Unmanned Aircraft Systems
Global Hawk Cost Increase Understated in Nunn-McCurdy Report Gao ID: GAO-06-222R December 15, 2005To provide for oversight of cost growth in DOD major defense acquisition programs, Congress passed legislation, commonly referred to as Nunn-McCurdy, which requires DOD to notify Congress when a program's unit cost growth exceeds (or breaches) the latest approved acquisition program baseline by at least 15 percent. If the cost growth has increased at least 25 percent over the baseline, the Secretary of Defense must certify to Congress that (1) the program is essential to national security; (2) no alternatives exist which will provide equal or greater military capability at less cost; (3) new program acquisition or procurement unit cost estimates are reasonable; and (4) the management structure is adequate to control unit cost. On April 13, 2005, the Acting Secretary of the Air Force formally notified Congress that the procurement unit cost of the Global Hawk had increased 18 percent over the baseline estimate. As requested, we are in the process of reviewing the acquisition strategies and requirements for several unmanned aircraft systems, including the Global Hawk. While that work will not be completed for some months, we are issuing this correspondence because we have developed important information on the accuracy and completeness of the Air Force's reporting of the Global Hawk unit cost increase that needs attention.
The Air Force's Nunn-McCurdy report to Congress understates the unit cost increase in that it does not include $400.6 million in known additional procurement costs. Including these costs results in procurement unit cost growth of 31 percent over the current baseline versus the 18 percent reported by the Air Force. In our view, this larger unit cost increase should have been reported to Congress with the required certification by the Secretary of Defense. The additional costs not included in the Air Force's reporting are for the purchase and installation of sensors, enhancements to communications equipment and ground stations, parts procurement, and other items required to achieve the system's initial, full-up capability. Air Force Global Hawk program budget documents included these costs before submitting the April 2005 Nunn-McCurdy notice to Congress and before the March 2005 publication of the annual Selected Acquisition Report. However, these costs were removed after the program office budget reporting documents were submitted to DOD offices in the Pentagon. Office of Secretary of Defense (OSD) officials explained that these costs had been recategorized as modifications that have historically been excluded from baseline measurements. We believe these costs should have been reported since they are needed to achieve the system's required capabilities.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-222R, Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in Nunn-McCurdy Report
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2005.
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United States Government Accountability Office:
Washington, DC 20548:
December 15, 2005:
The Honorable John W. Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
Subject: Unmanned Aircraft Systems: Global Hawk Cost Increase
Understated in Nunn-McCurdy Report:
To provide for oversight of cost growth in DOD major defense
acquisition programs, Congress passed legislation, commonly referred to
as Nunn-McCurdy, which requires DOD to notify Congress when a program's
unit cost growth exceeds (or breaches) the latest approved acquisition
program baseline by at least 15 percent.[Footnote 1] If the cost growth
has increased at least 25 percent over the baseline, the Secretary of
Defense must certify to Congress that (1) the program is essential to
national security; (2) no alternatives exist which will provide equal
or greater military capability at less cost; (3) new program
acquisition or procurement unit cost estimates are reasonable; and (4)
the management structure is adequate to control unit cost.
On April 13, 2005, the Acting Secretary of the Air Force formally
notified Congress that the procurement unit cost of the Global Hawk had
increased 18 percent over the baseline estimate. As you requested, we
are in the process of reviewing the acquisition strategies and
requirements for several unmanned aircraft systems,[Footnote 2]
including the Global Hawk. While that work will not be completed for
some months, we are issuing this correspondence because we have
developed important information on the accuracy and completeness of the
Air Force's reporting of the Global Hawk unit cost increase that needs
attention.
Summary:
The Air Force's Nunn-McCurdy report to Congress understates the unit
cost increase in that it does not include $400.6 million in known
additional procurement costs.[Footnote 3] Including these costs results
in procurement unit cost growth of 31 percent over the current baseline
versus the 18 percent reported by the Air Force. In our view, this
larger unit cost increase should have been reported to Congress with
the required certification by the Secretary of Defense. The additional
costs not included in the Air Force's reporting are for the purchase
and installation of sensors, enhancements to communications equipment
and ground stations, parts procurement, and other items required to
achieve the system's initial, full-up capability. Air Force Global Hawk
program budget documents included these costs before submitting the
April 2005 Nunn-McCurdy notice to Congress and before the March 2005
publication of the annual Selected Acquisition Report.[Footnote 4]
However, these costs were removed after the program office budget
reporting documents were submitted to DOD offices in the Pentagon.
Office of Secretary of Defense (OSD) officials explained that these
costs had been recategorized as modifications that have historically
been excluded from baseline measurements. We believe these costs should
have been reported since they are needed to achieve the system's
required capabilities.
