end in 2017, when Block 3F developmental flight testing is complete, with a total development cost of $55 billion. The first increment of follow-on modernization, known as Block 4, is expected to add new capabilities and correct deficiencies of 9 capabilities carried over from the current development program such as the prognostics health management system down-link and communication capabilities. Although the requirements are not yet final and no official cost estimate has been developed for Block 4, DOD’s fiscal year 2017 budget request indicates that the department expects to spend nearly $3 billion on these development efforts over the next 6 years (see figure 1). Our preliminary analysis indicates that F-35 Block 4 development costs of this magnitude would exceed the statutory and regulatory thresholds for what constitutes a major defense acquisition program (MDAP), and it would be larger than many of the MDAPs in DOD’s current portfolio. However, in August 2015, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued an Acquisition Decision Memorandum directing the F-35 program office to manage Block 4 development under the existing F-35 acquisition program baseline and not as a separate incremental acquisition program. As a result, DOD will not hold a Milestone B review—the decision point in which program officials would present a business case in order to initiate system development. A Milestone B review would also set in motion oversight mechanisms including an acquisition program baseline; Nunn-McCurdy unit cost growth thresholds; and periodic reporting of the program’s cost, schedule, and performance progress. These mechanisms form the basic business case and oversight framework to ensure that a program is executable and that Congress and DOD decision makers are informed about the program’s progress. Best practices recommend an incremental approach in which new development efforts are structured and managed as separate acquisition programs and that a business case should match requirements with resources—proven technologies, sufficient engineering capabilities, time, and funding—before undertaking a new product development. Because DOD does not yet have approved requirements and is not planning to hold a Milestone B review, its approach for Block 4 modernization will not require the program to have such important cost, schedule, and performance reporting and oversight mechanisms in place. Based on our ongoing work, we have concerns about DOD’s approach to Block 4 that are partly rooted in our assessment of a similar case with the F-22 modernization program. In March 2005 we found that the Air Force was managing its multi-billion dollar F-22 modernization efforts as part of the program’s existing acquisition baseline and had not established a separate knowledge-based business case. As a result, the F-22 baseline and schedule were adjusted to reflect the new timeframes and additional costs, comingling the funding and some content for the baseline development and modernization efforts—some content that had not been achieved under the baseline program were deferred into the modernization program. When the content, scope, and phasing of modernization capabilities changed over time, it appeared that the F-22 program was fraught with new schedule delays and further cost overruns. The comingling of modernization efforts with the existing baseline reduced transparency and Congress could not distinguish the new costs associated with modernization funding from cost growth in the original baseline. We recommended that the Air Force structure and manage F- 22 modernization as a separate acquisition program with its own business case—matching requirements with resources—and acquisition program baseline. Eventually, the department separated the F-22 modernization program from the baseline program with a Milestone B review, in line with our recommendation, which increased transparency and better facilitated oversight. The department has the opportunity to apply similar lessons learned to the F-35 Block 4 program. Although the estimated F-35 program’s total acquisition costs have decreased since 2014, the program continues to face affordability challenges. As of March 2016, DOD’s estimated total acquisition cost for the F-35 program is $379 billion, or $12.1 billion less than it reported in 2014. The program will require an average of $12.7 billion per year to complete the procurement of aircraft through 2038 (see figure 2). The program expects to reach peak production rates for U.S. aircraft in 2022, at which point DOD expects to spend more than $14 billion a year on average for a decade. At the same time, DOD will be operating and sustaining an increasing number of fielded F-35 aircraft. DOD officials we spoke with for our September 2014 report, stated that the current F-35 sustainment strategy with cost estimates around $1 trillion is not affordable. When acquisition and sustainment funds are combined, annual funding requirements could easily approach $30 billion in some years. Our preliminary results indicate that affordability challenges will compound as the program competes with other large acquisition programs including the long range strike bomber, KC-46A Tanker, Ohio Class Submarine Replacement and the DDG-51 Class Destroyer. In recent years, affordability challenges, in part, have forced the Air Force to defer F-35 aircraft procurements to later years. Since 2014, the Air Force has deferred 45 aircraft between 2017 and 2021 to later years. This will likely require the military service to make unplanned investments in extending the service life of their current fighter aircraft. The cost of extending the lives of current fighter aircraft and acquiring other major weapon systems, while continuing to produce and field new F-35 aircraft, poses significant affordability risks in a period of austere defense budgets. The F-35 program is nearing the completion of the initial developmental test program with about 20 percent of its flight sciences and mission systems testing remaining; however our ongoing work indicates that the remaining testing is likely to be challenging as it will require complex missions and stressing environments. Developmental flight testing is separated into two key areas referred to as flight sciences and mission systems. Developmental flight science testing is done to verify the aircraft’s basic flying capabilities, while mission systems testing is done to verify that the software and systems that provide warfighting capabilities function properly and meet requirements. The F-35 program is nearing the completion of developmental flight testing with only 20 percent of its total planned test points remaining. Before completing the remaining high speed and high altitude flight science testing, Lockheed Martin officials noted that they will incorporate a pressure relief valve into the aircraft’s fuel system to allow the aircraft to fly at altitudes and speeds that are currently restricted due to fuel pressure concerns. As we have reported in the past, DOD is developing, testing, and fielding mission systems capabilities in software blocks (see figure 3). The full warfighting capability for the F-35 is to be attained with the completion of Block 3F, the final software block in the current development program. As indicated by the percent of test points completed, all of the blocks leading up to 3F have been completed, although they experienced delays in getting to this point. Block 3F has completed 18 percent of its test points. Our preliminary findings show that the program completed all of the mission systems software testing planned in 2015, but completion of Block 3F testing could be challenging given the complexity of the missions and the stressing environments that remain to be tested. Program officials believe that the completion of 3F developmental testing could be delayed by about 2-3 months. As of December 2015, our preliminary analysis of program data indicated that Block 3F testing could be delayed by as much as 6 months if the program performs at the same rate it has in the past and is executed according to the current plan with no additional test point growth. Delays could be exacerbated by the current mission system software stability issues and large number of remaining weapon delivery accuracy events that must take place. Our preliminary work indicates that in 2015 program officials continued to address many of the key technical risks that we have highlighted in the past—including an engine seal and the helmet mounted display—and they identified some new risks. Problems with the engine seal were addressed through a design change that was incorporated into production, and as of September 2015, 69 of 180 engines had undergone retrofits. A new helmet—known as the Gen III helmet—that is intended to address shortfalls in night vision capability, among others, was developed and delivered to the program in 2015. Developmental testing of the new helmet is mostly complete, with final verification testing planned in 2016. The program also identified new risks with the ejection seat and cracking in the F-35C wing structure. Program officials discovered that pilots less than 136 pounds could possibly suffer neck injuries during ejection. Officials noted that although the problem was discovered during testing of the new helmet, the helmet’s weight was not the root cause. The program is exploring a number of possible solutions to ensure pilot safety. In addition, program officials discovered cracking in the wing structure of the F-35C structural test aircraft during durability testing. Structural testing was halted for about 3 months, and Lockheed Martin officials we spoke with stated that a long-term fix had not been identified. Although improvements have been made, ALIS continues to pose technical risks. Recognizing that a fully functional ALIS is critical to the program’s overall success, in October 2015, the F-35 executive program officer testified before Congress that ALIS is one of the most significant technical and schedule risks to the program. ALIS is a complex system of systems that supports operations, mission planning, supply-chain management, maintenance, and other processes. In the past, we have reported that ALIS software has not been delivered on time and has not functioned as expected when it is delivered.