Homeland Security
Observations on the Department of Homeland Security's Acquisition Organization and on the Coast Guard's Deepwater Program Gao ID: GAO-07-453T February 8, 2007In January 2003, GAO designated the Department of Homeland Security's (DHS) implementation and transformation as high risk because of the size and complexity of the effort and the existing challenges faced by the components being merged into the department. The success of the effort to integrate numerous agencies and organizations into one cabinet-level department rests in large part on DHS's ability to effectively acquire the wide range of goods and services it needs to achieve its mission of protecting the nation from terrorism. DHS is undertaking a number of large, complex investments as the federal government increasingly relies on contractors for roles and missions previously performed by government employees. One of the department's largest investments--the Deepwater program, now estimated to cost $24 billion--is the Coast Guard's major effort to replace or modernize its aircraft and vessels. Rather than using a traditional acquisition approach, the Coast Guard is using a system integrator to design, construct, deploy, support, and integrate the Deepwater assets. In this testimony, the Comptroller General discussed (1) the overarching challenges DHS faces in establishing an effective acquisition organization, (2) GAO's prior work on Coast Guard and contractor management of the Deepwater program, and (3) the status of GAO's ongoing reviews.
GAO has reported in the past on acquisition management at several components of DHS and has assessed the department's overall acquisition management and oversight efforts. A common theme in these reports is DHS's struggle, from the outset, to provide adequate support to its mission components in acquiring goods and services and to provide departmentwide oversight of its acquisition function. DHS has a stated goal of integrating the acquisition function more broadly across the department. GAO has reported that this goal has not yet been accomplished and has identified key impediments to achieving it. A management directive intended to integrate the acquisition line of business did not provide the Chief Procurement Officer with the enforcement authority needed in practice, and it does not pertain to all component agencies. Also, the procurement organizations within the department remained somewhat autonomous, and centralized acquisition oversight had not been implemented. While DHS's review process for major investments adopts some best practices, key decision-making reviews at certain points are not required. Investments that are not reviewed at the appropriate points can face a range of problems--such as redesign--resulting in significant cost increases and schedule delays. The Coast Guard's Deepwater program illustrates problems that can occur when effective program management and contractor oversight are not in place. In 2001, GAO described the Deepwater project as "risky" due to the unique, untried acquisition strategy for a project of this magnitude within the Coast Guard--a system-of-systems approach with the contractor as the integrator. In 2004, GAO reported that well into the contract's second year, key components needed to manage the program and oversee the system integrator's performance had not been effectively implemented. For example, integrated product teams, comprised of government and contractor employees, are the Coast Guard's primary tool for managing the program and overseeing the contractor. GAO found that the teams had not been effective due to changing membership, understaffing, insufficient training, lack of authority for decision-making, and inadequate communication among members. GAO also reported that, despite documented problems in schedule, performance, cost control, and contract administration throughout the first year of the Deepwater contract, the contractor had received a rating of 87 percent, which fell in the "very good" range and resulted in an award fee of $4.0 million. GAO's more recent work found that, while the Coast Guard had taken steps to address some of the problems, concerns remained about program management and contractor oversight. In addition to these overall management issues, there have been problems with the design and performance of specific Deepwater assets. Given the size of DHS and the scope of its acquisitions, GAO is continuing to assess the department's acquisition oversight process and procedures in ongoing work. GAO is also currently reviewing the status of the Deepwater program's implementation and contractor oversight.
GAO-07-453T, Homeland Security: Observations on the Department of Homeland Security's Acquisition Organization and on the Coast Guard's Deepwater Program
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Testimony:
Before the Committee on Oversight and Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, February 8, 2007:
Homeland Security:
Observations on the Department of Homeland Security's Acquisition
Organization and on the Coast Guard's Deepwater Program:
Statement of David M. Walker:
Comptroller General of the United States:
GAO-07-453T:
GAO Highlights:
Highlights of GAO-07-436T, a testimony to Committee on Energy and
Natural Resources, U.S. Senate
Why GAO Did This Study:
The U.S. insular area of the Commonwealth of the Northern Mariana
Islands (CNMI) is a self-governing commonwealth of the United States
that comprises 14 islands in the North Pacific. In a December 2006
report”U.S. Insular Areas: Economic, Fiscal, and Financial
Accountability Challenges (GAO-07-119)”regarding four insular areas
including CNMI, GAO identified and reported the following: (1) economic
challenges, including the effect of changing tax and trade laws on
their economies; (2) fiscal condition; and (3) financial
accountability, including compliance with the Single Audit Act. The
Chairman of the Senate Committee on Energy and Natural Resources, which
requested the December 2006 report, asked GAO to present and discuss
the results as they pertain to CNMI. Our summary and conclusions are
based on our work performed for our December 2006 report on U.S.
insular areas. For this testimony we also had available CNMI‘s fiscal
year 2005 audited financial statements, which we have included in our
review, along with some recent developments in fiscal year 2006.