We are recommending that the Office of the Secretary of Defense revise
the Global Hawk Selected Acquisition Report and take the necessary
actions to comply with the Nunn-McCurdy legislation for reporting and
certification.
Reasons for Nunn-McCurdy Cost Breach:
The Air Force's April 2005 letter to Congress stated that the 18-
percent breach was primarily the result of increasing aircraft capacity
to accommodate requirements for a more sophisticated, integrated
imagery and signals intelligence sensor suite. This letter refers to
the program restructuring of the Global Hawk program in 2002 that added
a new, larger, and more capable aircraft (designated the RQ-4B). Before
2002, the Global Hawk program had planned to procure only the smaller
version now designated the RQ-4A. The Air Force letter explains that
the final design of the RQ-4B required more extensive changes to the
fuselage, tail, and landing gear than expected when the new, larger
Global Hawk system was baselined in 2002. The December 31, 2004,
Selected Acquisition Report showed the reasons for unit cost increases
as:
* requirements growth,
* increased sensor cost,
* deferred aircraft purchases,
* increased costs of airframe,
* increased support requirements and initial spares, and:
* increased government costs for acceptance tests, design changes, and
mission support.
Additionally, program officials told us that they originally expected
substantial commonality between the A and B models but, as designs were
finalized and production started, it was apparent that the B model was
more different, more complex, and more costly than anticipated.
Costs Not Included in Global Hawk Nunn-McCurdy Notice to Congress:
Program officials said the unreported costs ($400.6 million) are for
items needed to bring the RQ-4B to a common configuration and to meet
warfighter requirements. Such items as signals intelligence sensors and
ground station enhancements will be retrofitted on aircraft and ground
equipment after they have left the production line. Development and
procurement cost increases and schedule slips have resulted in numerous
adjustments to funding plans that included deferring some items to
later in the program and reclassifying costs. For example, officials
originally planned to procure 25 signals intelligence sensors and
install them on the aircraft production line to meet the warfighter's
requirements for fully configured multi-intelligence aircraft. These
costs were budgeted for last year in the aircraft procurement weapon
system account and were included in the December 2002 acquisition
program baseline. Because of cost pressures and schedule changes,
officials moved the cost for 10 of these sensors--$122.6 million worth-
-to a different funding account used to modify aircraft after they are
delivered. The new plan is to install these 10 sensors in aircraft
after they have left the production line. Because historical DOD
practice does not include modifications in the program baseline,
funding for these sensors and the other modification items were
excluded for the Nunn-McCurdy reporting purposes.
OSD officials responsible for the Selected Acquisition Reports told us,
historically, modification costs have not been included in the
calculations in these reports to Congress. This is because modification
costs were typically used to add new capabilities or make changes after
a fully capable weapon system had been delivered. However, in the case
of the Global Hawk, the modification costs for the sensors and other
items were intended to deliver the full initial capability and, in our
view, should have been included in the unit and total cost reporting to
Congress. In response to our inquiry, OSD officials recently initiated
a review of policies and practices to evaluate Global Hawk reporting
and also to determine whether this issue affects other acquisition
programs. OSD and Air Force officials said a factor contributing to
uncertainty is that DOD policies and practices have been increasingly
streamlined to provide less detailed guidance and may need to be
updated to keep pace with new business practices such as evolutionary
and spiral development.
As shown in table 1, the impact of adding $400.6 million for
modification costs would have resulted in a breach of 31 percent over
baseline and required the Secretary to certify the program to Congress.
This additional cost would raise the average procurement cost for each
aircraft to $74.8 million compared with $57.0 million estimated in the
December 2002 baseline. We further note that adding modification costs
would also result in a breach of program acquisition unit cost growth
of almost 19 percent compared with the 11 percent reported in the
Selected Acquisition Report.
Table 1: Global Hawk Procurement Unit Cost (in millions of dollars):
Procurement Cost;
Baseline estimate (Dec 2002): $2,904.6;
Program estimate (Mar 2005): $3,416.1;
Retrofit costs not reported: $400.6;
GAO estimate including retrofit costs: $3,816.7.
Quantity;
Baseline estimate (Dec 2002): 51;
Program estimate (Mar 2005): 51;
GAO estimate including retrofit costs: 51.
Unit cost & Change;
Baseline estimate (Dec 2002): $57.0;
Program estimate (Mar 2005): $67.0;
Percent change reported to Congress: 18%;
GAO estimate including retrofit costs: $74.8;
Percent change, including retrofit costs: 31%.
Note: Costs expressed in base year 2000 dollars.
Source: Air Force (data); GAO (analysis).
