Joint Strike Fighter
Impact of Recent Decisions on Program Risks Gao ID: GAO-08-569T March 11, 2008The Joint Strike Fighter (JSF) is the Department of Defense's (DOD) most expensive aircraft acquisition program. DOD is expected to develop, procure, and maintain 2,443 aircraft at a cost of more than $950 billion. DOD plans for the JSF to replace or complement several types of aircraft in the Air Force, Navy, and Marine Corps. Given the program's cost and importance, it is critical that decisions are made within this program to maximize its benefit to the nation. This testimony highlights a number of those decisions and impacts. It (1) discusses emerging risks to the overall program, and (2) updates information for GAO's cost analysis of last year regarding sole-source and competitive scenarios for acquisition and sustainment of the JSF engine. Information on the overall program is from our mandated annual report, also issued today. GAO tracked annual cost and schedule changes, reasons for changes, decisions affecting development, and compared DOD cost estimating methodologies to best practices. For the two engines, GAO updated cost data from last year's testimony and made new projections.
GAO believes recent DOD decisions, while potentially reducing near-term funding needs, could have long-term cost implications. DOD's recent plan to reduce test resources in order to pay for development cost overruns adds more risk to the overall JSF program. Midway through development, the program is over cost and behind schedule. Difficulties in stabilizing aircraft designs and the inefficient manufacturing of test aircraft have forced the program to spend management reserves much faster than anticipated. To replenish this reserve, DOD officials decided not to request additional funding and time for development at this time, but opted instead to reduce test resources. GAO believes this plan will hamper development testing while still not addressing the root causes of related cost increases. While DOD reports that total acquisition costs have increased by $55 billion since a major restructuring in 2004, GAO and others in DOD believe that the cost estimates are not reliable and that total costs will be much higher than currently advertised. Another restructuring appears likely--GAO expects DOD will need more money and time to complete development and operational testing, which will delay the full-rate production decision and the fielding of capabilities to the warfighter. This year, DOD is again proposing cancellation of the JSF alternate engine program. The current estimated remaining life cycle cost for the JSF engine program under a sole-source scenario is $54.9 billion. To ensure competition by continuing the JSF alternate engine program, an additional investment of about $3.5 billion to $4.5 billion may be required. However, potential advantages from a competitive strategy could result in savings equal to or exceeding that amount across the life cycle of the engine. GAO's updated cost analysis suggests that a savings of 9 to 11 percent--about 2 percent less than what GAO estimated last year--would recoup that investment. Also, as we noted last year, prior experience indicates that it is reasonable to assume that competition on the JSF engine program could yield savings of at least that much. Further, non financial benefits in terms of better engine performance and reliability, more responsive contractors, and improved industrial base stability are more likely outcomes under a competitive environment than under a sole-source strategy. While cancellation of the program provides needed funding in the near term, recent test failures for the primary JSF engine underscore the importance and long-term implications of DOD decision making with regard to the ultimate engine acquisition approach.
GAO-08-569T, Joint Strike Fighter: Impact of Recent Decisions on Program Risks
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Testimony before the Subcommittees on Air and Land Forces, and Seapower
and Expeditionary Forces, Committee on Armed Services, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Tuesday, March 11, 2008:
Joint Strike Fighter:
Impact of Recent Decisions on Program Risks:
Statement of Michael Sullivan, Director Acquisition and Sourcing
Management:
GAO-08-569T:
GAO Highlights:
Highlights of GAO-08-569T, a testimony before the Subcommittees on Air
and Land Forces, and Seapower and Expeditionary Forces, Committee on
Armed Services, House of Representatives.
Why GAO Did This Study:
The Joint Strike Fighter (JSF) is the Department of Defense‘s (DOD)
most expensive aircraft acquisition program. DOD is expected to
develop, procure, and maintain 2,443 aircraft at a cost of more than
$950 billion. DOD plans for the JSF to replace or complement several
types of aircraft in the Air Force, Navy, and Marine Corps.
Given the program‘s cost and importance, it is critical that decisions
are made within this program to maximize its benefit to the nation.
This testimony highlights a number of those decisions and impacts. It
(1)discusses emerging risks to the overall program, and (2)updates
information for GAO‘s cost analysis of last year regarding sole-source
and competitive scenarios for acquisition and sustainment of the JSF
engine.
Information on the overall program is from our mandated annual report,
also issued today. GAO tracked annual cost and schedule changes,
reasons for changes, decisions affecting development, and compared DOD
cost estimating methodologies to best practices. For the two engines,
GAO updated cost data from last year‘s testimony and made new
projections.
What GAO Found:
GAO believes recent DOD decisions, while potentially reducing near-term
funding needs, could have long-term cost implications. DOD‘s recent
plan to reduce test resources in order to pay for development cost
overruns adds more risk to the overall JSF program. Midway through
development, the program is over cost and behind schedule. Difficulties
in stabilizing aircraft designs and the inefficient manufacturing of
test aircraft have forced the program to spend management reserves much
faster than anticipated. To replenish this reserve, DOD officials
decided not to request additional funding and time for development at
this time, but opted instead to reduce test resources. GAO believes
this plan will hamper development testing while still not addressing
the root causes of related cost increases. While DOD reports that total
acquisition costs have increased by $55 billion since a major
restructuring in 2004, GAO and others in DOD believe that the cost
estimates are not reliable and that total costs will be much higher
than currently advertised. Another restructuring appears likely”GAO
expects DOD will need more money and time to complete development and
operational testing, which will delay the full-rate production decision
and the fielding of capabilities to the warfighter.