What GAO Found:
The Commonwealth of the Northern Mariana Islands (CNMI) faces serious
economic, fiscal, and financial accountability challenges. CNMI‘s
economy depends heavily on two industries, garment manufacturing and
tourism. However, recent changes in U.S. trade law have increased
foreign competition for CNMI‘s garment industry, while other external
events have negatively affected its tourism sector.
CNMI‘s garment industry has declined in recent years with factory
closings and reduced production. The value of garment shipments to the
United States dropped by more than 16 percent between 2004 and 2005 and
by an estimated 25 percent in 2006.
Tourism in CNMI declined sharply in the late 1990s as a result of a
series of external events, including the Asian financial crisis;
cancellation of Korean Air service; and fears of international crises
such as the SARS epidemic, terrorism, and the Iraq war. In 2005, Japan
Airlines withdrew direct flights to the capital.
The fiscal condition of CNMI‘s government has steadily weakened from
fiscal year 2001 through fiscal year 2005, as government spending has
exceeded revenues each year since 2002. CNMI ended fiscal year 2005
with a deficit of $84.1 million in its governmental fund balance.
CNMI‘s liabilities also exceed its assets for its primary government.
Indicators point to a severe financial crisis in fiscal year 2006. In
response, the CNMI government has implemented cost-cutting and
restructuring measures, including ’austerity holidays,“ consisting of
biweekly furloughs during which government workers are not paid and
many government operations are closed to reduce personnel and operating
costs.
CNMI‘s long-standing financial accountability problems include the late
submission of financial audit reports, inability to achieve ’clean“
opinions in its financial statements by the independent financial
auditors, and reports showing serious internal control weaknesses over
financial reporting. Many of the auditors‘ findings are longstanding,
going back in some cases to 1987.
Federal agencies and CNMI have sponsored and participated in
conferences, training sessions, technical assistance, and other
programs to improve CNMI‘s economy, fiscal condition, and
accountability. During 2006, the CNMI government took steps to reverse
its prior patterns of deficit spending. It will need to continue to
work toward long-term sustainable solutions, with concentrated
attention on the challenges facing the islands and feedback mechanisms
for continuing improvement. Leadership on the part of the CNMI
government and the Department of the Interior‘s Office of Insular
Affairs is critical to providing long-term stability and prosperity for
this U.S. insular area.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-436T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jeanette Franzel, (202)
512-9471, franzelj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
Thank you for inviting me here today to discuss our reviews of the
Department of Homeland Security's (DHS) acquisition organization and
the U.S. Coast Guard's Deepwater program. When it was established in
March 2003, DHS faced the challenge of integrating 22 separate federal
agencies and organizations with multiple missions, values, and cultures
into one cabinet-level department.[Footnote 1] The success of this
mammoth task--one of the biggest mergers ever to take place within the
federal government--rests in large part on DHS's ability to implement
the necessary management structure and processes for effectively
acquiring goods and services. A wide range of contractor-provided
products, technologies, and services are critical to the department's
ability to achieve its mission of protecting the nation from terrorism.
For example, DHS has purchased increasingly sophisticated screening
equipment for air passenger security, acquired technologies to secure
the nation's borders, and is upgrading the Coast Guard's offshore fleet
of surface and air assets.
In January 2003, we designated DHS's implementation and transformation
as high risk because of the size and complexity of the effort and the
existing challenges faced by the components being merged into the
department.[Footnote 2] Although DHS has made some progress
transforming its components into a fully functioning department, this
transformation remains high risk.[Footnote 3] DHS has yet to implement
a corrective action plan that includes a comprehensive transformation
strategy, and its management systems--including those related to
acquisition--are not yet integrated and wholly operational. DHS's
acquisition systems will require continued attention to help prevent
waste and ensure that DHS can allocate its resources efficiently and
effectively.
In fiscal year 2006, DHS reported obligating $15.6 billion in
acquisitions, making it the third largest federal department in
spending taxpayer dollars. DHS is undertaking large, complex
investments as the federal government increasingly relies on
contractors for roles and missions previously performed by government
employees. Contractors have an important role to play in the discharge
of the government's responsibilities, and in some cases the use of
contractors can result in improved economy, efficiency, and
effectiveness. At the same time, there may be occasions when
contractors are used to provide certain services because the government
lacks another viable and timely option. In such cases, the government
may actually be paying more than if such services were provided by
federal employees. In this environment of increased reliance on
contractors, sound planning and contract execution are critical for
success. We have previously identified the need to examine the
appropriate role for contractors to be among the challenges in meeting
the nation's defense needs in the 21st century.[Footnote 4]
My statement today will focus on the overarching challenges DHS faces
in creating an effective, integrated acquisition organization and will
discuss our prior work on one of the department's most complex
programs--the Coast Guard's Deepwater program. I will also discuss
areas where we have related ongoing work.
This testimony is based on our work on DHS's acquisition organization
and the Deepwater program. That work was conducted in accordance with
generally accepted government auditing standards.