[End of table]
The Air Force is in the midst of rebaselining the cost and schedule for
acquiring the Global Hawk system. The Defense Acquisition Board is
scheduled to review the new baseline in November 2005. This will be the
program's fourth baseline since the original baseline at system
development start in March 2001.
Conclusions:
The Selected Acquisition Reports and unit cost reporting requirements
are intended to inform Congress of the costs to develop and procure
weapon systems and should accurately include all costs necessary to
deliver the full capability stipulated in acquisition and requirements
documents that support the business case for new weapon system
development programs. The Global Hawk program does not meet this
standard and therefore Congress does not have accurate and complete
information about this program with which to make decisions on current
and future budget requests.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Under Secretary
of Defense for Acquisition, Technology, and Logistics to revise the
Global Hawk report and take the necessary actions to comply with the
Nunn-McCurdy legislation for reporting and certification.
Agency Comments:
In written comments on a draft of this report, DOD partially concurred
with our recommendation. DOD agreed that retrofit costs for the 10
signals intelligence sensors and one radar sensor were previously in
the approved baseline and should have been included in the unit cost
reporting. Including these items would have increased unit costs by
22.5 percent over the baseline versus the 18 percent reported to
Congress and in the annual Selected Acquisition Report. DOD did not
agree with us that funding for the other remaining modifications was
also reportable, maintaining that these items meet the historical
reporting practice for modifications to provide more performance
capability than defined in the original approved acquisition program
baseline. DOD's written comments also said that OSD will review the
Department's acquisition reporting policies and practices and determine
what changes, if any, are necessary to keep pace with new business
practices such as evolutionary acquisition and will provide additional
guidance to clarify current practices regarding weapon system
modification and retrofit accounting.
We continue to believe that Global Hawk unit procurement cost increase
exceeds the 25-percent threshold established in law. Besides the costs
for sensors and the radar, we believe other major modification costs
identified in our report should have been included in unit cost
reporting because they represent the cost to deliver capability
originally agreed to in the acquisition program baseline. For example,
other items not reported by DOD included $108 million in funding for
technical solutions needed to meet required warfighter capabilities in
the operational requirements document for communicating with ground
forces. Furthermore, we understand that the Air Force plans to notify
Congress that unit procurement costs for the Global Hawk program have
increased over the 25-percent threshold and will initiate the
certification process required by Nunn-McCurdy. Finally, we are pleased
that DOD plans to review acquisition and accounting policies and
practices concerning modifications to determine if changes are needed.
We believe that keeping policy and practice aligned will facilitate
more accurate tracking and reporting and allow for greater oversight
for major acquisition program baselines and unit costs over time.
Scope and Methodology:
This report is the result of a broader ongoing review of the
acquisition strategies being applied on Unmanned Aircraft Vehicle
programs, including Global Hawk, Predator, and Joint Unmanned Combat
Air Systems. To examine the accuracy and completeness of the Air
Force's Nunn-McCurdy report on Global Hawk, we obtained budget and
programmatic data and compared changes in data from prior periods. This
comparison showed that modification dollars were excluded in
calculations used to prepare the final Nunn-McCurdy report and the
annual Selected Acquisition Report. We discussed this analysis with Air
Force Global Hawk program officials at Wright-Patterson Air Force Base,
Ohio. We also discussed our analysis of Global Hawk and Nunn-McCurdy
reporting and policy with officials of the Office of Secretary of
Defense, Under Secretary for Acquisition, Technology, and Logistics. We
discussed Global Hawk requirements with Air Combat Command officials at
Langley Air Force Base, Virginia. We conducted our work from September
through November 2005 in accordance with generally accepted government
auditing standards.
We are sending copies of this letter to the Honorable Donald H.
Rumsfeld, Secretary of Defense, and Michael W. Wynne, Secretary of the
Air Force. We will make copies available to other interested parties
upon request. The letter is also available at no charge on the GAO Web
site at http://www.gao.gov.
Please contact me at (202) 512-4841 if you or your staffs have any
questions. Contact points for our offices of Congressional Relations
and Public Affairs may be found on the last page of this report. Other
major contributors to this letter were Mike Hazard, Assistant Director;
Bruce Fairbairn; Rae Ann Sapp; and Charlie Shivers III.
Sincerely yours,
Signed by:
Michael J. Sullivan, Director:
Acquisition and Sourcing Management:
Enclosure:
[End of section]
Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:
DEC 02 2005:
Mr. Michael J. Sullivan:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Sullivan:
This is the Department of Defense (DoD) response to the GAO draft
report, 'UNMANNED AIRCRAFT SYSTEMS: Global Hawk Cost Increases
Understated in Nunn-McCurdy Report,' dated December 15, 2005 (GAO Code
120462/120498/GAO-06-222R).
