Defense Acquisitions
Business Case and Business Arrangements Key for Future Combat System's Success Gao ID: GAO-06-478T March 1, 2006The Future Combat System (FCS) is a networked family of weapons and other systems in the forefront of efforts by the Army to become a lighter, more agile, and more capable combat force. When considering complementary programs, projected investment costs for FCS are estimated to be on the order of $200 billion. FCS's cost is of concern given that developing and producing new weapon systems is among the largest investments the government makes, and FCS adds significantly to that total. Over the last five years, the Department of Defense (DOD) doubled its planned investments in such systems from $700 billion in 2001 to $1.4 trillion in 2006. At the same time, research and development costs on new weapons continue to grow on the order of 30 to 40 percent. FCS will be competing for significant funds at a time when Federal fiscal imbalances are exerting great pressures on discretionary spending. In the absence of more money being available, FCS and other programs must be executable within projected resources. Today, I would like to discuss (1) the business case needed for FCS to be successful and (2) related business arrangements that support that case.
There are a number of compelling aspects of the FCS program, and it is hard to argue with the program's goals. However, the elements of a sound business case for such an acquisition program--firm requirements, mature technologies, a knowledge-based acquisition strategy, a realistic cost estimate and sufficient funding--are not yet present. FCS began product development prematurely in 2003. Since then, the Army has made several changes to improve its approach for acquiring FCS. Yet, today, the program remains a long way from having the level of knowledge it should have had before starting product development. FCS has all the markers for risks that would be difficult to accept for any single system, much less a complex, multi-system effort. These challenges are even more daunting in the case of FCS not only because there are so many of them but because FCS represents a new concept of operations that is predicated on technological breakthroughs. Thus, technical problems, which accompany immaturity, not only pose traditional risks to cost, schedule, and performance; they pose risks to the new fighting concepts envisioned by the Army. Many decisions can be anticipated that will involve trade-offs the Government will make in the program. Facts of life, like technologies not working out, reductions in available funds, and changes in performance parameters, must be anticipated. It is important, therefore, that the business arrangements for carrying out the FCS program--primarily in the nature of the development contract and in the lead system integrator (LSI) approach-- preserve the government's ability to adjust course as dictated by these facts of life. At this point, the $8 billion to be spent on the program through fiscal year 2006 is a small portion of the $200 billion total. DOD needs to guard against letting the buildup in investment limit its decision making flexibility as essential knowledge regarding FCS becomes available. As the details of the Army's new FCS contract are worked out and its relationship with the LSI evolves, it will be important to ensure that the basis for making additional funding commitments is transparent. Accordingly, markers for gauging knowledge must be clear, incentives must be aligned with demonstrating such knowledge, and provisions must be made for the Army to change course if the program progresses differently than planned.
GAO-06-478T, Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System's Success
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Testimony before the Subcommittee on Airland, Committee on Armed
Services, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:30 p.m. EST:
Wednesday, March 1, 2006:
Defense Acquisitions:
Business Case and Business Arrangements Key for Future Combat System's
Success:
Statement of Paul L. Francis, Director, Acquisition and Sourcing
Management:
GAO-06-478T:
GAO Highlights:
Highlights of GAO-06-478T, testimony before the Subcommittee on
Airland, Committee on Armed Services, U.S. Senate:
Why GAO Did This Study:
The Future Combat System (FCS) is a networked family of weapons and
other systems in the forefront of efforts by the Army to become a
lighter, more agile, and more capable combat force. When considering
complementary programs, projected investment costs for FCS are
estimated to be on the order of $200 billion.
FCS‘s cost is of concern given that developing and producing new weapon
systems is among the largest investments the government makes, and FCS
adds significantly to that total. Over the last five years, the
Department of Defense (DOD) doubled its planned investments in such
systems from $700 billion in 2001 to $1.4 trillion in 2006. At the same
time, research and development costs on new weapons continue to grow on
the order of 30 to 40 percent.
FCS will be competing for significant funds at a time when Federal
fiscal imbalances are exerting great pressures on discretionary
spending. In the absence of more money being available, FCS and other
programs must be executable within projected resources.
Today, I would like to discuss (1) the business case needed for FCS to
be successful and (2) related business arrangements that support that
case.