Summary:
DHS faces challenges in creating an effective acquisition organization:
* DHS has a stated goal of integrating the acquisition function more
broadly across the department. We have reported that this goal has not
yet been accomplished and have identified key impediments to achieving
it. A management directive intended to integrate the acquisition line
of business did not provide the Chief Procurement Officer with the
enforcement authority needed in practice, and it does not pertain to
the Coast Guard and Secret Service. Also, the procurement organizations
within the department remained somewhat autonomous, and centralized
acquisition oversight had not been implemented. While DHS's review
process for major investments adopts some best practices, key decision-
making reviews at certain points are not required.
The Coast Guard's Deepwater program illustrates the type of problems
that can occur when effective program management and contractor
oversight are not in place:
* From the outset, we have expressed concern about the risks involved
with the Coast Guard's acquisition strategy for the Deepwater program.
In 2004, we reported that well into the contract's second year, key
components needed to manage the program and oversee the system
integrator's performance had not been effectively implemented. For
example, integrated product teams, comprised of government and
contractor employees, are the Coast Guard's primary tool for managing
the program and overseeing the contractor. We found that the teams had
not been effective due to changing membership, understaffing,
insufficient training, lack of authority for decision-making, and
inadequate communication among members. We also reported that, despite
documented problems in schedule, performance, cost control, and
contract administration throughout the first year of the Deepwater
contract, the contractor had received a rating of 87 percent, which
fell in the "very good" range and resulted in an award fee of $4.0
million of the maximum $4.6 million.[Footnote 5] In 2006, we reported
that the Coast Guard had taken steps to address some of the problems we
identified.[Footnote 6] However, the actions had not been adequate to
resolve continuing concerns about program management and contractor
oversight. In addition to these overall management issues, there have
been problems with the design and performance of specific Deepwater
assets.
We continue to review DHS's overall acquisition organization and the
Deepwater program:
* Clearly, the challenges DHS faces in establishing an effective,
integrated acquisition organization will take some time to resolve. We
are continuing to assess DHS's progress, as well as examining other
aspects of its acquisition function such as its use of performance-
based acquisitions.
* Similarly, we continue to review the Deepwater program as it moves
into the 5TH year of the contract. We recognize that a variety of
factors have contributed to the problems we have identified. In some
cases, the Coast Guard has taken actions to improve outcomes; in other
cases it has either not taken action or actions taken to date have not
been effective. We are currently doing work on Deepwater for the House
and Senate Appropriations Committees. When we complete our work in
several months, we would be happy to provide our results to this
committee.
Challenges to Creating an Integrated Acquisition Function at DHS:
We have reported in the past on acquisition management at several
components of DHS. We have also assessed the department's overall
acquisition management efforts. [Footnote 7] A common theme in these
reports is DHS's struggle, from the outset, to provide adequate
procurement support to its mission components and to provide
departmentwide oversight of its acquisition function. Of the 22
components that initially joined DHS from other agencies, only 7 came
with their own procurement support. An eighth office, the Office of
Procurement Operations, was created anew to provide support to a
variety of DHS entities--but not until January 2004, almost a year
after the department was created. DHS has established a goal of
aligning procurement staffing levels with contract spending at its
various components by the last quarter of fiscal year 2009.
DHS has set forth a stated goal of integrating the acquisition function
more broadly across the department. However, the goal has not been
accomplished. In March 2005, we identified key factors impeding
accomplishment of the department's objective, including limitations of
a 2004 management directive and lack of departmentwide oversight of
component acquisition organizations. We also identified potential gaps
in the department's knowledge-based approach for reviewing its major,
complex investments. On a related issue, a number of systemic
acquisition challenges we have identified at the Department of Defense
could apply equally to DHS.
Management Directive Has Limitations:
In October 2004, the Secretary of DHS signed a management directive
entitled "Acquisition Line of Business Integration and Management," the
department's principal guidance for leading, governing, integrating,
and managing the acquisition function. It directs managers from each
component organization to commit resources to training, development,
and certification of acquisition professionals. It also highlights the
Chief Procurement Officer's broad authority, including management,
administration, and oversight of departmentwide acquisition.
However, we have reported that the directive may not achieve its goal
of creating an integrated acquisition organization because it creates
unclear working relationships between the Chief Procurement Officer and
heads of DHS's principal components. For example, the Chief Procurement
Officer and the director of Immigration and Customs Enforcement share
responsibility for recruiting and selecting key acquisition officials,
preparing performance ratings for the top manager of the contracting
office, and providing appropriate resources to support procurement
initiatives. The policy leaves unclear how the responsibilities will be
implemented or what enforcement authority the Chief Procurement Officer
has to ensure that initiatives are carried out.
Further, the directive does not apply to the Coast Guard or Secret
Service, two entities that are required by the Homeland Security Act of
2002[Footnote 8] to be maintained as distinct entities within DHS.
According to the directive, the Coast Guard and Secret Service are
exempted by statute. We are not aware of any explicit statutory
exemption that would prevent the application of this directive. Nothing
in the document would reasonably appear to threaten the status of these
entities as distinct entities within the department or otherwise impair
their ability to perform statutory missions. DHS's General Counsel has
agreed, telling us that the applicability of the directive is a policy,
not legal, matter. Excluding certain components from complying with
management directives regarding the acquisition function hampers
efforts to integrate the acquisition organization. The Coast Guard, for
example, is one of the largest organizations within DHS.