This year, DOD is again proposing cancellation of the JSF alternate
engine program. The current estimated remaining life cycle cost for the
JSF engine program under a sole-source scenario is $54.9 billion. To
ensure competition by continuing the JSF alternate engine program, an
additional investment of about $3.5 billion to $4.5 billion may be
required. However, potential advantages from a competitive strategy
could result in savings equal to or exceeding that amount across the
life cycle of the engine. GAO‘s updated cost analysis suggests that a
savings of 9 to 11 percent”about 2 percent less than what GAO estimated
last year”would recoup that investment. Also, as we noted last year,
prior experience indicates that it is reasonable to assume that
competition on the JSF engine program could yield savings of at least
that much. Further, non financial benefits in terms of better engine
performance and reliability, more responsive contractors, and improved
industrial base stability are more likely outcomes under a competitive
environment than under a sole-source strategy. While cancellation of
the program provides needed funding in the near term, recent test
failures for the primary JSF engine underscore the importance and long-
term implications of DOD decision making with regard to the ultimate
engine acquisition approach.
What GAO Recommends:
This testimony does not have recommendations, but GAO‘s mandated report
recommends revisiting the mid-course plan and improving cost estimates.
DOD substantially agreed.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-569T]. For more information, contact
Michael Sullivan at (202) 512-4841 or sullivanm@gao.gov.
[End of section]
Mr. Chairmen and Members of the Subcommittees:
I am pleased to be here today to discuss the Joint Strike Fighter (JSF)
program. The JSF is the linchpin of future Department of Defense (DOD)
tactical aircraft modernization efforts because of the program's sheer
size and envisioned role to replace or complement several different
types of aircraft providing a wide variety of missions in the Air
Force, Navy, and Marine Corps. Given the program's cost and military
importance, it is critical that decisions are made within this program
to maximize its benefit to the nation. Today, my testimony highlights a
number of those decisions by (1) discussing emerging risks to the
overall program and (2) updating information for the cost analysis we
performed last year regarding sole-source and competitive scenarios for
development, production, and sustainment of the JSF engine. Information
on the overall program risks is taken from our annual mandated report,
also being issued today.[Footnote 1] Using updated cost data, we
projected cost and savings for one and two engine programs utilizing
the parameters and overall methodology from our testimony of last
year.[Footnote 2] Appendix I describes our scope and methodology. For
this testimony, we conducted a performance audit from February 2008 to
March 2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Summary:
In the past year, DOD reported that JSF procurement cost estimates
increased by more than $23 billion due to a 7-year extension to the
procurement period, future price increases, and airframe material cost
increases. The official development cost estimate remained about the
same; however, only by reducing requirements, canceling funding for the
alternate engine program, and reducing test resources. Repercussions
from late release of engineering drawings to the manufacturing floor,
design changes, and parts shortages forced the program to deplete its
management reserve funds by $600 million, but DOD officials have
decided not to request additional funding and time, opting instead to
reduce test resources in order to replenish those reserves. This
decision eliminated two development test aircraft, reduced flight
tests, revised test verification plans, and accelerated the reduction
in the prime contractor's development workforce. Officials from several
prominent defense offices found that the plan was too risky because it
increases the risks of not finding and fixing design and performance
problems until late into production, when it is more expensive and
disruptive to do so. We agree and our report recommends revisiting the
plan to address these concerns and examine alternatives. DOD stated
that it believes the plan is a cost effective approach with a
manageable level of risk, but will monitor execution and revise the
plan if necessary.
We do not think the official JSF program cost estimate is reliable when
judged against best practice cost-estimating standards used throughout
the federal government and industry. Specifically, the program cost
estimate is not comprehensive, accurate, well documented, or credible.
In addition to higher estimates made by the three independent defense
organizations, we found that (1) DOD has identified billions of dollars
in unfunded requirements; (2) there is continued degradation in the
schedule; and (3) both the engine and airframe contracts have
substantial negative cost variances. The prime contractor and program
office are readying a new estimate, which is expected to be much larger
than what is now budgeted. We made several recommendations to improve
cost-estimating and the Department generally agreed. Looking to the
future, the program makes unprecedented demands for funding from the
defense budget--averaging about $11 billion each year for the next two
decades--and must compete with other priorities for the shrinking
federal discretionary dollar.
This year, DOD is again proposing cancellation of the JSF alternate
engine program. Under a sole-source scenario, the current estimated
remaining life cycle cost for the JSF engine program is $54.9
billion.[Footnote 3] By continuing the JSF alternate engine program, an
additional investment of about $3.5 billion to $4.5 billion may be
required to ensure competition. However, as we reported last year, a
competitive strategy could result in potential savings equal to or
exceeding that amount across the life cycle of the engine. In fact, our
updated cost analysis suggests that a savings of 9 to 11 percent--about
2 percent less than what we estimated last year--would recoup that
investment. Further, prior experience indicates that it is reasonable
to assume that competition on the JSF engine program could yield
savings of at least that much. Further, non financial benefits in terms
of better engine performance and reliability, more responsive
contractors, and improved industrial base stability are more likely
outcomes under a competitive environment than under a sole-source
strategy. While cancellation of the program provides additional funding
for other near-term needs, recent test failures for the primary JSF
engine show how the ultimate engine acquisition approach selected could
have long-term implications on DOD decision making.
Background:
The Joint Strike Fighter is DOD's most expensive aircraft acquisition
program. The number of aircraft, engines, and spare parts expected to
be purchased, along with the lifetime support needed to sustain the
aircraft, mean the future financial investment will be significant. DOD
is expected to develop, procure, and maintain 2,443 operational
aircraft at a cost of more than $950 billion over the program's life
cycle. The JSF is being developed in three variants for the U.S.
military: a conventional takeoff and landing aircraft for the Air
Force, a carrier-capable version for the Navy, and a short takeoff and
vertical landing variant for the Marine Corps.[Footnote 4] In addition
to its size and cost, the impact of the JSF program is even greater
when combined with the number of aircraft expected for international
sales (a minimum of 646 aircraft and potentially as many as 3,500).
