Defense Acquisitions
Improved Business Case Key for Future Combat System's Success Gao ID: GAO-06-564T April 4, 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 5 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) our recent recommendations to DOD and matters for congressional consideration regarding the FCS program.
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, multiprogram 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. Last month, we made recommendations to the Secretary of Defense to take several actions, prior to DOD's long-term commitment to the program, to improve the FCS business case and establish knowledge-based measures to guide oversight of FCS progress. These recommendations detailed specific steps DOD should take leading up to a major milestone review of the program in 2008 when the program is expected to have achieved the level of knowledge it should have had in 2003. We believe it is at this point the program should be reviewed as to whether it has established enough of a solid business case to continue. While DOD concurred with the intent of our recommendations, it did not agree to limit its commitment to the FCS program or to do much beyond what it had already planned to do. This concerns us. As a result, we have also raised to Congress several matters for consideration to ensure that FCS has a sound business case before future funding commitments are made. We believe the actions we have recommended to DOD and the matters for consideration we have presented to Congress are necessary to improve the prospects for FCS success and to protect the government's ability to change course if the program does not progress as the Army plans.
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-06-564T, Defense Acquisitions: Improved Business Case Key for Future Combat System's Success
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Testimony:
Before the Subcommittee on Tactical Air and Land Forces, Committee on
Armed Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Tuesday, April 4, 2006:
Defense Acquisitions:
Improved Business Case Key for Future Combat System's Success:
Statement of Paul L. Francis, Director, Acquisition and Sourcing
Management:
GAO-06-564T:
GAO Highlights:
Highlights of GAO-06-564T, a testimony before the Subcommittee on
Tactical Air and Land Forces, Committee on Armed Services, House of
Representatives:
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 5 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) our recent recommendations to DOD and matters for
congressional consideration regarding the FCS program.
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, multiprogram 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.
Last month, we made recommendations to the Secretary of Defense to take
several actions, prior to DOD‘s long-term commitment to the program, to
improve the FCS business case and establish knowledge-based measures to
guide oversight of FCS progress. These recommendations detailed
specific steps DOD should take leading up to a major milestone review
of the program in 2008 when the program is expected to have achieved
the level of knowledge it should have had in 2003. We believe it is at
this point the program should be reviewed as to whether it has
established enough of a solid business case to continue. While DOD
concurred with the intent of our recommendations, it did not agree to
limit its commitment to the FCS program or to do much beyond what it
had already planned to do. This concerns us. As a result, we have also
raised to Congress several matters for consideration to ensure that FCS
has a sound business case before future funding commitments are made.
We believe the actions we have recommended to DOD and the matters for
consideration we have presented to Congress are necessary to improve
the prospects for FCS success and to protect the government‘s ability
to change course if the program does not progress as the Army plans.
www.gao.gov/cgi-bin/getrpt?GAO-06-564T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Paul Francis at (202) 512-
2811 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 linking 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 5 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.
My statement today is based on our recently issued report about the
need for an improved business case for the FCS. This report responds to
the National Defense Authorization Act for Fiscal Year 2006, which
requires GAO to report annually on the product development phase of the
FCS's acquisition.[Footnote 1] Recently, we testified before the Senate
Armed Services Committee about the FCS's business case and related
business arrangements.[Footnote 2]
Today, I would like to discuss (1) the scope of the business case that
we feel is necessary for the FCS to be successful and (2) our recent
recommendations to DOD and matters for congressional consideration
regarding 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 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 predicated on technological breakthroughs. Thus,
technical problems, which accompany immaturity, not only pose
traditional risks to cost, schedule, and performance, but also pose
risks to the new fighting concepts envisioned by the Army.
A full commitment to the Army's strategy for acquiring FCS is not yet
warranted because the Army has not demonstrated sufficient knowledge by
providing the confidence it can deliver a fully capable FCS within
projected costs and time frames. As DOD proceeds with its decisions, it
must preserve its ability to change course on acquiring FCS
capabilities to guard against a situation in which FCS will have to be
acquired at any cost. It must also be able to hold the Army accountable
for delivering FCS within budgeted resources. Last month, we made
recommendations to the Secretary of Defense to take several actions,
prior to DOD's long-term commitment to the program, to improve the FCS
business case and establish knowledge-based measures to guide oversight
of FCS progress. These recommendations detailed specific steps DOD
should take leading up to a major milestone review of the program in
2008, when the program is expected to have achieved the level of
knowledge it should have had in 2003. We believe it is at this point
the program should be reviewed as to whether it has established enough
of a solid business case to continue. While DOD concurred with the
intent of our recommendations, it did not agree to limit its commitment
to the FCS program or to do much beyond what it had already planned to
do. This concerns us. As a result, we have also raised to Congress
several matters for consideration to ensure that FCS has a sound
business case before future funding commitments are made. We believe
the actions we have recommended to DOD and the matters for
consideration we have presented are necessary to improve the prospects
for FCS success and to protect the government's ability to change
course if the program does not progress as the Army plans.