Procurement Organizations are Somewhat Autonomous and Lack
Departmentwide Oversight:
We have reported that DHS's principal organizations are, to a large
extent, still functioning much as they did in pre-merger days with
regard to acquisition-related functions. Embedded within the seven
procurement organizations that came to DHS were, for the most part, the
same contracting staffs that joined the department from their former
agencies.[Footnote 9] In addition, the Chief Procurement Officer, who
is held accountable for departmentwide management and oversight of the
acquisition function, lacks the enforcement authority and has limited
resources to ensure compliance with acquisition policies and processes.
As of August 2006, according to DHS officials, only five staff were
assigned to departmentwide oversight responsibilities. The officials
told us that, because their small staff faces the competing demands of
providing departmentwide oversight and providing acquisition support
for urgent needs at the component level, they have focused their
efforts on procurement execution rather than oversight. Our prior work
shows that in a highly functioning acquisition organization, the chief
procurement officer is in a position to oversee compliance by
implementing strong oversight mechanisms.[Footnote 10] Adequate
oversight of acquisition activities across DHS is imperative, in light
of the department's mission and the problems that have been reported by
us and inspectors general for some of the large components within the
department.
Knowledge-based Acquisition Review Process:
Some DHS organizations have large, complex, and high-cost acquisition
programs--such as the Coast Guard's Deepwater program--that need to be
closely managed. DHS's investment review process involves several
different levels of review, depending on the dollar threshold and risk
level of the program. Deepwater, for example, has been designated as a
level 1 investment, meaning that it is subject to review at the highest
levels within the department. We reported in 2005 that DHS's framework
for reviewing its major investments adopts several best practices from
lessons learned from leading commercial companies and successful
federal programs that, if applied consistently, could refine its
ability to reduce risk to meet cost and delivery targets.[Footnote 11]
One of these best practices is a knowledge-based approach for managers
to hold reviews at key decision points in order to reduce risk before
investing resources in the next phase of a program's development. For
example, DHS's investment review policy encourages program managers to
demonstrate a product's design with critical design reviews prior to a
production decision.
However, we have found that, based on our extensive body of work on
this knowledge-based approach, additional program reviews could be
incorporated into the process as internal controls to better position
DHS to make well-informed decisions on its major, complex investments.
For example, DHS does not require a review to ensure that an
investment's design performs as expected before investing in a
prototype. We also reported that DHS review processes permitted low-
rate initial production to be well underway before a mandatory review
gave the go-ahead to proceed to production. A review prior to
initiating low-rate initial production was not mandatory; rather, it
was held at the discretion of the Investment Review Board (IRB). Our
best practices work shows that successful investments reduce risk by
ensuring that high levels of knowledge are achieved at these key points
of development. We have found that investments that were not reviewed
at the appropriate points faced problems--such as redesign--that
resulted in cost increases and schedule delays. It is not clear how the
Deepwater acquisition has been influenced by the department's
investment review process. According to a DHS official, an IRB review
of the Deepwater acquisition program baseline, scheduled for January
2007, was postponed.
In its Performance and Accountability Report for fiscal year 2006, DHS
stated that it has improved its process for investment reviews by
providing greater clarity on DHS policies and procedures. It
acknowledges that developing and maintaining the capability needed to
achieve DHS missions requires a robust investment program. DHS also
states that its components are now required to report on the status of
major investments on a quarterly basis and to submit information to
ensure that investments are staying within established baselines for
cost, schedule, and performance. The report says that the department
will identify and introduce acquisition best practices into the
investment review process by the first quarter of fiscal year 2008.
Systemic Acquisition Challenges:
We have identified a series of systemic acquisition challenges for
complex, developmental systems, based mostly on our reviews of
Department of Defense programs. In principle, many may apply equally to
DHS as it moves forward with its major, complex investments. Some of
these challenges include:
* Program requirements are often set at unrealistic levels, then
changed frequently as recognition sets in that they cannot be achieved.
As a result, too much time passes, threats may change, and/or members
of the user and acquisition communities may simply change their minds.
The resulting program instability causes cost escalation, schedule
delays, fewer quantities, and reduced contractor accountability.
* Program decisions to move into design and production are made without
adequate standards or knowledge.
* Contracts, especially service contracts, often do not have measures
in place at the outset in order to control costs and facilitate
accountability.
* Contracts typically do not accurately reflect the complexity of
projects or appropriately allocate risk between the contractors and the
taxpayers.
* The acquisition workforce faces serious challenges (e.g. size,
skills, knowledge, succession planning).
* Incentive and award fees are often paid based on contractor attitudes
and efforts versus positive results, such as cost, quality, and
schedule.
* Inadequate government oversight results in little to no
accountability for recurring and systemic problems.
Deepwater Program Is Illustrative of Problems Stemming from Lack of
Effective Program Management and Contractor Oversight:
The Deepwater program is the Coast Guard's major effort to replace or
modernize its aircraft and vessels. It has been in development for a
number of years. Between 1998 and 2001, three industry teams competed
to identify and provide the assets needed to transform the Coast Guard.