What GAO Found:
There are a number of compelling aspects of the FCS program, and it is
hard to argue with the program‘s goals. However, the elements of a
sound business case for such an acquisition program”firm requirements,
mature technologies, a knowledge-based acquisition strategy, a
realistic cost estimate and sufficient funding”are not yet present. FCS
began product development prematurely in 2003. Since then, the Army has
made several changes to improve its approach for acquiring FCS. Yet,
today, the program remains a long way from having the level of
knowledge it should have had before starting product development. FCS
has all the markers for risks that would be difficult to accept for any
single system, much less a complex, multi-system effort. These
challenges are even more daunting in the case of FCS not only because
there are so many of them but because FCS represents a new concept of
operations that is predicated on technological breakthroughs. Thus,
technical problems, which accompany immaturity, not only pose
traditional risks to cost, schedule, and performance; they pose risks
to the new fighting concepts envisioned by the Army.
Many decisions can be anticipated that will involve trade-offs the
Government will make in the program. Facts of life, like technologies
not working out, reductions in available funds, and changes in
performance parameters, must be anticipated. It is important,
therefore, that the business arrangements for carrying out the FCS
program”primarily in the nature of the development contract and in the
lead system integrator (LSI) approach”preserve the government‘s ability
to adjust course as dictated by these facts of life. At this point, the
$8 billion to be spent on the program through fiscal year 2006 is a
small portion of the $200 billion total. DOD needs to guard against
letting the buildup in investment limit its decision making flexibility
as essential knowledge regarding FCS becomes available. As the details
of the Army‘s new FCS contract are worked out and its relationship with
the LSI evolves, it will be important to ensure that the basis for
making additional funding commitments is transparent. Accordingly,
markers for gauging knowledge must be clear, incentives must be aligned
with demonstrating such knowledge, and provisions must be made for the
Army to change course if the program progresses differently than
planned.
www.gao.gov/cgi-bin/getrpt?GAO-06-478T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Paul L. Francis at (202)
512-4841 or francisp@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the Department of the Army's
Future Combat System (FCS), a networked family of weapons and other
systems. FCS is in the forefront of efforts to help the Army transform
itself into a lighter, more agile, and more capable combat force by
using a new concept of operations, new technologies, and a new
information network that links whole brigades together. This is a
tremendous undertaking that will involve a total investment cost on the
order of $200 billion.
The context within which the FCS investment is being made is important.
Fiscal imbalances faced by the federal government will continue to
constrain discretionary spending. One of the single largest investments
the government makes is the development and production of new weapon
systems. Over the last five years, the Department of Defense (DOD) has
doubled its planned investments in new weapon systems from about $700
billion in 2001 to nearly $1.4 trillion in 2006. At the same time,
research and development cost growth on new weapons maintains its
historical level of about 30 to 40 percent. This is the lens that must
be used to look at major new investments, such as FCS, because more
money may not be an option for the future. Rather, the key to getting
better outcomes is to make individual programs more executable.
Today, I would like to discuss (1) the business case that is necessary
for the FCS to be successful and (2) the related business arrangements
for carrying out the FCS program.
Summary:
The critical role played by U.S. ground combat forces is underscored
today in Operation Iraqi Freedom. That the Army should ensure its
forces are well equipped with the capabilities they will need in the
coming years is unquestioned. Moreover, the top-level goals the Army
has set for its future force seem inarguable: to be as lethal and
survivable as the current force, but significantly more sustainable and
mobile. However, the Army's approach to meeting these needs--embodied
in the FCS and its complementary systems--does raise questions.
On the one hand, the FCS is the result of the Army leadership's taking
a hard look at how it wants its forces to fight in the future. Army
leadership has had the courage to break with tradition on FCS; it would
have likely been much easier to win support for successor vehicles to
the Abrams and Bradley. On the other hand, FCS does not present a good
business case for an acquisition program. It is necessary that a major
new investment like FCS have a compelling, well-thought out concept,
but this alone is not sufficient. FCS began the product development
prematurely in 2003, and today is a long way from having the level of
knowledge it should have had before committing the high level of
resources associated with a new product development effort. The
elements of a sound business case--firm requirements, mature
technologies, a knowledge-based acquisition strategy, a realistic cost
estimate and sufficient funding--are not yet present. FCS has all the
markers for risks that would be difficult to accept for any single
system. They are even more daunting in the case of FCS not only because
of their multiplicity but because FCS represents a new concept of
operations that is predicated on technological breakthroughs. Thus,
technical problems, which accompany immaturity, not only pose
traditional risks to cost, schedule, and performance; they pose risks
to the new fighting concepts envisioned by the Army.
