DOD has substantially restructured the JSF program over the past 15 months, taking positive actions that should lead to more achievable and predictable outcomes. Restructuring has consequences—higher development costs, fewer aircraft in the near term, training delays, and extended times for testing and delivering capabilities to warfighters. Key restructuring changes include the following: The total system development cost estimate rose to $56.4 billion and its schedule was extended to 2018. This represents a 26 percent increase in cost and a 5-year slip in schedule compared to the current approved program baseline established in 2007. Resources and time were added to development testing. Testing plans were made more robust by adding another development test aircraft and the use of several production aircraft; increasing the number of test flights by one-third; extending development testing to 2016; and reducing its overlap with initial operational testing. Near-term procurement quantities were reduced by 246 aircraft through 2016; the annual rate of increase in production was lowered; and the start of full-rate production moved to 2018, a 5-year slip from the current baseline. The military services were directed to reexamine their initial operational capability (IOC) requirements, the critical need dates when the warfighter must have in place the first increment of operational forces available for combat. We expect the Marine Corps’ IOC will slip significantly from its current 2012 date and that the Air Force’s and Navy’s IOC dates will also slip from the current dates in 2016. To address technical problems and test deficiencies for the Marine Corps’ STOVL variant, the department significantly scaled back its procurement quantities and directed a 2-year period for evaluating and engineering technical solutions to inform future decisions on this variant. DOD also “decoupled” STOVL testing from the other two variants so as not to delay them and to allow all three to proceed at their own speeds. The fiscal year 2012 Defense Budget reflects the financial effects from restructuring actions through 2016. Compared to estimates in the fiscal year 2010 future years defense program for the same 5-year period, the department increased development funding by $7.7 billion and decreased procurement funding by $8.4 billion reflecting plans to buy fewer aircraft. Table 1 summarizes the revised funding requirements and annual quantities following the Secretary’s reductions. Even after decreasing near-term quantities and lowering the annual rate of increase in production, JSF procurement still escalates significantly. Annual funding levels more than double and quantities more than triple during this period. These numbers do not include the additional orders expected from the international partners. At the time of our review, DOD did not yet know the full impact from restructuring actions on future procurement funding requirements beyond this 5-year period. Cost analysts were still calculating the net effects from deferring the near-term procurement of 246 aircraft to future years and from lowering the annual rate of increased procurement. After a Nunn- McCurdy breach of the critical cost growth threshold and DOD certification, the most recent milestone must be rescinded, the program restructured to address the cause of the breach, and a new acquisition program baseline must be approved that reflects the certification approved by the milestone decision authority. The Secretary has not yet granted new milestone B approval for the JSF nor approved a new acquisition program baseline; officials expect to do so next month. We expect future funding requirements will be somewhat higher than currently projected. This could reduce the quantities considered affordable by the U.S. and allies, further driving up unit costs. Affordability—in terms of the investment costs to acquire the JSF, the continuing costs to operate and maintain it over the life-cycle, and its impact on other defense programs—is a challenging issue. Including the funding added by the restructuring actions, system development cost estimates have increased 64 percent since program start. (Appendix III summarizes the increases in target prices and major cost drivers for the air system and primary engine development contracts.) Also, the estimated average unit procurement price for the JSF has about doubled since program start and current forecasts indicate that life-cycle costs will be substantially higher than the legacy aircraft it replaces. Rising JSF costs erode buying power and may make it difficult for the U.S. and its allies to buy and sustain as many aircraft as planned. Going forward, the JSF will require unprecedented demands for funding in a period of more austere defense budgets where it will have to annually compete with other defense and nondefense priorities for the discretionary federal dollar. Figure 1 illustrates the substantive annual development and procurement funding requirements—almost $13 billion on average through program completion in 2035. This reflects the program’s estimate at the time of the fiscal year 2012 budget submission. As discussed earlier, defense cost analysts are still computing the long- term procurement funding requirements reflecting the deferral of aircraft to future years. The JSF program established 12 clearly stated goals in testing, contracting, and manufacturing for completion in calendar year 2010. It had mixed success, achieving 6 goals and making varying degrees of progress on the other 