Continuing cost increases and schedule delays culminated in the extensive restructuring of the JSF program recently announced. Restructuring is not complete and further cost growth and schedule extensions are likely. Manufacturing test aircraft continues to take more time, money, and effort than budgeted, contributing to substantial flight testing delays and raising questions about the ability to ramp up production as rapidly and steeply as planned. There is still substantial overlap of development, test, and production activities while DOD continues to push ahead and invest in large quantities of production aircraft before variant designs are proven and system performance verified. The JSF program continues to struggle with increased costs and slowed progress—negative outcomes that were foreseeable as events have unfolded over several years. Total estimated acquisition costs have increased $46 billion and development extended 2 ½ years, compared to the program baseline approved in 2007. DOD is now taking some positive steps that, if effectively implemented, should improve future outcomes and provide more realistic cost and schedule estimates. Officials increased time and funding for system development, added four aircraft to the flight test program, and reduced near-term procurement quantities by 122 aircraft. However, there is still substantial risk that the program will not deliver the expected number of aircraft and required capabilities on time. Dates for achieving initial operational capabilities may have to be extended or some requirements deferred to future upgrades. Also, aircraft unit costs will likely exceed the thresholds established by the statutory provision commonly referred to as Nunn-McCurdy and require the department to certify the need for the JSF to Congress. Program setbacks in costs, deliveries, and performance directly impact modernization plans and retirement schedules of the legacy aircraft the JSF is slated to replace. Table 1 summarizes changes in program cost, quantities, and schedules at key stages of acquisition. The 2004 replan estimates reflect a quantity reduction and a major restructuring of the program after integration efforts and design review identified significant weight problems. The 2007 data is the current approved acquisition baseline and the 2011 budget request reflects cost increases stemming from a major reassessment of the program by a joint team comprised of the Office of the Secretary of Defense (OSD), Air Force, and Navy representatives. Table 2 shows the extension of major milestone dates for completing key acquisition activities. The February 2010 restructure reflects the direction ordered by the Secretary in an acquisition decision memorandum issued on February 24 and revised on March 3. Completing system development and approving full-rate production is now expected in April 2016, about 2 ½ years later than planned in the acquisition program baseline approved in 2007. Manufacturing JSF test aircraft continues to take more time, money, and effort than budgeted. By December 2009, only 4 of 13 test aircraft had been delivered and total labor hours to build the aircraft had increased more than 50 percent above earlier estimates. Late deliveries hamper the development flight test program and affect work on production aircraft, even as plans proceed to significantly ramp up annual procurement rates. Some improvement is noted, but continuing manufacturing inefficiencies, parts problems, and engineering technical changes indicate that design and production processes may lack the maturity needed to efficiently produce aircraft at planned rates. An independent manufacturing review team determined that the planned production ramp rate was unachievable absent significant improvements. While the restructuring has reduced near-term procurement, annual aircraft quantities are still substantial. In addition, the program has procured several lots of low rate initial production (LRIP) aircraft using cost-reimbursement contracts, a contract type that places most of the cost risk on the government. Continued use of cost reimbursement contracts beyond initial LRIP quantities indicate that uncertainties in contract performance exist that do not permit costs to be estimated with sufficient accuracy for the contractor to assume the risk under a fixed price contract. Figure 1 compares labor hour estimates for test aircraft in 2007 and the revised manufacturing plan in 2009. Although DOD’s restructuring actions should help, there is still substantial overlap of development, test, and production activities while DOD continues to push ahead and invest in large quantities of production aircraft before variant designs are proven and system performance verified. Given the extended development time and reduced near-term procurement, DOD still intends to procure up to 307 aircraft at an estimated cost of $58.2 billion before completing development flight testing by mid fiscal year 2015 (see figure 2). At the same time, progress on flight testing is behind schedule—slowed by late aircraft deliveries and low productivity, the flight test program completed only 10 percent of the sorties planned during 2009, according to the Director of Operational Test and Evaluation. Other technical challenges include (1) relying on an extensive but largely unproven and unaccredited network of ground test laboratories and simulation models to evaluate system performance; (2) developing and integrating very large and complex software requirements; and (3) maturing several critical technologies essential to meet operational performance and