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 linked by an information
network. These vehicles, weapons, and equipment will constitute the
majority of the equipment needed for a brigade combat team. The Army
plans to buy 15 brigades' worth of FCS equipment by 2025. See figure 1
for the various elements of the FCS program.
Figure 1: FCS's Core Systems:
[See PDF for image]
[End of figure]
If successful, the FCS system-of-systems concept will leverage
individual capabilities of weapons and platforms and will facilitate
interoperability and open system designs. This would be a significant
improvement over the traditional approach of building superior
individual weapons that must be retrofitted and netted together after
the fact. This transformation, in terms of both operations and
equipment, is under way with the full cooperation of the Army
warfighter community. In fact, the development and acquisition of FCS
is being accomplished using a uniquely collaborative relationship among
the Army's developers, the participating contractors, and the
warfighter community.
FCS Restructures the Program and Changes Contracting Approach:
As a key element of its efforts to transform itself, the Army has
recognized FCS from its outset as the greatest technology and
integration challenge it has ever undertaken. In May 2003, DOD approved
the FCS program to begin the system development and demonstration
phase, a milestone that ideally marks the completion of technology
development and the start of product development. However, FCS's entry
into this phase was premature given the program had failed to satisfy
basic tenets of DOD acquisition policy. We have reported that, as FCS
started product development, it did not have mature technologies or
adequately defined requirements.
Responding to direction from the Army Chief of Staff, the Army
announced in July 2004 its plans to restructure the FCS program. The
Army added 4 years to develop and mature the manned ground vehicles,
added more demonstrations and experiments, and established an
evaluation unit to demonstrate FCS capabilities. The restructuring
reintroduced 4 systems that previously had been left unfunded, raising
the total number of FCS-related systems to 18. The restructure also
included plans to spin off mature FCS capabilities as they become
available to current force units. With the restructuring, the FCS
program now plans to achieve initial operational capability in fiscal
year 2015 and full operational capability in fiscal year 2017. FCS low-
rate production is expected to start in fiscal year 2012, and full-rate
production in fiscal year 2016. The Army intends to continue FCS
procurement through fiscal year 2025, eventually equipping 15 brigade
combat teams.
The restructuring was not the only major modification to the FCS
program. Because of congressional concerns that the Army's contracting
approach incorporated insufficient safeguards to protect the
government's interests, the Army is preparing a new contract that is to
be completed and finalized in late March 2006 and is based on the
Federal Acquisition Regulation, which governs acquisitions within the
federal government. The new contract will incorporate standard Federal
Acquisition Regulation clauses such as those relating to procurement
integrity, Truth in Negotiations, and Cost Accounting Standards.
Previously, the lead systems integrator had been performing FCS work
for the Army under a contractual instrument called an "other
transaction agreement" that was not subject to the Federal Acquisition
Regulation. The other transaction agreement gave the Army considerable
flexibility to negotiate the terms and conditions for contractors
involved in FCS development. The Army's purpose for using such an
agreement was to encourage innovation and to use its wide latitude in
tailoring business, organizational, and technical relationships to
achieve the program goals. In April 2005, the Army decided to
incorporate into its agreement the procurement integrity, Truth in
Negotiations, and Cost Accounting Standards clauses from the
regulation.
After Congress raised questions about the Army using an other
transaction agreement for the development of a program as large and
risky as FCS and about the Army's choice not to include standard
Federal Acquisition Regulation clauses in the agreement, the Secretary
of the Army directed that the other transaction agreement be converted
to a Federal Acquisition Regulation-based contract. All of the work
performed under the product development phase as of September 2005 will
be accounted for under the prior other transaction agreement, and all
work after September 2005 will be performed under the new contract. The
Army expects the content of the program--its statement of work--will
remain largely the same, and it does not expect the cost, schedule, and
performance of the overall development effort to change materially.
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 demonstrating 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 it is capable of meeting performance
requirements. The critical design review takes place at 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, then 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 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 government auditing standards.