We are still early in the long journey that FCS entails. Many decisions
lie ahead that will involve trade-offs the government will make. Facts
of life, like technologies not working out, reductions in available
funds, and changes in performance parameters, must be anticipated. It
is important, therefore, that the business arrangements made for FCS,
primarily the development contract and the lead system integrator
approach, preserve the government's ability to adjust course as
dictated by facts and circumstances. At this point, the $8 billion to
be spent on the program through the end of fiscal year 2006 is a small
portion of the $200 billion total. DOD needs to guard against letting
the buildup in investment from limiting its decision making flexibility
as essential knowledge regarding FCS becomes available. As the details
of the Army's new FCS contract are worked out and its relationship with
the lead system integrator evolves, it will be important to ensure that
the basis for making additional funding commitments is transparent.
Accordingly, markers for gauging knowledge must be clear, incentives
must be aligned with demonstrating such knowledge, and provisions must
be made for the Army to change course if the program progresses
differently than planned.
Background:
The FCS concept is part of a pervasive change to what the Army refers
to as the Future Force. The Army is reorganizing its current forces
into modular brigade combat teams, meaning troops can be deployed on
different rotational cycles as a single team or as a cluster of teams.
The Future Force is designed to transform the Army into a more rapidly
deployable and responsive force and to enable the Army to move away
from the large division-centric structure of the past. Each brigade
combat team is expected to be highly survivable and the most lethal
brigade-sized unit the Army has ever fielded. The Army expects FCS-
equipped brigade combat teams to provide significant warfighting
capabilities to DOD's overall joint military operations. The Army is
implementing its transformation plans at a time when current U.S.
ground forces are playing a critical role in the ongoing conflicts in
Iraq and Afghanistan.
The FCS family of weapons includes 18 manned and unmanned ground
vehicles, air vehicles, sensors, and munitions that will be linked by
an information network. These vehicles, weapons, and equipment will
comprise the majority of the equipment needed for a brigade combat
team. The Army plans to buy 15 brigades worth of FCS equipment by 2025.
Elements of a Business Case:
We have frequently reported on the importance of using a solid,
executable business case before committing resources to a new product
development. In its simplest form, this is evidence that (1) the
warfighter's needs are valid and can best be met with the chosen
concept, and (2) the chosen concept can be developed and produced
within existing resources--that is, proven technologies, design
knowledge, adequate funding, and adequate time to deliver the product
when needed.
At the heart of a business case is a knowledge-based approach to
product development that demonstrates high levels of knowledge before
significant commitments are made. In essence, knowledge supplants risk
over time. This building of knowledge can be described as three levels
or knowledge points that should be attained over the course of a
program:
* First, at program start, the customer's needs should match the
developer's available resources--mature technologies, time, and
funding. An indication of this match is the demonstrated maturity of
the technologies needed to meet customer needs.
* Second, about midway through development, the product's design should
be stable and demonstrate that it is capable of meeting performance
requirements. The critical design review is that point of time because
it generally signifies when the program is ready to start building
production-representative prototypes.
* Third, by the time of the production decision, the product must be
shown to be producible within cost, schedule, and quality targets and
have demonstrated its reliability and the design must demonstrate that
it performs as needed through realistic system level testing.
The three knowledge points are related, in that a delay in attaining
one delays the points that follow. Thus, if the technologies needed to
meet requirements are not mature, design and production maturity will
be delayed.