logistical support requirements. Collectively, testing and technical challenges will likely add more costs and time to development, slowing delivery of capabilities to warfighters and hampering start up of pilot and maintainer training and initial operational testing. The JSF program began with an acquisition strategy that called for a competitive engine development effort. In the fiscal year 2007 budget submission, DOD stopped requesting funding for the alternate engine (F136). At that time, DOD determined that the risks of a single point failure in a sole source environment were very low and did not justify the extra costs to maintain a second source. Each year since then, Congress has subsequently recommended funding for alternate engine development. We have previously testified on our assessment that, based on past defense competitions (including a fighter engine competition started in the 1980s between these same manufacturers) and making certain assumptions about relative quantities purchased from each, competition could reasonably be expected to yield enough savings across the JSF life cycle to offset the remaining investments required to sustain a second source. Prior studies also indicate a number of nonfinancial benefits from competition, including better performance, increased reliability, and improved contractor responsiveness. As noted in our prior testimonies, the acquisition strategy for the JSF engine must weigh expected costs against potential rewards—both quantifiable and non quantifiable. As a result, we have updated our prior studies conducted in 2007, and later updated in 2008, to assess whether changes in the JSF program have impacted the costs and benefits of the sole-source and competitive scenarios for acquisition and sustainment of the JSF engine. We updated our analysis to include (1) new estimates for Research, Development, Test, and Evaluation (RDT&E) and additional sunk costs, (2) a slower production ramp as a result of the recent program restructure, (3) increased engine unit recurring costs, and (4) updated production support costs. Based on schedule delays with the program, we moved the starting point of the procurement competition to fiscal year 2015, a 3-year slip from our past analysis. This adjustment aligns with the completion of the JSF development flight test program and would start the competition with the last low-rate initial production aircraft buy. We were not provided information that allowed us to update operations and support costs. Our updated analysis, based largely on data provided by the JSF program office, found that, without competition, an estimated $62.5 billion will be needed over the remainder of the F135 primary (current) engine to cover costs for completing system development, procuring 2,443 engines, production support, and sustainment. An additional investment of between $4.5 billion to $5.7 billion (depending on the competitive scenario) may be required should the department continue competition. Depending on assumptions, the additional costs of the alternate engine investment could be recouped if competition were to generate approximately 10.1 to 12.6 percent savings over the life of the program. Air Force data on the first 4 years of competition for engines on the F-16 aircraft projected they would recoup at least that much. Actual savings will ultimately depend on factors such as the number of aircraft actually purchased, the ratio of engines awarded to each contractor, and when the competition begins. Competition may also provide non-quantifiable benefits with respect to better contractor responsiveness, technical innovation and improved operational readiness. Recent engine cost concerns and past test failures are other factors that should be considered in deciding whether to continue the engine competition. Our updated analysis estimates the remaining costs for the Pratt & Whitney F135 engine is estimated to be $62.5 billion over the life of the program. This includes cost estimates for the completion of system development, procurement of engines, production support, and sustainment. Table 3 shows the costs remaining to acquire and support the Pratt & Whitney F135 engine on a sole-source basis in our updated analysis. In addition to development of the F135 engine design, Pratt & Whitney also has responsibility for the common components that will be designed and developed to go on all JSF aircraft, regardless of which contractor provides the engine core. This responsibility supports the JSF program level requirement that the engine be interchangeable—either engine can be used in any aircraft variant. In the event that Pratt &Whitney is made the sole-source engine provider, future configuration changes to the aircraft and common components could be optimized for the F135 engine. Our updated analysis estimated the additional costs under two competitive scenarios beginning in fiscal year 2015: one in which contractors are each awarded 50 percent of the total engine purchases (50/50 split) and one in which there is an annual 70/30 percent award split of total engine purchases to either contractor,. Without consideration of potential savings, the additional costs of competition total about $5.7 billion under the first scenario and about $4.5 billion under the second scenario. Table 4 shows the additional cost associated with competition under these two scenarios. The disparity in costs between the two competitive scenarios reflects the loss of learning resulting from lower production volume that is accounted for in the projected recurring flyaway costs used to construct each estimate.