Finally, because a number of current U.S. aircraft will either be
replaced by or used in conjunction with the JSF, the program is
critical for meeting future force requirements.
The JSF program began in November 1996 with a 5-year competition
between Lockheed Martin and Boeing to determine the most capable and
affordable preliminary aircraft design. Lockheed Martin won the
competition. The program entered system development and demonstration
in October 2001. At that time, officials planned on a 10½ years
development period costing about $34 billion (amount includes about $4
billion incurred before system development start). By 2003, system
integration efforts and a preliminary design review revealed
significant airframe weight problems that affected the aircraft's
ability to meet key performance requirements. Weight reduction efforts
were ultimately successful but added substantially to program cost and
schedule estimates. In March 2004, DOD rebaselined the program,
extending development by 18 months and adding about $7.5 billion to
development costs. In total, estimated development costs for the JSF
are now about $10 billion more than at start of system development.
In August 2005, DOD awarded a $2.1 billion contract for alternate
engine system development and demonstration, of which more than $1
billion has been appropriated to date.[Footnote 5] Since awarding that
contract, DOD's last three budget submissions have included no funding
for the alternate engine program and DOD has proposed canceling it,
stating that (1) no net acquisition cost benefits or savings are to be
expected from competition and (2) low operational risk exists for the
warfighter under a sole-source engine supplier strategy. We have
previously reported that DOD's analysis to support this decision
focused only on the potential up-front savings in engine procurement
costs. That analysis, along with statements made before this committee
last year, inappropriately included cost already sunk in the program
and excluded long-term savings that might accrue from competition for
providing support for maintenance and operations over the life cycle of
the engine.
In fiscal year 2007, the program office awarded the first of three
annual production contracts to Pratt & Whitney for its F135 engine.
Under that acquisition strategy, the program then planned to award
noncompetitive contracts to both Pratt & Whitney and to the Fighter
Engine Team in fiscal years 2010 and 2011.[Footnote 6] Beginning in
fiscal year 2012, the program planned to award contracts on an annual
basis under a competitive approach for quantities beyond each
contractor's minimum sustaining rate. Full-rate production for the
program begins in fiscal year 2014 and is expected to continue through
fiscal year 2034. The JSF program intends to use a combination of
competition, performance-based logistics, and contract incentives to
achieve goals related to affordability, supportability, and safety.
Through this approach, the JSF program office hopes to achieve
substantial reductions in engine operating and support costs, which
traditionally have accounted for 72 percent of a program's life cycle
costs.
Recent Decisions by DOD Add to Overall JSF Program Risk:
Today, we are issuing our latest report[Footnote 7] on the JSF
acquisition program, the fourth as mandated in the Ronald W. Reagan
National Defense Authorization Act for Fiscal Year 2005.[Footnote 8] In
our report we acknowledge the challenges in managing such a complex and
ambitious acquisition and cite recent progress in refining system
requirements, forging production agreements with international
partners, and beginning flight testing of the prototype aircraft and a
flying test bed. DOD also extended the procurement period for 7 years,
reducing annual quantities and the rate of ramp up to full production.
These actions somewhat lessened, but did not eliminate, the undue
concurrency of development and production we have previously reported.
We also report continuing cost increases and development risks
resulting from recent decisions by DOD to eliminate test resources to
replenish needed management reserve funds. We expect that DOD will
eventually need more money and time to complete development and
operational testing, potentially delaying the full-rate production
decision now planned for October 2013. We further report that the
official program cost estimate before the Congress is not reliable for
decision-making, based on our assessment of estimating methodologies
compared to best practice standards. With almost 90 percent of the
acquisition program's spending still ahead, it is important to address
these challenges, effectively manage future risks, and move forward
with a successful program that meets ours' and our allies' needs.
Program Cost Estimate Increased Since Last Year:
DOD reported that total acquisition cost estimate increased by more
than $23 billion since our last report in March of 2007, and $55
billion since the program underwent a major restructure in 2004. Recent
increases in the procurement cost estimate were principally due to (1)
extending the procurement period seven years at lower annual rates; (2)
increases to future price estimates based on contractor proposals for
the first production lot, and (3) airframe material cost increases. The
official development cost estimate remained about the same. However,
this was largely achieved by reducing requirements, not fully funding
the alternate engine program despite congressional interest in the
program, and reducing test resources in order to replenish management
reserve funds which were spent much faster than budgeted. Table 1 shows
the evolution in costs, unit costs, quantities, and deliveries since
the start of the JSF's system development and demonstration program.
Table 1: Changes in Reported JSF Program Costs, Quantities, and
Deliveries:
Expected quantities: Development quantities;
October 2001 (development start): 14;
December 2003[A]: 14;
December 2005[A]: 15;
December 2006[A[(Latest Available Data)] ta): 15[B].
Expected quantities: Procurement quantities (U.S. only);
October 2001 (development start): 2,852;
December 2003[A]: 2,443;
December 2005[A]: 2,443;
December 2006[A[(Latest Available Data)] ta): 2,443.
Total quantities;
October 2001 (development start): 2,866;
December 2003[A]: 2,457;
December 2005[A]: 2,458;
December 2006[A[(Latest Available Data)] ta): 2,458.
Cost estimates (then year dollars in billions): Development;
October 2001 (development start): $34.4;
December 2003[A]: $44.8;
December 2005[A]: $44.5;
December 2006[A[(Latest Available Data)] ta): $44.2.
Cost estimates (then year dollars in billions): Procurement;
October 2001 (development start): 196.6;
December 2003[A]: 199.8;
December 2005[A]: 231.7;
December 2006[A[(Latest Available Data)] ta): 255.1.
Cost estimates (then year dollars in billions): Military
construction[C];
October 2001 (development start): 2.0;
December 2003[A]: 0.2;
December 2005[A]: 0.2;
December 2006[A[(Latest Available Data)] ta): 0.5.