Objectives, Scope, and Methodology:
To develop the information on the Future Combat System program's
progress toward meeting established goals, the contribution of critical
technologies and complementary systems, and the estimates of cost and
affordability, we interviewed officials of the Office of the Under
Secretary of Defense (Acquisition, Technology, and Logistics); the Army
G-8; the Office of the Under Secretary of Defense (Comptroller); the
Secretary of Defense's Cost Analysis Improvement Group; the Director of
Operational Test and Evaluation; the Assistant Secretary of the Army
(Acquisition, Logistics, and Technology); the Army's Training and
Doctrine Command; Surface Deployment and Distribution Command; the
Program Manager for the Future Combat System (Brigade Combat Team); the
Future Combat System Lead Systems Integrator; and other contractors. We
reviewed, among other documents, the Future Combat System's Operational
Requirements Document, the Acquisition Strategy Report, the Baseline
Cost Report, the Critical Technology Assessment and Technology Risk
Mitigation Plans, and the Integrated Master Schedule. We attended
and/or reviewed the results of the FCS System of Systems Functional
Review, In-Process Reviews, Board of Directors Reviews, and multiple
system demonstrations. In our assessment of the FCS, we used the
knowledge- based acquisition practices drawn from our large body of
past work as well as DOD's acquisition policy and the experiences of
other programs. We conducted the above in response to the National
Defense Authorization Act of Fiscal Year 2006, which requires GAO to
annually report on the product development phase of the FCS
acquisition. We performed our review from June 2005 to March 2006 in
accordance with generally accepted auditing standards.
Improved Business Case Is Needed for the FCS's Success:
An improved business case for the FCS program is essential to help
ensure that the program is successful in the long run. The FCS is
unusual in that it is developing 18 systems and a network under a
single program office and lead system integrator in the same amount of
time that it would take to develop a single system. It also started
development with less knowledge than called for by best practices and
DOD policy.
While Progress Has Been Made, Requirements Still Remain Uncertain:
The Army has made significant progress defining FCS's system of systems
requirements, particularly when taking into account the daunting number
of them involved--nearly 11,500 at this level. Yet system-level
requirements are not yet stabilized and will continue to change,
postponing the needed match between requirements and resources. Now,
the Army and its contractors are working to complete the definition of
system level requirements, and the challenge is in determining if those
requirements are technically feasible and affordable. Army officials
say it is almost certain that some FCS system-level requirements will
have to be modified, reduced, or eliminated; the only uncertainty is by
how much. We have previously reported that unstable requirements can
lead to cost, schedule, and performance shortfalls. Once the Army gains
a better understanding of the technical feasibility and affordability
of the system-level requirements, trade-offs between the developer and
the warfighter will have to be made, and the ripple effect of such
trade-offs on key program goals will have to be reassessed. Army
officials have told us that it will be 2008 before the program reaches
the point which it should have reached before it started in May 2003 in
terms of stable requirements.
FCS Success Hinges on Numerous Undemonstrated Technologies and
Complementary Programs:
Development of concrete program requirements depends in large part on
stable, fully mature technologies. Yet, according to the latest
independent assessment[Footnote 1], the Army has not fully matured any
of the technologies critical to FCS's success. Some of FCS's critical
technologies may not reach a high level of maturity until the final
major phase of acquisition, the start of production. The Army considers
a lower level of demonstration as acceptable maturity, but even against
this standard, only about one-third of the technologies are mature. We
have reported that going forward into product development without
demonstrating mature technologies increases the risk of cost growth and
schedule delays throughout the life of the program. The Army is also
facing challenges with several of the complementary programs considered
essential for meeting FCS's requirements. Some are experiencing
technology difficulties, and some have not been fully funded. These
difficulties underscore the gap between requirements and available
resources that must be closed if the FCS business case is to be
executable.
Technology readiness levels (TRL) are measures pioneered by the
National Aeronautics and Space Administration and adopted by DOD to
determine whether technologies were sufficiently mature to be
incorporated into a weapon system. Our prior work has found TRLs to be
a valuable decision-making tool because they can presage the likely
consequences of incorporating a technology at a given level of maturity
into a product development. The maturity levels range from paper
studies (level 1), to prototypes tested in a realistic environment
(level 7), to an actual system proven in mission operations (level 9).
Successful DOD programs have shown that critical technologies should be
mature to at least a TRL 7 before the start of product development.
In the case of the FCS program, the latest independent technology
assessment shows that none of the critical technologies are at TRL 7,
and only 18 of the 49 technologies currently rated have demonstrated
TRL 6, defined as prototype demonstration in a relevant environment.