In 2001, we described the Deepwater project as "risky" due to the
unique, untried acquisition strategy for a project of this magnitude
within the Coast Guard.[Footnote 12] Rather than using the traditional
approach of replacing classes of ships or aircraft through a series of
individual acquisitions, the Coast Guard chose to use a system-of-
systems acquisition strategy that would replace its deteriorating
assets with a single, integrated package of aircraft, vessels, and
unmanned aerial vehicles, to be linked through systems that provide
C4ISR,[Footnote 13] and supporting logistics.
System Integrator Concept and the Role of Contractors:
In June 2002, the Coast Guard awarded the Deepwater contract to
Integrated Coast Guard Systems (ICGS). ICGS--a business entity jointly
owned by Northrop Grumman and Lockheed Martin--is a system integrator,
responsible for designing, constructing, deploying, supporting, and
integrating the Deepwater assets to meet Coast Guard requirements. The
management approach of using a system integrator has been used on other
government programs that require system-of-systems integration, such as
the Army's Future Combat System, a networked family of weapons and
other systems. This type of business arrangement gives the contractor
extensive involvement in requirements development, design, and source
selection of major system and subsystem subcontractors.
Government agencies have turned to the system integrator approach when
they believe they do not have the in-house capability to design,
develop, and manage complex acquisitions. Giving contractors more
control and influence over the government's acquisitions in a system
integrator role creates a potential risk that program decisions and
products could be influenced by the financial interest of the
contractor (who is accountable to its shareholders), which may not
match the primary interest of the government--maximizing its return on
taxpayer dollars. The system integrator arrangement creates an inherent
risk, as the contractor is given more discretion to make certain
program decisions. Along with this greater discretion comes the need
for more government oversight and an even greater need to develop well-
defined outcomes at the outset.
The proper role of contractors in providing services to the government
is currently the topic of some debate. I believe there is a need to
focus greater attention on what type of functions and activities should
be contracted out and which ones should not. There is also a need to
review and reconsider the current independence and conflict of interest
rules relating to contractors. Finally, there is a need to identify the
factors that prompt the government to use contractors in circumstances
where the proper choice might be the use of civil servants or military
personnel. Possible factors could include inadequate force structure,
outdated or inadequate hiring policies, classification and compensation
approaches, and inadequate numbers of full-time equivalent slots.
Performance-based Acquisition:
The Deepwater program has also been designated as a performance-based
acquisition. When buying services, federal agencies are currently
required to employ--to the maximum extent feasible--this concept,
wherein acquisitions are structured around the results to be achieved
as opposed to the manner in which the work is to be performed. That is,
the government specifies the outcome it requires while leaving the
contractor to propose decisions about how it will achieve that outcome.
Performance-based contracts for services are required to include a
performance work statement; measurable performance standards (i.e., in
terms of quality, timeliness, quantity, etc.) and the method of
assessing contractor performance against these standards; and
performance incentives, where appropriate. If performance-based
acquisitions are not appropriately planned and structured, there is an
increased risk that the government may receive products or services
that are over cost estimates, delivered late, and of unacceptable
quality.
Assessments of Deepwater Program:
In 2001, we reported that the Deepwater project faced risks, including
the ability to control costs in the contract's later years; ensuring
that procedures and personnel were in place for managing and overseeing
the contractor; and minimizing potential problems with developing
unproven technology.[Footnote 14] We noted that the risks could be
mitigated to varying degrees, but not without management attention. Our
assessment of the Deepwater program in 2004 found that the Coast Guard
had not effectively managed the program or overseen the system
integrator.[Footnote 15] We reported last year that the Coast Guard had
revised its Deepwater implementation plan to reflect additional
homeland security responsibilities as a result of the September 11,
2001, terrorist attacks.[Footnote 16] The revised plan increased
overall program costs from the original estimate of $17 billion to $24
billion. Overall, the acquisition schedule was lengthened by 5 years,
with the final assets now scheduled for delivery in 2027.
Our reported concerns in 2004 and in subsequent assessments in 2005 and
2006 have centered on three main areas: program management, contractor
accountability, and cost control through competition. While we
recognize that the Coast Guard has taken steps to address our findings
and recommendations, aspects of the Deepwater program will require
continued attention, such as the risk involved in the system-of-systems
approach with the contractor acting as overall integrator. A project of
this magnitude will likely continue to experience other problems as
more becomes known.
Program Management:
In 2004, we reported that more than a year and a half into the
Deepwater contract, the key components needed to manage the program and
oversee the system integrator had not been effectively implemented. For
example, integrated product teams, comprised of government and
contractor employees, are the Coast Guard's primary tool for managing
the program and overseeing the contractor. We found that the teams had
not been effective due to changing membership, understaffing,
insufficient training, lack of authority for decision making, and
inadequate communication among members.