Total program acquisition;
October 2001 (development start): $233.0;
December 2003[A]: $244.8;
December 2005[A]: $276.5;
December 2006[A[(Latest Available Data)] ta): $299.8.
Unit cost estimates (then year dollars in millions): Program
acquisition;
October 2001 (development start): $81;
December 2003[A]: $100;
December 2005[A]: $112;
December 2006[A[(Latest Available Data)] ta): $122.
Unit cost estimates (then year dollars in millions): Average
procurement;
October 2001 (development start): 69;
December 2003[A]: 82;
December 2005[A]: 95;
December 2006[A[(Latest Available Data)] ta): 104.
Estimated Delivery Dates: First operational aircraft delivery;
October 2001 (development start): 2008;
December 2003[A]: 2009;
December 2005[A]: 2009;
December 2006[A[(Latest Available Data)] ta): 2010.
Estimated Delivery Dates: Initial operational capability;
October 2001 (development start): 2010- 2012;
December 2003[A]: 2012-2013;
December 2005[A]: 2012-2013;
December 2006[A[(Latest Available Data)] ta): 2012-2015.
Source: GAO analysis of DOD data.
[A] Data is from the annual Selected Acquisition Reports that are dated
in December but not officially released until March or April of the
following year. The December 2003 data reflects the 2004 Replan. The
December 2006 data is the latest information on total program costs
made available to us by DOD.
[B] A subsequent decision by DOD in September 2007 has reduced
development test aircraft by 2 to 13.
[C] Military construction costs have not been fully established and the
reporting basis changed over time in these DOD reports. The amount
shown for December 2006 represents costs currently in the 2008 future
years defense plan.
[End of table]
JSF Development Program Faces Increased Risks of Further Cost Increases
and Schedule Delays:
Midway through its planned 12-year development period, the JSF program
is over cost and behind schedule. The program has spent two-thirds of
its budgeted funding on the prime development contract, but estimates
that only about one-half of the development work has been completed.
The contractor has extended manufacturing schedules several times and
test aircraft delivery dates have continually slipped. Repercussions
from late release of engineering drawings to the manufacturing floor,
design changes, and parts shortages continue to cause delays in
maturing manufacturing processes and force inefficient production line
workarounds.
These design and manufacturing problems depleted management reserve
funds to an untenable level in 2007. Facing a probable contract cost
overrun, DOD officials decided not to request additional funding and
time for development, opting instead to reduce test resources in order
to replenish management reserves from $400 million to $1 billion. The
decision to replenish management reserves by reducing test resources,
known as the Mid-Course Risk Reduction Plan, was ratified by OSD in
September 2007. It eliminated two development test aircraft (reducing
the total from 15 to 13), reduced flight tests, revised test
verification plans, and accelerated the reduction in the prime
contractor's development workforce. Officials from several prominent
defense offices objected to specific elements of the plan because of
risks to the test program and because it did not treat the root causes
of production and schedule problems.
We agree with this prognosis and believe the mid-course plan should be
re-evaluated to address these concerns, examine alternatives, and
correct the causes of management reserve depletion. The plan
significantly increases the risks of not completing development testing
on time and not finding and fixing design and performance problems
until late into operational testing and production, when it is more
expensive and disruptive to do so. It also does not directly address
and correct the continuing problems that caused the depletion in
management reserves. This increases the risk that development costs
will increase substantially and schedules will be further delayed. The
flight test program has barely begun, but faces substantial risks with
reduced assets as design and manufacturing problems continue to cause
delays that further compress the time available to complete
development. We expect that DOD will have to soon restructure the JSF
program to add resources and extend the development period, likely
delaying operational testing, the full-rate production decision, and
achievement of initial operational capabilities.
JSF Program Cost Estimate Is Not Reliable:
We do not think the official JSF program cost estimate is reliable when
judged against cost estimating standards used throughout the federal
government and industry. Specifically, the program cost estimate: (1)
is not comprehensive because it does not include all applicable costs,
including $6.8 billion for the alternate engine program; (2) is not
accurate because some of its assumptions are optimistic and not
supportable--such as applying a weight growth factor only half as large
as historical experience on similar aircraft--and because the data
system relied upon to report and manage JSF costs and schedule is
deficient; (3) is not well documented in that it does not sufficiently
identify the primary methods, calculations, results, rationales and
assumptions, and data sources used to generate cost estimates; and (4)
is not credible according to individual estimates from OSD's Cost
Analysis Improvement Group, the Defense Contract Management Agency, and
the Naval Air Systems Command.
All three of these defense offices concluded that the official program
cost estimate is understated in a range up to $38 billion and that the
development schedule is likely to slip from 12 to 27 months. Despite
this and all the significant events and changes that have occurred in
the 6 years since the start of system development, DOD does not intend
to accomplish another fully documented, independent total program life-
cycle cost estimate for another 6 years. Twelve years between high-
fidelity estimates is not acceptable in our view, especially given the
size of the JSF program, its importance to our and our allies' future
force structures, the changes in cost and quantity in the intervening
years, and the unreliability of the current estimate.
Based on the evidence we collected, we believe a new estimate will
likely be much higher than now reported. In addition to the higher
estimates made by the three independent defense organizations, we
determined that:
* DOD has identified billions of dollars in unfunded requirements that
are not in the program office estimate, including additional tooling
and procurement price hikes.
* A new manufacturing schedule in the works indicates continued
degradation in the schedule and further extends times for first
flights.
* Both the aircraft and engine development contracts have persistent,
substantial cost variances that cost analysts believe are too large and
too late in the program to resolve without adding to budget.
* The prime contractor and program office are readying a new estimate
needed to complete the program, which is expected to be much larger
than what is now budgeted.
JSF Faces Challenges as Program Moves Forward:
The first and foremost challenge for the JSF program is affordability.