None of the critical technologies may reach TRL 7 until the production
decision in fiscal year 2012, according to Army officials.[Footnote 2]
Projected dates for FCS technologies to reach TRL 6 have slipped
significantly since the start of the program. In the 2003 technology
assessment, 87 percent of FCS's critical technologies were projected to
be mature to a TRL 6 by 2005. When the program was looked at again in
April 2005, 31 percent of the technologies were expected to mature to a
TRL 6 by 2005, and all technologies are not expected to be mature to
that level until 2009.
FCS Acquisition Strategy Will Demonstrate Design Maturity After
Production Begins:
The knowledge deficits for requirements and technologies have created
enormous challenges for devising an acquisition strategy that can
demonstrate the maturity of design and production processes. Several
efforts within the FCS program are facing significant problems that may
eventually involve reductions in promised capabilities and may lead to
cost overruns and schedule delays. Even if requirements setting and
technology maturity proceed without incident, FCS design and production
maturity will still not be demonstrated until after the production
decision is made. Production is the most expensive phase in which to
resolve design or other problems.
The Army's acquisition strategy for FCS does not reflect a knowledge-
based approach. Figure 1 shows how the Army's strategy for acquiring
FCS involves concurrent development, design reviews that occur late,
and other issues that are out of alignment with the knowledge-based
approach outlined in DOD policy.
Figure 1: Differences between Best Practices' Acquisition Approach and
FCS Approach:
[See PDF for image]
[End of figure]
Ideally, the preliminary design review occurs at or near the start of
product development. Doing so can help reveal key technical and
engineering challenges and can help determine if a mismatch exists
between what the customer wants and what the product developer can
deliver. An early preliminary design review is intended to help
stabilize cost, schedule, and performance expectations. The critical
design review ideally occurs midway into the product development phase.
The critical design review should confirm that the system design is
stable enough to build production-representative prototypes for
testing.
The FCS acquisition schedule indicates several key issues:
* The program did not have the basic knowledge needed for program start
in 2003. While the preliminary design review normally occurs at or near
the start of product development, the Army has scheduled it in fiscal
year 2008, about 5 years after the start of product development.
* Instead of the sequential development of knowledge, major elements of
the program are being conducted concurrently.
* The critical design review is scheduled in fiscal year 2010, just 2
years after the scheduled preliminary review and the planned start of
detailed design. The timing of the design reviews is indicative of how
late knowledge will be attained in the program, assuming all goes
according to plan.
* The critical design review is also scheduled just 2 years before the
initial FCS low-rate production decision in fiscal year 2012, leaving
little time for product demonstration and correction of any issues that
are identified at that time.
The FCS program is thus susceptible to late-cycle churn, which refers
to the additional--and unanticipated--time, money, and effort that must
be invested to overcome problems discovered late through testing.
FCS's Higher Costs May Result in Funding Challenge:
The total cost for the FCS program, now estimated at $160.7 billion
(then year dollars), has climbed 76 percent from the Army's first
estimate. Because uncertainties remain regarding FCS's requirements and
the Army faces significant challenges in technology and design
maturity, we believe the Army's latest cost estimate still lacks a firm
knowledge base. Furthermore, this latest estimate does not include
complementary programs that are essential for FCS to perform as
intended, or all of the necessary funding for FCS spin-outs. The Army
has taken some steps to help manage the growing cost of FCS, including
establishing cost ceilings or targets for development and production;
however, program officials told us that setting cost limits may result
in accepting lower capabilities. As FCS's higher costs are recognized,
it remains unclear whether the Army will have the ability to fully fund
the planned annual procurement costs for the FCS current program of
record. FCS affordability depends on the accuracy of the cost estimate,
the overall level of development and procurement funding available to
the Army, and the level of competing demands.
At the start of product development, FCS program officials estimated
that the program would require about $20 billion in then-year dollars
for research, development, testing, and evaluation and about $72
billion to procure the FCS systems to equip 15 brigade combat teams. At
that time, program officials could only derive the cost estimate on the
basis of what they knew then--requirements were still undefined and
technologies were immature. The total FCS program is now expected to
cost $160.7 billion in then-year dollars, a 76 percent increase. Table
1 summarizes the growth of the FCS cost estimate.
Table 1: Comparison of Original Cost Estimate and Current Cost Estimate
for FCS Program (in billions of then-year dollars):
Research, development, testing, and evaluation;
Original estimate: $19.6;
Revised estimate (as of 1/2006): $30.5;
Percentage increase: 56%.