Although some efforts have been made to improve the effectiveness of
the integrated product teams, we have found that the needed changes are
not yet sufficiently in place. In 2005, we reported that decision
making was to a large extent stove-piped, and some teams lacked
adequate authority to make decisions within their realm of
responsibility.[Footnote 17] One source of difficulty for some team
members has been the fact that each of the two major subcontractors has
used its own management systems and processes to manage different
segments of the program. We noted that decisions on air assets were
made by Lockheed Martin, while decisions regarding surface assets were
made by Northrop Grumman. This approach can lessen the likelihood that
a system-of-systems outcome will be achieved if decisions affecting the
entire program are made without the full consultation of all parties
involved. In 2006, we reported that Coast Guard officials believed
collaboration among the subcontractors to be problematic and that ICGS
wielded little influence to compel decisions among them. For example,
when dealing with proposed design changes to assets under construction,
ICGS submitted the changes as two separate proposals from both
subcontractors rather than coordinating the separate proposals into one
coherent plan. According to Coast Guard performance monitors, this
approach complicates the government review of design changes because
the two proposals often carried overlapping work items, thereby forcing
the Coast Guard to act as the system integrator in those situations.
In addition, we reported in 2004 that the Coast Guard had not
adequately communicated to its operational personnel decisions on how
new and old assets would be integrated and how maintenance
responsibilities would be divided between government and contractor
personnel. We also found that the Coast Guard had not adequately
staffed its program management function. Despite some actions taken to
more fully staff the Deepwater program, we reported that in January
2005 shortfalls remained. While 244 positions were assigned to the
program, only 206 were filled, resulting in a 16 percent vacancy rate.
Contractor Accountability:
In 2004, we found that the Coast Guard had not developed quantifiable
metrics to hold the system integrator accountable for its ongoing
performance and that the process by which the Coast Guard assessed
performance after the first year of the contract lacked rigor. For
example, the first annual award fee determination was based largely on
unsupported calculations. Despite documented problems in schedule,
performance, cost control, and contract administration throughout the
first year, the program executive officer awarded the contractor an
overall rating of 87 percent, which fell in the "very good" range. This
rating resulted in an award fee of $4.0 million of the maximum of $4.6
million.
We also reported in 2004 that the Coast Guard had not begun to measure
the system integrator's performance on the three overarching goals of
the Deepwater program--maximizing operational effectiveness, minimizing
total ownership costs, and satisfying the customers. Coast Guard
officials told us that metrics for measuring these objectives had not
been finalized; therefore they could not accurately assess the
contractor's performance against the goals. However, at the time, the
Coast Guard had no time frame in which to accomplish this measurement.
Cost Control through Competition:
In 2004, we reported that, although competition among subcontractors
was a key vehicle for controlling costs, the Coast Guard had neither
measured the extent of competition among the suppliers of Deepwater
assets nor held the system integrator accountable for taking steps to
achieve competition.[Footnote 18] As the two major subcontractors to
ICGS, Lockheed Martin and Northrop Grumman have sole responsibility for
determining whether to provide the Deepwater assets themselves or to
hold competitions--decisions commonly referred to as "make or buy." We
noted that the Coast Guard's hands-off approach to make-or-buy
decisions and its failure to assess the extent of competition raised
questions about whether the government would be able to control
Deepwater program costs.
Failure to control costs can result in waste of taxpayer dollars. Along
with my several colleagues in the accountability community, I have
developed a definition of waste. As we see it, waste involves the
taxpayers in the aggregate not receiving reasonable value for money in
connection with any government funded activities due to an
inappropriate act or omission by players with control over or access to
government resources (e.g., executive, judicial or legislative branch
employees, contractors, grantees or other recipients). Importantly,
waste involves a transgression that is less than fraud and abuse and
most waste does not involve a violation of law. Rather, waste relates
primarily to mismanagement, inappropriate actions, or inadequate
oversight.
Status of Recommendations:
We made 11 recommendations in 2004 in the areas of management and
oversight, contractor accountability, and cost control through
competition. In April 2006, we reported that the Coast Guard had
implemented five of them. Actions had been taken to:
* revise the Deepwater human capital plan;
* develop measurable award fee criteria;
* implement a more rigorous method of obtaining input from Coast Guard
monitors on the contractor's performance;
* include in the contractor's performance measures actions taken to
improve the integrated product teams' effectiveness; and:
* require the contractor to notify the Coast Guard of subcontracts over
$10 million that were awarded to the two major subcontractors.[Footnote
19]
The Coast Guard had begun to address five other recommendations by:
* initiating actions to establish charters and training for integrated
product teams;
* improving communications with field personnel regarding the
transition to Deepwater assets;
* devising a time frame for measuring the contractor's progress toward
improving operational effectiveness;
* establishing criteria to determine when to adjust the project
baseline; and:
* developing a plan to hold the contractor accountable for ensuring
adequate competition among suppliers.
We determined that, based on our work, these recommendations had not
been fully implemented.
The Coast Guard disagreed with and declined to implement one of our
recommendations, to establish a baseline to determine whether the
system-of-systems acquisition approach is costing the government more
than the traditional asset replacement approach. While we stand behind
our original recommendation, the Coast Guard maintains that the cost to
implement this recommendation would be excessive.