From its outset, the JSF goal was to develop and field an affordable,
highly common family of strike aircraft. Rising unit procurement prices
and somewhat lower commonality than expected raise concerns that the
United States and its allies may not be able to buy as many aircraft as
currently planned. The program also makes unprecedented demands for
funding from the defense budget--averaging about $11 billion each year
for the next two decades--and must compete with other priorities for
the shrinking federal discretionary dollar. Figure 1 compares the
current funding profile with two prior projections and shows the impact
from extending procurement 7 more years to 2034. This reduced mid-term
annual budget requirements, but added $11.2 billion to the total
procurement cost estimate.
Figure 1: JSF Acquisition Program's Annual Funding Requirements:
This figure is a combination bar graph showing JSF acquisition
program's annual funding requirements. The X axis represents the fiscal
year, and the Y axis represents the funding requirements. The lines
represents December 2003 plan and December 2005 plan. The bar
represents December 2006 plan.
[See PDF for image]
Source: GAO analysis of DOD data.
[End of figure]
Further, informed by more knowledge as the program progresses, DOD
doubled its projection of JSF life-cycle operating and support costs
compared to last year's estimate and its expected cost per flight hour
now exceeds the F-16 legacy fighter it is intended to replace. With
almost 90 percent (in terms of dollars) of the acquisition program
still ahead, it is important to address these challenges, effectively
manage future risks, and move forward with a successful program that
meets our military needs, as well as those of our allies.
Engine Competition Benefits Could Outweigh Costs:
As we noted in testimony before this committee last year, the
acquisition strategy for the JSF engine must weigh expected costs
against potential rewards. Without competition, the JSF program office
estimates that it will spend $54.9 billion over the remainder of the
F135 engine program. This includes cost estimates for completing system
development, procurement of 2,443 engines, production support, and
sustainment. Due primarily to the money spent on the engine program
over the past year, thereby increasing the sunk costs in our
calculations, we believe competition could provide an even better
return on investment than our previous assessment. Additional
investment of between $3.5 billion to $4.5 billion may be required
should the Department decide to continue competition. While Pratt &
Whitney design responsibilities and associated costs may actually be
reduced under a sole-source contract, we remain confident that
competitive pressures could yield enough savings to offset the costs of
competition over the program's life. This ultimately will depend on the
final approach for the competition, the number of aircraft actually
purchased, and the ratio of engines awarded to each contractor. Given
certain assumptions with regard to these factors, the additional costs
of having the alternate engine could be recouped if competition were to
generate approximately 9 to 11 percent savings--about 2 percent less
than we estimated previously. According to actual Air Force data from
past engine programs, including the F-16 aircraft, we still believe it
is reasonable to expect savings of at least that much.
Sole-Source Approach Results in Reduced Upfront Costs:
The cost of the Pratt & Whitney F135 engine is estimated to be $54.9
billion over the remainder of the program. This includes cost estimates
for the completion of system development, procurement of engines,
production support, and sustainment. Table 2 shows the costs remaining
to develop, procure, and support the Pratt & Whitney F135 engine on a
sole-source basis.
Table 2: Costs to Complete Pratt & Whitney F135 Engine Program (Fiscal
year 2002 dollars in billions):
Cost element: System development and demonstration costs;
Cost: $0.7.
Cost element: Total engine unit recurring flyaway costs;
Cost: $19.5.
Cost element: Production support costs (including initial spares,
training, manpower, and depot standup);
Cost: $3.1.
Cost element: Sustainment costs of fielded aircraft;
Cost: $31.6.
Total;
Cost: $54.9.
Source: JSF program office data; GAO analysis.
Note: Based on 2,443 installed engines and spares.
[End of table]
In addition to development of the F135 engine design, Pratt & Whitney
also has responsibility for the common components that will be designed
and developed to go on all JSF aircraft, regardless of which contractor
provides the engine core. This responsibility supports the JSF program
level requirement that the engine be interchangeable--either engine can
be used in any aircraft variant, either during initial installation or
when replacement is required. In the event that Pratt & Whitney is made
the sole-source engine provider, future configuration changes to the
aircraft and common components could be optimized for the F135 engine,
instead of potentially compromised design solutions or additional costs
needed to support both F135 and the F136, the alternate engine.
JSF Engine Competition Could Result in Future Savings:
The government's ability to recoup the additional investments required
to support competition depends largely on (1) the number of aircraft
produced,[Footnote 9] (2) the ratio that each contractor wins out of
that total, and (3) the savings rate that competitive pressures drive.
Our analysis last year, and again for this statement, estimated costs
under two competitive scenarios; one in which contractors are each
awarded 50 percent of the total engine purchases (50/50 split) and one
in which there is an annual 70/30 percent award split of total engine
purchases to either contractor, beginning in fiscal year 2012. Without
consideration of potential savings, the additional costs of competition
total about $4.5 billion under the first scenario and about $3.5
billion under the second scenario. Table 3 shows the additional cost
associated with competition under these two scenarios.
Table 3: Additional Costs for Competition in JSF Engine Program (Fiscal
year 2002 dollars in billions):
Additional costs: System development and demonstration costs;
50/50 Aircraft award split: $1.1;
70/30 Aircraft award split: $1.1.
Additional costs: Total engine unit recurring flyaway costs;
50/50 Aircraft award split: $3.2;
70/30 Aircraft award split: $2.3.
Additional costs: Production support costs (including initial spares,
training, manpower, and depot standup);
50/50 Aircraft award split: $0.1;
70/30 Aircraft award split: $0.1.
Additional costs: Sustainment costs of fielded aircraft[A];
50/50 Aircraft award split: N/A;
70/30 Aircraft award split: N/A.
Total;
50/50 Aircraft award split: $4.5;
70/30 Aircraft award split: $3.5.