Procurement;
Original estimate: $71.8;
Revised estimate (as of 1/2006): $130.2;
Percentage increase: 81%.
Total;
Original estimate: $91.4;
Revised estimate (as of 1/2006): $160.7;
Percentage increase: 76%.
Source: Army (data); GAO (analysis and presentation).
[End of table]
According to the Army, the current cost estimate is more realistic,
better informed, and based on a more reasonable schedule. It accounts
for the restructure of the FCS program and its increased scope, the 4-
year extension to the product development schedule, the reintroduction
of four systems that had been previously deferred, and the addition of
a spin-out concept whereby mature FCS capabilities would be provided,
as they become available, to current Army forces. It also reflects a
rate of production reduced from an average of 2 brigade combat teams
per year to an average of 1.5 brigades per year. Instead of completing
all 15 brigades by 2020, the Army would complete production in 2025.
This cost estimate has also benefited from progress made in defining
system of systems requirements.
Figure 2 compares the funding profiles for the original program and for
the latest restructured program.
Figure 2: Comparison of Original Cost Estimate and Current Cost
Estimate for FCS Program between Fiscal Years 2003 and 2026 (in
millions of then-year dollars):
[See PDF for image]
[End of figure]
The current funding profile is lower than the original through fiscal
year 2013, but is substantially higher than the original after fiscal
year 2013. It still calls for making substantial investments before key
knowledge has been demonstrated. Stretching out FCS development by 4
years freed up about $9 billion in funding through fiscal year 2011 for
allocation to other Army initiatives. Originally, FCS annual funding
was not to exceed $10 billion in any one year. Now, the cost estimate
is expected to exceed $10 billion in each of 9 years. While it is a
more accurate reflection of program costs than the original estimate,
the latest estimate is still based on a low level of knowledge about
whether FCS will work as intended. The cost estimate has not been
independently validated, as called for by DOD's acquisition policy. The
Cost Analysis Improvement Group will not release its updated
independent estimate until spring 2006, after the planned Defense
Acquisition Board review of the FCS program.
The latest cost estimate does not include all the costs that will be
needed to field FCS capabilities. For instance,
* Costs for the 52 essential complementary programs are separate, and
some of those costs could be substantial. For example, the costs of the
Joint Tactical Radio System Clusters 1 and 5 programs were expected to
be about $32.6 billion (then-year dollars).[Footnote 3]
* Some complementary programs, such as the Mid-Range Munition and
Javelin Block II, are currently not funded for their full development.
These and other unfunded programs would have to compete for already
tight funding.
* Procurement of the spin-outs from the FCS program to current Army
forces is not yet entirely funded. Procuring the FCS items expected to
be spun out to current forces is expected to cost about $19 billion,
and the needed installation kits may add $4 billion. Adding these items
brings the total required FCS investment to the $200 billion range.
Through fiscal year 2006, the Army will have budgeted over $8 billion
for FCS development. Through fiscal year 2008, when the preliminary
design review is held, the amount budgeted for FCS will total over $15
billion. By the time the critical design review is held in 2010, about
$22 billion will have been budgeted. By the time of the production
decision in 2012, about $27 billion will have been budgeted.
The affordability of the FCS program depends on several key
assumptions. First, the program must proceed without exceeding its
currently projected costs. Second, the Army's annual procurement
budget--not including funds specifically allocated for the modularity
initiative--is expected to grow from between $11 billion to $12 billion
in fiscal year 2006 to at least $20 billion by fiscal year 2011. The
large annual procurement costs for FCS are expected to begin in fiscal
year 2012, which is beyond the current Future Years Defense Plan period
(fiscal years 2006-2011). FCS procurement will represent about 60-70
percent of Army procurement from fiscal years 2014 to 2022. This
situation is typically called a funding bow wave.[Footnote 4] As it
prepares the next Defense Plan, the Army will face the challenge of
allocating sufficient funding to meet the increasing needs for FCS
procurement in fiscal years 2012 and 2013. If all the needed funding
cannot be identified, the Army will have to consider reducing the FCS
procurement rate or delaying or reducing items to be spun out to
current Army forces. However, reducing the FCS procurement rate would
increase the FCS unit costs and extend the time needed to deploy FCS-
equipped brigade combat teams.