The DoD partially concurs with the report's recommendation for
executive action. The rationale for the DoD's position is enclosed.
The Department appreciates the opportunity to comment on the draft
report. For further questions concerning this report, please contact
Dyke Weatherington, Deputy, Unmanned Aircraft Systems Planning Task
Force, 703-695-6188.
Sincerely,
Signed by:
Nancy L. Spruill:
Director:
Acquisition Resources and Analysis:
Enclosure: As stated:
GAO DRAFT REPORT - DATED NOVEMBER 4, 2005 GAO CODE 120462/120498/GAO-06-
222R:
"UNMANNED AIRCRAFT SYSTEMS: GLOBAL HAWK COST INCREASES UNDERSTATED IN
NUNN-MCCURDY REPORT"
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Under Secretary of
Defense (Acquisition, Technology and Logistics) revise the Global Hawk
report and take the necessary actions to comply with the Nunn-McCurdy
legislation for reporting and certification. (p. 4/GAO Draft Report).
DOD RESPONSE: Partial Concur. The current reporting for the Global Hawk
program is consistent with the long standing Department practice to
exclude field modification costs in Selected Acquisition Reports (SARs)
and Nunn-McCurdy unit cost calculations. Historically, modification
activities upgrade program capability, above that defined in the
approved Acquisition Program Baseline (APB). The GAO does, however,
make a legitimate point that some of the modification costs,
specifically those costs for 10 signals intelligence (SIGINT) sensors,
were previously in the APB and moving these costs to the modification
category did not provide a completely accurate presentation of the
current program financial status. These costs were moved to the
modification category as a result of the Department's decision to
reduce concurrence in the Global Hawk program, a recommendation that
GAO made in a previous report.
The GAO assertion that the Nunn-McCurdy notification reported by the
Air Force in April 2005 should have been calculated at 31 %, however,
overstates their position. The GAO identified 10 SIGINT sensors that
were once calculated in the APB and then moved to the modification
category (they did not identify one radar sensor that fell into this
category). However, the GAO included the entire modification account in
their calculation, most of which is for modifications that meet the
historical reporting criteria. Based on the GAO assessment, the unit
cost report accounting should have included an additional 10 SIGINT
sensors, and one radar sensor only. The impact on unit cost increase
would have been 22.5%, not 31%.
The Department is committed to full and open disclosure for all
attributes of DoD acquisition programs. The Department will, therefore,
report in the upcoming Selected Acquisition Report the unit cost
calculations against the approved APB, including applicable
modification costs.
OSD will conduct a review of the Department's acquisition reporting
policies and practices regarding modifications. After further
investigation and review, the Department will determine what changes,
if any, need to be made to keep pace with new business practices such
as evolutionary development. At a minimum, additional guidance will be
provided to clarify the current practice regarding weapon system
modification and retrofit accounting.
[End of section]
FOOTNOTES
[1] 10 U.S.C. 2433 establishes the requirement for unit cost reports.
The requirement became permanent law in 1982 in Public Law 97-252,
section 1107. Two measures are tracked: procurement unit cost (total
funds programmed for procurement divided by the total number of fully
configured items to be procured) and program acquisition unit cost
(total cost of development, procurement, and system-specific military
construction divided by the number of fully configured end items to be
produced). To eliminate the effects of inflation, costs are expressed
in constant base year dollars.
[2] Rather than referring to unmanned aerial vehicles, we are adopting
DOD's new parlance of unmanned aircraft systems. DOD recently began
changing its references to better reflect that the air vehicle itself
is part of a larger system (e.g. payloads, ground stations, and
communication equipment) and to reflect the Federal Aviation
Administration's classification of unmanned vehicles as aircraft.
[3] This and other costs are expressed in terms of base year 2000
dollars to facilitate unit cost comparisons across years. The total
cost expressed in then-year, budgeted dollars for items not included in
the unit cost report is $487.6 million.
[4] For the purpose of congressional oversight and decision making, DOD
is required by law to report to Congress the unit costs for each major
defense acquisition program. DOD reports this unit cost for both the
current budget estimate and the most recent acquisition program
baseline, which describes the cost, quantity, schedule, and performance
goals of a program. DOD reports these comparisons in a Selected
Acquisition Report. 10 U.S.C. 2432 establishes the requirements for
these reports. Another statute, 10 U.S.C. 2433, establishes the
requirement for unit cost reports. If certain program cost increase
thresholds are exceeded (known as unit cost or Nunn-McCurdy breaches),
DOD is required to report to Congress and, if applicable, certify the
program to Congress.