Source: JSF program office data; GAO analysis.
Notes: Based on 2,443 installed engines and spares. Numbers may not add
due to rounding.
[A] No additional sustainment costs were considered because the number
of aircraft and cost per flight hour would be the same under either
scenario.
[End of table]
The disparity in costs between the two competitive scenarios reflects
the loss of learning resulting from lower production volume that is
accounted for in the projected unit recurring flyaway costs used to
construct each estimate. The other costs include approximately $1.1
billion for remaining F136 development and $116 million in additional
standup costs, which would be the same under either competitive
scenario.
Competition may incentivize the contractors to achieve more aggressive
production learning curves, produce more reliable engines that are less
costly to maintain, and invest additional corporate money in
technological improvements to remain competitive. To reflect these and
other factors, we applied a 10 to 20 percent range of potential cost
savings to our estimates, where pertinent to a competitive
environment.[Footnote 10] Further, when comparing life cycle costs, it
is important to consider that many of the additional investments
associated with competition are often made earlier in the program's
life cycle, while much of the expected savings do not accrue for
decades. As such, we include a net present value calculation (time
value of money) in the analysis that, once applied, provides for a
better estimate of program rate of return.
When we apply overall savings expected from competition, our analysis
indicates that recoupment of those initial investment costs would occur
at somewhere between 9 and 11 percent, depending on the number of
engines awarded to each contractor. A competitive scenario where one of
the contractors receives 70 percent of the annual production aircraft,
while the other receives only 30 percent reaches the breakeven point at
9 percent savings--1.3 percent less than we estimated before. A
competitive scenario where both contractors receive 50 percent of the
production aircraft reaches this point at 11 percent savings--again
about 1.3 percent less than last year.[Footnote 11] We believe it is
reasonable to assume at least this much savings in the long run based
on analysis of actual data from the F-16 engine competition.
Past Engine Programs Show Potential Financial Benefits from
Competition:
Results from past competitions provide evidence of potential financial
and non financial savings that can be derived from engine programs. One
relevant case study to consider is the "Great Engine War" of the 1980s-
-the competition between Pratt & Whitney and General Electric to supply
military engines for the F-16 and other fighter aircraft
programs.[Footnote 12] At that time all engines for the F-14 and F-15
aircraft were being produced on a sole-source basis by Pratt & Whitney,
which was criticized for increased procurement and maintenance costs,
along with a general lack of responsiveness with regard to government
concerns about those programs. Beginning in 1983, the Air Force
initiated a competition that resulted in significant cost savings in
the program. For example, in the first 4 years of the competition, when
comparing actual costs to the program's baseline estimate, results
included:
* nearly 30 percent cumulative savings for acquisition costs,
* roughly 16 percent cumulative savings for operations and support
costs, and:
* total savings of about 21 percent in overall life cycle costs.
The Great Engine War was able to generate significant benefits because
competition incentivized contractors to improve designs and reduce
costs during production and sustainment.
Multiple Studies and Analyses Show Additional Benefits from
Competition:
Competition for the JSF engines may also provide benefits that do not
result in immediate financial savings, but could result in reduced
costs or other positive outcomes over time. Our prior work, along with
studies by DOD and others, indicate there are a number of non financial
benefits that may result from competition, including better
performance, increased reliability, and improved contractor
responsiveness. In addition, the long term impacts of the JSF engine
program on the global industrial base go far beyond the two competing
contractors.
DOD and others have performed studies and have widespread concurrence
as to these other benefits, including better engine performance,
increased reliability, and improved contractor responsiveness. In fact,
in 1998 and 2002, DOD program management advisory groups assessed the
JSF alternate engine program and found the potential for significant
benefits in these and other areas. Table 4 summarizes the benefits
determined by those groups.
Table 4: 1998 and 2002 Program Management Advisory Group Study Findings
on the Benefits of an Alternate Engine Program:
Factor assessed: Costs;
Beneficial: 1998: [Empty];
Beneficial: 2002: [Empty];
Marginal: 1998: X;
Marginal: 2002: X;
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: Development risk reduction;
Beneficial: 1998: [Empty];
Beneficial: 2002: [Empty];
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: X;
No value: 2002: X.
Factor assessed: Engine growth potential;
Beneficial: 1998: [Empty];
Beneficial: 2002: [Empty];
Marginal: 1998: X;
Marginal: 2002: X;
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: Fleet readiness;
Beneficial: 1998: X;
Beneficial: 2002: X;
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: Industrial base;
Beneficial: 1998: X;
Beneficial: 2002: X;
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: International implications;
Beneficial: 1998: X;
Beneficial: 2002: X;
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: Other considerations[A];
Beneficial: 1998: X;
Beneficial: 2002: X;
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: [Empty];
No value: 2002: [Empty].
Factor assessed: Overall;
Beneficial: 1998: X;
Beneficial: 2002: X;
Marginal: 1998: [Empty];
Marginal: 2002: [Empty];
No value: 1998: [Empty];
No value: 2002: [Empty].
Source: DOD data; GAO analysis and presentation.
[A] Other considerations include contractor responsiveness, improved
design solutions, and competition at the engine subsystem level.
[End of table]
While the benefits highlighted may be more difficult to quantify, they
are no less important, and ultimately were strongly considered in an
earlier recommendation to continue the alternate engine program. These
studies concluded that the program would:
* maintain the industrial base for fighter engine technology,
* enhance readiness,
* instill contractor incentives for better performance,
* ensure an operational alternative if the current engine developed
problems, and:
* enhance international participation.
Another potential benefit of having an alternate engine program, and
one also supported by the program advisory group studies, is to reduce
the risk that a single point, systemic failure in the engine design
could substantially affect the fighter aircraft fleet. This point is
underscored by recent failures of the Pratt & Whitney test program. In
August 2007, an engine running at a test facility experienced failures
in the low pressure turbine blade and bearing, which resulted in a
suspension of all engine test activity. In February 2008, during follow-
on testing to prove the root cost of these failures, a blade failure
occurred in another engine, resulting in delays to both the Air Force
and Marine Corps variant flight test programs.