FCS Business Arrangements:
Given the risks facing the FCS program, the business arrangements made
for carrying out the program will be critical to protecting the
government's interests. To manage the program, the Army is using a lead
system integrator (LSI), Boeing. As LSI, Boeing carries greater
responsibilities than a traditional prime contractor. The Army is in
the process of finalizing a new Federal Acquisition Regulation (FAR)-
based contract in response to concerns that the previous Other
Transaction Agreement was not the best match for a program of FCS's
size and risks. This contract will establish the expectations, scope,
deliverables, and incentives that will drive the development of the
FCS.
Program Management with A Lead System Integrator:
From the outset of the FCS program, the Army has employed a management
approach that centers on the LSI. The Army did not believe it had the
resources or flexibility to field a program as complex as FCS under the
aggressive timeline established by the then-Army Chief of Staff.
Although there is no complete consensus on the definition of LSI,
generally, it is a prime contractor with increased responsibilities.
These responsibilities may include greater involvement in requirements
development, design and source selection of major system and subsystem
subcontractors. The government has used the LSI approach on other
programs that require system-of-systems integration. The FCS program
started as a joint Defense Advanced Research Projects Agency and Army
program in 2000. In 2002, the Army competitively selected Boeing as the
LSI for the concept technology demonstration phase of FCS. The Army's
intent is to maintain the LSI for the remainder of FCS development.
Boeing and the Army established a relationship to work in what has
become known as a "one-team" management style with several first tier
subcontractors to develop, manage, and execute all aspects of the FCS
program. For example, Boeing's role as LSI extends beyond that of a
traditional prime contractor and includes some elements of a partner to
the government in ensuring the design, development, and prototype
implementation of the FCS network and family of systems. In this role,
Boeing is responsible for (1) engineering a system of systems solution,
(2) competitive selection of industry sources for development of the
individual systems and subsystems, and (3) integrating and testing
these systems to satisfy the requirements of the system of systems
specifications. Boeing is also responsible for the actual development
of two critical elements of the FCS information network--the System of
Systems Common Operating Environment and the Warfighter-Machine
Interface.
The Army participates in program decisions such as make/buy and
competitive selection decisions, and it may disapprove any action taken
under these processes. The decision structure of the program is made up
of several layers of Integrated Product Teams. These teams are co-
chaired by Army and LSI representatives. Government personnel
participate in each of the integrated product teams. This collaborative
structure is intended to force decision making to the lowest level in
the program. Decisions can be elevated to the program manager level,
and ultimately the Army has final decision authority. The teams also
include representation of the Army user community, whose extensive
presence in the program is unprecedented.
The advantages of using an LSI approach on a program like FCS include
the ability of the contractor to know, understand, and integrate
functions across the various FCS platforms. Thus, the LSI has the
ability to facilitate movement of requirements and make trade-offs
across platforms. This contrasts with past practices of focusing on
each platform individually. However, the extent of contractor
responsibility in so many aspects of the FCS program management
process, including responsibility for making numerous cost and
technical tradeoffs and for conducting at least some of the
subcontractor source selections, is also a potential risk. As an
example, many of the subcontractor source selections are for major
weapon systems that, in other circumstances, would have been conducted
by an Army evaluation team, an Army Contracting Officer and a senior-
level Army source selection authority. These decisions, including
procurement decisions for major weapons systems, are now being made by
the LSI with Army involvement. This level of responsibility, as with
other LSI responsibilities in the program management process, requires
careful government oversight to ensure that the Army's interests are
adequately protected now and in the future.
Thus far, the Army has been very involved in the management of the
program and in overseeing the LSI. It is important that as the program
proceeds, the Army continue to be vigilant about maintaining control of
the program and that organizational conflicts of interest are avoided,
such as can arise when the LSI is also a supplier. As discussed in the
next section, the Army intends the new contract to provide additional
protection against potential conflicts.
Contracting Arrangements:
The Army and Boeing entered into a contractual instrument called an
Other Transaction Agreement (OTA). The purpose of the OTA was to
encourage innovation and to use its wide latitude in tailoring
business, organizational, and technical relationships to achieve the
program goals. The original OTA was modified in May 2003 and fully
finalized in December 2003 for the Systems Development and
Demonstration phase of the FCS program. The latest major modification
to the OTA, to implement the 2004 program restructuring, was finalized
in March 2005.