Improved Business Case Is Needed for the FCS's Success:
The FCS program started its product development phase with inadequate
knowledge in several key areas. After almost 3 years and progress in
key areas, the elements of a sound business case, namely firm
requirements, mature technologies, a knowledge-based acquisition
strategy, a realistic cost estimate, and sufficient funding, are not
yet demonstrably present. Given that, an improved business case for the
FCS program is essential to help ensure the program is successful in
the long run. The importance of a business case is amplified by the
fact that the program is developing 18 systems and a network under a
single program office and lead system integrator in the same amount of
time it would take to develop a single system.
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 some FCS system-level requirements will have
to be modified, reduced, or eliminated; the only uncertainty is by how
much. We have previously reported 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 it will be 2008 before the program reaches the point that
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, the Army has not fully matured any of the
technologies critical to FCS's success.[Footnote 3] 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 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 are 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 critical technologies should be
mature to at least a TRL 7 before the start of product development.
Table 1: Number of FCS Critical Technologies Sorted by TRLs:
TRL: TRL 7 and higher;
Critical technology assessment as of April 2003: 1;
Critical technology assessment as of April 2005: 0.
TRL: TRL 6;
Critical technology assessment as of April 2003: 7;
Critical technology assessment as of April 2005: 18.
TRL: TRL 5 and lower;
Critical technology assessment as of April 2003: 24;
Critical technology assessment as of April 2005: 31.
TRL: Total;
Critical technology assessment as of April 2003: 32;
Critical technology assessment as of April 2005: 49.
Source: U.S. Army (data); GAO (analysis and presentation).
Note: The April 2003 assessment was organized into 31 technology areas,
one of which had two different TRL ratings for separate technologies.
For the April 2005 assessment, the original 31 technology areas were
subdivided into 54 individual technologies. Five of the original
technologies are no longer being tracked, leaving a total of 49.
[End of table]
Table 1 shows that in the latest independent FCS technology assessment,
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. 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 2 shows how the Army's strategy for acquiring
FCS involves concurrent development, design reviews occurring late, and
other issues out of alignment with the knowledge-based approach
outlined in DOD policy.
Figure 2: FCS Acquisition Compared with Commercial Best Practices'
Approach:
[See PDF for image]
[End of figure]
Ideally, the preliminary design review occurs at or near the start of
product development. Review at this point 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 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
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 the necessary funding for 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
2 summarizes the growth of the FCS cost estimate.
Table 2: 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. The estimate
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.
The estimate 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 3 compares the funding profiles for the original program and for
the latest restructured program.
Figure 3: Comparison of Original Cost Estimate and Current Cost
Estimate for FCS Program between Fiscal Years 2003 and 2026:
[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 1 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 4]
* 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 about $11 billion in fiscal year
2006 to at least $20 billion by fiscal year 2011. Even if this
optimistic projection comes to pass, FCS annual procurement costs will
dominate the Army procurement funding. If the Army budget remains at
fiscal year 2011 levels, FCS procurement will represent about 60 to 70
percent of Army procurement from fiscal years 2014 to 2022. With the
remainder, the Army will have to address current force upgrades,
including spin-outs from FCS, the procurement of FCS complementary
programs, aviation procurement, trucks, ammunition, and other
equipment. Further, FCS will have to compete for funding with other
Army "big-ticket" items, such as missile defense systems and the future
heavy lift helicopter.
Figure 4 compares the projected FCS budget with the funds the Army
projects for its total procurement budget.
Figure 4: Comparison of FCS Budget with Total Army Procurement Budget:
[See PDF for image]
[End of figure]
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). This situation is typically called a
funding bow wave. The term "bow wave" is used to describe a requirement
for more funds just beyond the years covered in the current defense
plan that are subject to funding constraints. 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. According to an Army official, if all the needed
funding cannot be identified, the Army will consider reducing the FCS
procurement rate or delaying or reducing items to be spun out to
current Army forces. However, reducing the procurement rate would
increase the FCS unit costs and extend the time needed to deploy FCS-
equipped brigade combat teams.
Recent FCS Recommendations and Matters for Congressional Consideration:
In our most recent report on the FCS, we made specific recommendations
to the Secretary of Defense, with the intent that DOD limit its
commitment to the FCS until it demonstrates a solid business case. DOD,
in its response to our draft report, concurred with the intent of the
recommendations but did not agree to limit its commitment to the FCS
program or to take any action beyond what it had already planned to do.
Consequently, we added several matters for congressional consideration
in order to highlight key issues and actions that Congress may want to
take.
Recommendations to DOD:
In our March report we made several specific recommendations to the
Secretary of Defense, which are intended to limit DOD's commitment to
the FCS until a sound business case that is consistent with DOD
acquisition policy and best practices can be clearly demonstrated.