The JSF program continues to work toward identifying and correcting
these problems. Though current performance data indicate it is unlikely
that these or other engine problems would lead to fleetwide groundings
in modern aircraft, having two engine sources for the single-engine JSF
further reduces this risk as it is more unlikely that such a problem
would occur to both engine types at the same time.
Concluding Observations:
DOD is challenged once again with weighing short-term needs against
potential long-term payoffs within the JSF program, especially in terms
of the test program and the approach for developing, procuring, and
sustaining the engine. We and others believe that the JSF risk
reduction plan is too risky--cutting test resources and flight tests
will constrain the pace and fidelity of development testing--and
additional costs and time will likely be needed to complete JSF
development. Finding and fixing deficiencies during operational testing
and after production has ramped up is costly, disruptive, and delays
getting new capabilities to the warfighter. Further, without directly
addressing the root causes of manufacturing delays and cost increases,
the problems will persist and continue to drain development resources
and impact low-rate production that is just beginning. These actions
may postpone events, but a major restructuring appears likely--we
expect DOD will need more money and time to complete development and
operational testing, which will delay the full-rate production
decision.
Because the JSF is entering its most challenging phase--finalizing
three designs, maturing manufacturing processes, conducting flight
tests, and ramping up production in an affordable manner--decision
making and oversight by Congress, top military leaders, and our allies
is critical for successful outcomes. The size of the JSF acquisition,
its impact on our tactical air forces and those of our allies, and the
unreliability of the current estimate, argue for an immediate new and
independent cost estimate and uncertainty analysis, so that these
leaders can have good information for effective decision making.
Likewise, the way forward for the JSF engine acquisition strategy
entails one of many critical choices facing DOD today, and underscores
the importance of decisions facing the program. Such choices made today
on the JSF program will have long term impacts.
Mr. Chairmen, this concludes my prepared statement. I will be happy to
answer any questions you or other members of the subcommittee may have.
Contacts and Acknowledgments:
For future questions regarding this testimony, please contact Michael
J. Sullivan, (202) 512-4841. Individuals making key contributions to
this testimony include Marvin Bonner, Jerry Clark, Bruce Fairbairn, J.
Kristopher Keener, Matt Lea, Brian Mullins, Daniel Novillo, and Charles
Perdue.
[End of section]
Appendix I: Scope and Methodology:
To conduct our mandated work on the JSF acquisition program, we tracked
and compared current cost and schedule estimates with prior years,
identified major changes, and determined causes. We visited the prime
contractor's plant to view manufacturing processes and plans for low
rate production. We obtained earned value data, contractor workload
statistics, performance indicators, and manufacturing results. We
reviewed the Mid Course Risk Reduction Plan and supporting documents,
discussed pros and cons with DOD officials, and evaluated potential
impacts on flight plans and test verification criteria.
We reviewed the cost estimating methodologies, data, and assumptions
used by the JSF joint program office to project development,
procurement, and sustainment costs. We assessed the program office's
procedures and methodologies against GAO's Cost Assessment Guide and
best practices employed by federal and private organizations. We
obtained cost estimates prepared by the Cost Analysis Improvement
Group, Naval Air Systems Command, and Defense Contract Management
Command and discussed with the cost analysts the methodologies and
assumptions used by those organizations. We discussed plans, future
challenges, and results to date with DOD and contractor officials.
For our work on the alternate engine we used the methodology detailed
below, the same as had been used in support of our statement in March
2007. For this statement, we collected similar current information so
the cost information could be updated. In conducting our analysis of
costs for the Joint Strike Fighter (JSF) engine program, we relied
primarily on program office data. We did not develop our own source
data for development, production, or sustainment costs. In assessing
the reliability of data from the program office, we compared that data
to contractor data and spoke with agency and other officials and
determined that the data were sufficiently reliable for our review.
Other base assumptions for the review are as follows:
* Unit recurring flyaway cost includes the costs associated with
procuring one engine and certain nonrecurring production costs; it does
not include sunk costs, such as development and test, and other costs
to the whole system, including logistical support and construction.
* Engine procurement costs reflect only U.S. costs, but assumes the
quantity benefits of the 730 aircraft currently anticipated for foreign
partner procurement.
* Competition, and the associated savings anticipated, begins in fiscal
year 2012.
* Engine maturity, defined as 200,000 flight hours with at least 50,000
hours in each variant, is reached in fiscal year 2012.
* Two years are needed for delivery of aircraft.
* Aircraft life equals 30 years at 300 flight hours per year.
* For the sole-source Pratt & Whitney F135 engine scenario, we
calculated costs as follows:
Development:
* Relied on JSF program office data on the remaining cost of the Pratt
& Whitney development contract. We considered all costs for development
through fiscal year 2008 to be sunk costs and did not factor them into
analysis.
Production:
* For cost of installed engine quantities, we multiplied planned JSF
engine quantities for U.S. aircraft by unit recurring flyaway costs
specific to each year as derived from cost targets and a learning curve
developed by the JSF program office.
* For the cost of production support, we relied on JSF program office
cost estimates for initial spares, training, support equipment, depot
stand-up, and manpower related to propulsion. Because the JSF program
office calculates those numbers to reflect two contractors, we applied
a cost reduction factor in the areas of training and manpower to
reflect the lower cost to support only one engine type.
Sustainment:
* For sustainment costs, we multiplied the planned number of U.S.
fielded aircraft by the estimated number of flight hours for each year
to arrive at an annual fleet total. We then multiplied this total by
JSF program office estimated cost per engine flight hour specific to
each aircraft variant.