As you know, questions have been raised about the appropriateness of
the Army's use of an OTA for a program as large and risky as FCS. The
Airland Subcommittee held a hearing in March 2005 which addressed this
among other issues. In particular, concern has been raised about the
protection of the government's interests under the OTA arrangement and
the Army's choice to not include standard FAR clauses in the OTA. In
April 2005, the OTA was modified by the Army to incorporate the
procurement integrity, Truth in Negotiations, and Cost Accounting
Standards clauses.
In April 2005, the Secretary of the Army decided that the Army should
convert the OTA to a FAR-based contract. A request for proposals was
issued by the Army on August 15, 2005. An interim letter contract was
issued on September 23, 2005. The Systems Development and Demonstration
work through September 2005 will be accounted for under the OTA and all
future work under the FAR-based contract. Boeing/SAIC and all of the
FCS subcontractors were to submit a new certifiable proposal for the
remainder of Systems Development and Demonstration and that will be the
subject of negotiations with the Army. The Army expects the content of
the program--its statement of work--will remain the same and they do
not expect the cost, schedule, and performance of the overall Systems
Development and Demonstration effort to change materially. The target
date for completion of the finalized FAR contract is March 28, 2006. In
the coming months, we will be taking a close look at the new contract
as part of our continuing work on FCS that is now mandated by the
Defense Authorization Act for Fiscal Year 2006.
The FAR-based contract is expected to include standard FAR clauses,
including the Truth in Negotiations and Cost Accounting Standards
clauses. The letter contract includes Organizational Conflict of
Interest clauses whereby Boeing and SAIC can not compete for additional
FCS subcontracts. Also, other current subcontractors can compete for
work only if they do not prepare the request for proposals or
participate in the source selection process.
The last major revision of the OTA in March 2005 had a total value of
approximately $21 billion. Through September 2005 the Army and LSI
estimate that about $3.3 billion will be chargeable to the OTA. The FAR
based contract will cover all activity after September 2005 and is
expected to have a value of about $17.4 billion. Both the OTA and the
FAR-based contract will be cost plus fixed fee contracts with
additional incentive fees. According to the Army, the fee arrangement
is designed to address the unique relationship between the Army and the
LSI and to acknowledge their "shared destiny" by providing strategic
incentives for the LSI to prove out technologies, integrate systems,
and move the program forward to production, at an affordable cost and
on schedule. In the OTA, the annual fixed fee was set at 10 percent of
estimated cost and the incentive fee available was 5 percent.
The Army plans to change the fee structure for the FCS program in the
new contract. The request for proposals for the new contract proposed a
7 percent fixed fee and an 8 percent incentive fee. The OTA established
10 distinct events where LSI performance will be evaluated against pre-
determined performance, cost, and schedule criteria. (Those events are
expected to be retained in the FAR contract.) One event has already
occurred--the System of Systems Functional Requirements Review was held
in August 2005. The next event is called the Capabilities Maturity
Review and it is expected to occur in June or July 2006. As the details
are worked out, it is important that the new contract encourage
meaningful demonstrations of knowledge and to preserve the government's
ability to act on knowledge should the program progress differently
than planned.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions that you or members of the Subcommittee may have.
Contacts and Staff Acknowledgements:
For future questions about this statement, please contact me at (202)
512-4841. Individuals making key contributions to this statement
include Robert L. Ackley, Lily J. Chin, Noah B. Bleicher, Marcus C.
Ferguson, William R. Graveline, Guisseli Reyes, Michael J. Hesse, John
P. Swain, Robert S. Swierczek, and Carrie R. Wilson.
FOOTNOTES
[1] Technology Readiness Assessment Update, Office of the Deputy
Assistant Secretary of the Army for Research and Technology, April 2005
[2] When the program started seven of 32 technologies were rated at TRL
6 and one was at TRL 7.
[3] The ongoing operational assessment of the Joint Tactical Radio
System functionality could result in a program restructure, which would
have an impact on the program's costs.
[4] The term bow wave is used to describe a requirement for more funds
just beyond the years covered in the Future Years Defense Plan that are
subject to funding constraints.