6. For example, the program exceeded its goal for the number of development flight tests but did not deliver as many test and production aircraft as planned. Also, the program awarded its first fixed-price contract on its fourth lot of production aircraft, but did not award the fixed-price engine contract in 2010 as planned. Table 2 summarizes JSF goals and accomplishments for 2010. Although still hampered by the late delivery of test aircraft to testing sites, the development flight test program significantly ramped up operations in 2010, accomplishing 3 times as many test flights as the previous 3 years combined. The Air Force CTOL variant significantly exceeded the annual plan while initial limited testing of the Navy’s CV variant was judged satisfactory, below plans for the number and hours of flight but ahead on flight test points flown. The Marine Corps’ STOVL, however, substantially underperformed in flight tests, experienced significant down times for maintenance, and was challenged by several technical issues unique to this variant that could add to its weight and cost. The STOVL’s problems were a major factor in the Secretary’s decision to give the STOVL a 2-year period to solve engineering issues, assess impacts, and inform a future decision as to whether and how to proceed with this variant. Table 3 summarizes 2010 flight test results for each variant. After completing 9 years of system development and 4 years of overlapping production activities, the JSF program has been slow to gain adequate knowledge to ensure its design is stable and the manufacturing process is ready for greater levels of annual production. The JSF program still lags in achieving critical indicators of success expected from well- performing acquisition programs. Specifically, the program has not yet stabilized aircraft designs—engineering changes continue at higher than expected rates long after critical design reviews and well into procurement. Engineering drawings are still being released to the manufacturing floor. More changes are expected as testing accelerates. Also, manufacturing cost increases and delays in delivering test and production aircraft indicate a need for substantial improvements in factory throughput and performance of the global supply chain. Engineering drawings released since design reviews and the number and rate of design changes exceed those planned at program outset and are not in line with best practices. Critical design reviews were completed on the three aircraft variants in 2006 and 2007 and the designs declared mature, but the program continues to experience numerous changes. Since 2007, the program has produced 20,000 additional engineering drawings, a 50-percent increase in total drawings and about five times more than best practices suggest. In addition, changes to drawings have not yet decreased and leveled off as planned. Figure 2 tracks and compares monthly design changes and future forecasts against contractor plans in 2007. The monthly rate in 2009 and 2010 was higher than expected and the program now anticipates more changes over a longer period of time— about 10,000 more changes through January 2016. With most of development testing still ahead for the JSF, the risk and impact from required design changes are significant. In addition, emerging concerns about the STOVL lift fan and drive shaft, fatigue cracks in a ground test article, and stealth-related issues may drive additional and substantive design changes. Manufacturing and delivering test jets took much more time and money than planned. As in prior years, lingering management inefficiencies, including substantial out-of-station work and part shortages, continued to increase the labor needed to manufacture test aircraft. Although there have been improvements in these factors, final acceptance and delivery of test jets were still delayed. Total labor hours required to produce the test aircraft increased over time. The cumulative actual labor hours through 2010 to complete the 12 test aircraft exceeded the budgeted hours estimated in 2007 by more than 1.5 million hours, a 75 percent increase. Figure 3 depicts forecasted and actual labor hours for building test jets. DOD began procuring production jets in 2007 and has now ordered 58 aircraft on the first four low-rate initial production lots. The JSF program anticipated the delivery of 14 production aircraft through 2010, but none were delivered during that period. Delivery of the two production jets ordered in 2007 has been delayed several times since the contract was signed and the first aircraft was just delivered this month. The prices on each of the first three cost-reimbursable production contracts have increased from the amounts negotiated at contract awards and the completion dates for delivering aircraft have been extended over 9 months on average. We are encouraged by DOD’s award of a fixed-price incentive fee contract for lot 4 production and the prospects for the cost study to inform lot 5 negotiations, but we have not examined contract specifications. Accumulating a large backlog of jets on order but undelivered is not an efficient use of federal funds, tying up millions of dollars in obligations ahead of the ability of the manufacturing process to produce. The aircraft and engine manufacturers now have significantly more items in production flow compared to prior years and are making efforts to implement restructuring actions and recommendations from expert defense teams assembled to evaluate and improve production and supply operations.