* Sustainment costs do not include a calculation of the cost of engine
reliability or technology improvement programs.
* For a competitive scenario between the Pratt & Whitney F135 engine
and the Fighter Engine Team (General Electric and Rolls-Royce), we
calculated costs as follows:
Development:
* We used current JSF program office estimates of remaining development
costs for both contractors and considered all costs for development
through fiscal year 2008 to be sunk costs.
Production:
* We used JSF program office data for engine buy profiles, learning
curves, and unit recurring flyaway costs to arrive at a cost for
installed engine quantities on U.S. aircraft. We performed calculations
for competitive production quantities under 70/30 and 50/50 production
quantity award scenarios.
* We used JSF program office cost estimates for production support
under two contractors. We assumed no change in support costs based on
specific numbers of aircraft awarded under competition, as each
contractor would still need to support some number of installed engines
and provide some number of initial spares.
Sustainment:
* We used the same methodology and assumptions to perform the
calculation for sustainment costs in a competition as in the sole-
source scenario.
* Savings:
* We analyzed actual cost information from past aircraft propulsion
programs, especially that of the F-16 aircraft engine, in order to
derive the expected benefits of competition and determine a reasonable
range of potential savings.
* We applied this range of savings to the engine life cycle, including
recurring flyaway costs, production support, and sustainment. We
assumed costs to the government could decrease in any or all of these
areas as a result of competitive pressures.
* We did not apply any savings to the system development and
demonstration phase or the first five production lots because they are
not fully competitive. However, we recognize that some savings may
accrue as contractors prepare for competition.
In response to the request to present our cost analyses in constant
dollars, then year dollars, and using net present value, we:
* calculated all costs using constant fiscal year 2002 dollars,
* used separate JSF program office and Office of the Secretary of
Defense inflation indices for development, production, production
support, and sustainment to derive then year dollars; when necessary
for the out years, we extrapolated the growth of escalation factors
linearly; and:
* utilized accepted GAO methodologies for calculating discount rates in
the net present value analysis.
Our analysis of the industrial base does not independently verify the
relative health of either contractors' suppliers or workload.
[End of section]
Related GAO Products:
Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks, GAO-
08-388. Washington, D.C.: Mar. 11, 2008.
Tactical Aircraft: DOD Needs a Joint and Integrated Investment
Strategy, GAO-07-415. Washington, D.C.: Apr. 2, 2007.
Defense Acquisitions: Analysis of Costs for the Joint Strike Fighter
Engine Program, GAO-07-656T. Washington, D.C.: Mar. 22, 2007.
Joint Strike Fighter: Progress Made and Challenges Remain, GAO-07-360.
Washington, D.C.: Mar. 15, 2007.
Tactical Aircraft: DOD's Cancellation of the Joint Strike Fighter
Alternate Engine Program Was Not Based on a Comprehensive Analysis, GAO-
06-717R. Washington, D.C: May 22, 2006.
Recapitalization Goals Are Not Supported By Knowledge-Based F-22A and
JSF Business Cases, GAO-06-487T. Washington, D.C.: Mar. 16, 2006.
Joint Strike Fighter: DOD Plans to Enter Production before Testing
Demonstrates Acceptable Performance, GAO-06-356. Washington, D.C.: Mar.
15, 2006.
Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications
for Tactical Aircraft Modernization, GAO-05-519T. Washington, D.C.:
Apr. 6, 2005.
Defense Acquisitions: Assessments of Selected Major Weapon Programs,
GAO-05-301.Washington, D.C.: Mar. 31, 2005.
Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike
Fighter Program with Different Acquisition Strategy, GAO-05-271.
Washington D.C.: Mar. 15, 2005.
Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and
Implications for Tactical Aircraft Modernization, GAO-05-390T.
Washington, D.C.: Mar. 3, 2005.
Joint Strike Fighter Acquisition: Observations on the Supplier Base,
GAO-04-554. Washington, D.C.: May 3, 2004.
Joint Strike Fighter Acquisition: Managing Competing Pressures Is
Critical to Achieving Program Goals, GAO-03-1012T. Washington, D.C.:
July 21, 2003.
[End of section]
Footnotes:
[1] GAO, Joint Strike Fighter: Recent Decisions by DOD Add to Program
Risks, GAO-08-388 (Washington, D.C.: March 11, 2008). This report is
the fourth as mandated in the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005. See Pub. L. No. 108-375, § 213
(2004).
[2] GAO, Defense Acquisitions: Analysis of Costs for the Joint Strike
Fighter Engine Program, GAO-07-656T (Washington, D.C.: Mar. 22, 2007).
[3] To maintain consistency with our statement from last year, unless
otherwise noted, all costs related to the engine program are reported
in base year 2002 dollars; all other figures in the statement are
reported in then year dollars.
[4] Eight allied nations are also participating in the JSF program:
United Kingdom, Norway, Denmark, the Netherlands, Canada, Italy,
Turkey, and Australia.
[5] Prior to that contract, DOD had invested $722 million in the
alternate engine program.
[6] The Fighter Engine Team is a single company, created in July 2002
by General Electric and Rolls-Royce, and formed for the development,
deployment, and support of the F136 engine for the JSF program.
[7] GAO-08-388.
[8] Pub. L. No. 108-375, § 213 (2004).
[9] In conducting our cost analysis of the alternate engine program, we
presented the cost of only the 2,443 U.S. aircraft currently expected
for production. These costs assume the quantity benefits of the 730
aircraft currently anticipated for foreign partner procurement.
[10] Our review of DOD data as well as discussions with defense and
industry experts, confirmed this as a reasonable range of potential
savings to consider.
[11] These savings amounts reflect net present value calculations that
discount costs and savings for both inflation and the time value of
money.
[12] Other engine competitions include those for the F-15, F/A-18, and
F-22A fighter aircraft.
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