Performance and Design Problems:
In addition to overall management issues discussed above, there have
been problems with the design and performance of specific Deepwater
assets. For example, in February 2006, the Coast Guard suspended design
work on the Fast Response Cutter (FRC) due to design risks such as
excessive weight and horsepower requirements.[Footnote 20] The FRC was
intended as a long-term replacement for the legacy 110-foot patrol
boats. Coast Guard engineers raised concerns about the viability of the
FRC design (which involved building the FRC's hull, decks, and
bulkheads out of composite materials rather than steel) beginning in
January 2005. In February 2006, the Coast Guard suspended FRC design
work after an independent design review by third-party consultants
demonstrated, among other things, that the FRC would be far heavier and
less efficient than a typical patrol boat of similar length, in part,
because it would need four engines to meet Coast Guard speed
requirements.
In moving forward with the FRC acquisition, the Coast Guard will end up
with two classes of FRCs. The first class of FRCs to be built would be
based on an adapted design from a patrol boat already on the market to
expedite delivery. The Coast Guard would then pursue development of a
follow-on class that would be completely redesigned to address the
problems in the original FRC design plans. Coast Guard officials now
estimate that the first FRC delivery will slip to fiscal year 2009, at
the earliest, rather than 2007 as outlined in the 2005 Revised
Deepwater Implementation Plan.
In addition to problems with the FRC design, problems have also been
discovered with the long-term structural integrity of the National
Security Cutter's (NSC) design, which could pose operational and
financial impacts to the Coast Guard. The Commandant of the Coast Guard
recently stated that internal reviews by Coast Guard engineers, as well
as by independent analysts have concluded that the NSC as designed will
need structural reinforcement to meet its expected 30-year service
life. In addition, a recent report by the DHS Inspector General
indicated that the NSC design will not achieve a 30-year service life
based on an operating profile of 230 days underway per year in General
Atlantic and North Pacific sea conditions and added that Coast Guard
technical experts believe the NSC's design deficiencies will lead to
increased maintenance costs and reduced service life.[Footnote 21]
In an effort to address the structural deficiencies of the NSC, the
Commandant has stated that the Coast Guard is taking a two-pronged
approach. First, the Coast Guard is working with the contractors to
enhance the structural integrity of hulls three through eight that have
not yet been constructed. Second, after determining that the NSC's
structural deficiencies are not related to the safe operation of the
vessel in the near term, the Coast Guard has decided to address the
deficiencies of hulls one and two as part of depot-level maintenance,
planned for several years after they are delivered. The Commandant
stated that he decided to delay the repairs to the first two NSC hulls
in an effort to prevent further cost increases or delays in
construction and delivery.
Further, the Deepwater program's conversion of the legacy 110-foot
patrol boats to 123-foot patrol boats has also encountered performance
problems. The Coast Guard had originally intended to convert all 49 of
its 110-foot patrol boats into 123-foot patrol boats in order to
increase the patrol boats' annual operational hours. This conversion
program was also intended to add additional capability to the patrol
boats, such as enhanced and improved C4ISR capabilities, as well as
stern launch and recovery capability for a small boat. However, the
converted 123-foot patrol boats began to display deck cracking and hull
buckling and developed shaft alignment problems, and the Coast Guard
elected to stop the conversion process at eight hulls upon determining
that the converted patrol boats would not meet their expanded post-9/11
operational requirements.
Problems Have Operational Consequences:
The design and performance problems illustrated above have clear
operational consequences for the Coast Guard. In the case of the 123-
foot patrol boats, the hull performance problems cited above led the
Coast Guard to suspend all normal operations of the eight converted
normal 123-foot patrol boats effective November 30, 2006. The
Commandant of the Coast Guard has stated that having reliable, safe
cutters is "paramount" to executing its missions, such as search and
rescue and migrant interdiction.[Footnote 22] The Coast Guard is
exploring options to address operational gaps resulting from the
suspension of the 123-foot patrol boat operations.
In regard to the suspension of FRC design work, as of our June 2006
report, Coast Guard officials had not yet determined how changes in the
design and delivery date for the FRC would affect the operations of the
overall system-of-systems approach. However, because the delivery of
Deepwater assets are interdependent within this acquisition approach,
schedule slippages and uncertainties associated with potential changes
in the design and capabilities of the new assets have increased the
risks that the Coast Guard may not meet its expanded homeland security
performance requirements within given budget parameters and milestone
dates.
Additional Reviews Ongoing:
Given the size of DHS and the scope of its acquisitions, we are
continuing to assess the department's acquisition oversight process and
procedures in ongoing work. For example, we are currently reviewing
DHS's use of contractors to provide management and professional
services, including the roles they are performing and how their
performance is overseen. In addition, the conference report to the
Department of Homeland Security Appropriations Act for Fiscal Year
2007[Footnote 23] directed DHS's Chief Procurement Officer to develop a
procurement oversight plan, identifying necessary oversight resources
and how improvements in the department's performance of its procurement
functions will be achieved. We have been directed to review the plan
and provide our observations to congressional committees. We are also
reviewing the department's use of performance-based acquisitions.