Specifically, we recommended that the Secretary of Defense lay the
groundwork for the Army's development of a sound FCS business case by
tasking the spring 2006 Defense Acquisition Board to do the following:
* Revaluate the FCS business case--including requirements,
technologies, complementary programs, acquisition strategy, cost, and
funding availability--in light of its own acquisition policies.
* If the business case for FCS is found not to be executable, determine
whether investments in FCS design-and production-related activities
should be curbed until system-level requirements are firm and
technologies are mature.
* If the deficiencies in the FCS business case are judged to be
recoverable, establish the incremental markers that are needed to
demonstrate that FCS is proceeding on a knowledge-based approach and to
hold the Army accountable, through periodic reporting or other means,
for achieving those markers.
We also recommended that the Secretary of Defense reassess the FCS cost
estimate and funding availability based on the independent cost
estimate and any program changes to improve its business case.
Finally, we recommended that the Secretary of Defense establish a
milestone review by the Defense Acquisition Board following the Army's
preliminary design review scheduled for 2008. This should be a go/no-go
review of the FCS program that is based on (1) the program's ability to
demonstrate whether it is meeting the knowledge markers outlined above
at times consistent with DOD policy and best practices and (2) whether
the funds can still be made available to afford its costs.
DOD Comments on Our Report and Our Evaluation:
DOD concurred with the intent of our recommendations but did not agree
to limit its commitment to the FCS program or to take any action beyond
what it had already planned to do. DOD stated it is committed to the
Army's transformation, and that effort, in particular the FCS program,
requires a disciplined, yet agile, acquisition construct. DOD's
response to our draft report did not specifically address our findings
on the FCS program's lack of a sound business case. DOD added that the
Defense Acquisition Executive has determined that the FCS program is
based on a viable acquisition strategy and that it would reevaluate the
FCS acquisition strategy and reassess FCS cost estimates and funding in
the spring 2006 Defense Acquisition Board review. DOD also noted a
Defense Acquisition Board review would be held for the time frame
(2008) of the FCS preliminary design review, but it refrained from
committing to making a milestone decision review.
Regarding a commitment to a milestone review in 2008, we noted that the
FCS was allowed to proceed into Systems Development and Demonstration
prematurely, while DOD had directed a full milestone review update be
held in November 2004. However, the review has not yet occurred, and it
now appears it will not occur. Thus, there is no commitment by DOD to
review the FCS business case (including all elements in addition to the
acquisition strategy), culminating in a go/no-go decision in 2008 based
on the preliminary design review. The increased responsibility of
making a declarative decision adds a higher level of discipline and
accountability than a review implies. We maintain our position that
such a decision is warranted.
Matters for Congressional Consideration:
Based on DOD's response to our report, it did not appear that DOD
planned to assess the FCS business case against best practices or its
own policies. Nor did DOD agree to hold a go/no-go milestone review in
2008 based on the preliminary design review. Congress will likely be
asked to approve fiscal years 2008 and 2009 funding requests before the
FCS business case is adequately demonstrated. In light of DOD's
response, Congress should consider directing the Secretary of Defense
to:
* report on the results of the May 2006 Defense Acquisition Board's
review of the FCS program business case in the areas of requirements,
technologies, acquisition strategy, cost, and funding, and:
* direct DOD to conduct and report the results of a milestone review in
2008, following the preliminary design review, that will be a go/no-go
review of the FCS program based on its demonstration of a sound
business case.
Congress should also consider restricting annual appropriations for
fiscal years 2008 and 2009 for the FCS program until definitive
progress in establishing a sound business case is demonstrated in terms
of firm requirements, mature technologies, a knowledge-based
acquisition strategy, a realistic cost estimate, and sufficient
funding. Most important, the Army must provide sufficient evidence FCS
will work.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions you or members of the subcommittee may have.
Contacts and Staff Acknowledgments:
For future questions about this statement, please contact me at (202)
512-4841. Individuals making key contributions to this statement
include Robert L. Ackley, Noah B. Bleicher, Lily J. Chin, Randolfo E.
DeLeon, Marcus C. Ferguson, William R. Graveline, Michael J. Hesse,
Guisseli Reyes, John P. Swain, and Carrie R. Wilson.
FOOTNOTES
[1] GAO, Defense Acquisitions: Improved Business Case Is Needed for
Future Combat System's Successful Outcome. GAO-06-367. (Washington,
D.C.: Mar. 14, 2006).
[2] GAO, Defense Acquisitions: Business Case and Business Arrangements
Key for Future Combat System's Success. GAO-06-478T. (Washington, D.C.:
Mar. 1, 2006).
[3] Office of the Deputy Assistant Secretary of the Army for Research
and Technology, Technology Readiness Assessment Update, April 2005.
[4] 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.
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