We will also continue to review Deepwater implementation and contract
oversight. We are currently reviewing aspects of the Deepwater program
for the House and Senate Appropriations Committees' Subcommittees on
Homeland Security.[Footnote 24] Our objectives are to review (1) the
status of the development and delivery of the major aviation and
maritime assets that comprise the Coast Guard's Deepwater program; (2)
the history of the contract, design, fielding, and grounding of the
converted 123-foot patrol boats and operational adjustments the Coast
Guard making to account for the removal from service of the 123-foot
patrol boats; and (3) the status of the Coast Guard's implementation of
our 2004 recommendations on Deepwater contract management for improving
Deepwater program management, holding the prime contractor accountable
for meeting key program goals, and facilitating cost control through
competition. We will share our results with those committees in April
of this year.
Concluding Observations:
Due to the complexity of its organization, DHS is likely to continue to
face challenges in unifying the acquisition functions of its components
and overseeing their acquisitions--particularly those involving large
and complex investments. Although the Coast Guard has taken actions to
improve its management of the Deepwater program and oversight of the
system integrator, problems continue to emerge as the program is
implemented. DHS and the Coast Guard face the challenge of effectively
managing this program to obtain desired outcomes while making decisions
that are in the best interest of the taxpayer. Given its experience
with Deepwater, the department would be wise to apply lessons learned
to its other major, complex acquisitions, particularly those involving
a system integrator.
Mr. Chairman, that concludes my statement. I would be happy to respond
to any questions you or other Members of the Committee may have at this
time.
Contacts and Acknowledgements:
For information about this testimony, contact Steve Caldwell at (202)
512-9610 or John Hutton at (202) 512-7773. Other individuals making key
contributions to this testimony include Michele Mackin, Christopher
Conrad, and Adam Couvillion.
FOOTNOTES
[1] When the department was established, 22 agencies and organizations
were brought in; Plum Island Animal Disease Center joined DHS afterward
as the 23rd.
[2] GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.:
January 2003).
[3] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).
[4] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[5] We recently reported on the Department of Defense's use of award
and incentive fees. GAO, Defense Acquisitions: DOD Has Paid Billions in
Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66
(Washington, D.C.: Dec. 19, 2005).
[6] GAO, Coast Guard: Changes to Deepwater Appear Sound, and Program
Management Has Improved, but Continued Monitoring Is Warranted, GAO-06-
546 (Washington, D.C.: Apr. 28, 2006).
[7] GAO, Contract Management: INS Contracting Weaknesses Need Attention
from the Department of Homeland Security, GAO-03-799 (Washington, D.C.:
July 25, 2003); Transportation Security Administration: High-Level
Attention Needed to Strengthen Acquisition Function, GAO-04-544
(Washington, D.C.: May 28, 2004); and Homeland Security: Successes and
Challenges in DHS's Efforts to Create an Effective Acquisition
Organization, GAO-05-179 (Washington, D.C.: Mar. 29, 2005).
[8] Pub. L. No. 107-296, §§ 821, 888, 116 Stat. 2135 (2002).
[9] GAO-05-179.
[10] GAO, Best Practices: Taking a Strategic Approach Could Improve
DOD's Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18,
2002).
[11] GAO-05-179.
[12] GAO, Coast Guard: Progress Being Made on Deepwater Project, but
Risks Remain, GAO-01-564 (Washington, D.C.: May 2, 2001).
[13] C4ISR refers to command, control, communications, computer,
intelligence, surveillance, and reconnaissance.
[14] GAO-01-564.
[15] GAO, Contract Management: Coast Guard's Deepwater Program Needs
Increased Attention to Management and Contractor Oversight, GAO-04-380
(Washington, D.C.: Mar. 9, 2004).
[16] GAO-06-546.
[17] GAO, Coast Guard: Progress Being Made on Addressing Legacy Asset
Condition Issues and Program Management, but Acquisition Challenges
Remain, GAO-05-757 (Washington, D.C.: July 22, 2005).
[18] GAO-04-380.
[19] Our 2004 recommendation was to use a $5 million threshold because
Lockheed Martin, one of the major subcontractors, uses that amount as
the threshold for considering its suppliers major. The Coast Guard
decided to use the $10 million threshold based on the criteria in the
make-or-buy program provisions of the Federal Acquisition Regulation.
[20] GAO, Coast Guard: Status of Deepwater Fast Response Cutter Design
Efforts, GAO-06-764 (Washington, D.C.: June 23, 2006).
[21] Department of Homeland Security, Office of Inspector General,
Acquisition of the National Security Cutter, U.S. Coast Guard, OIG-07-
23 (Washington, D.C.: Jan. 23, 2007).
[22] Coast Guard Suspends Converted Patrol Boat Operations, November
30, 2006, U.S. Coast Guard, Office of Public Affairs.
[23] H.R. Conf. Rep. No. 109-699, at 118 (2006).
[24] This work is based on Conference Committee Report language (H.R.
Conf. Rep. No. 109-699, at 118 (2006)) incorporating GAO reporting
provisions contained in a House Appropriations Committee Report (H.R.
Rep. No. 109-476, at 15 (2006)).
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