Text: S.Hrg. 109-827 — DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR 2007

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[Senate Hearing 109-827]
[From the U.S. Government Printing Office]



                                                 S. Hrg. 109-827, Pt. 4
 
DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR 
                                  2007

=======================================================================

                                HEARINGS

                               before the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

                                S. 2766

     TO AUTHORIZE APPROPRIATIONS FOR FISCAL YEAR 2007 FOR MILITARY 
ACTIVITIES OF THE DEPARTMENT OF DEFENSE, FOR MILITARY CONSTRUCTION, AND 
   FOR DEFENSE ACTIVITIES OF THE DEPARTMENT OF ENERGY, TO PRESCRIBE 
PERSONNEL STRENGTHS FOR SUCH FISCAL YEAR FOR THE ARMED FORCES, AND FOR 
                             OTHER PURPOSES

                               __________

                                 PART 4

                                AIRLAND

                               __________

                       MARCH 1, 28; JULY 25, 2006


         Printed for the use of the Committee on Armed Services



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30-350 PDF                 WASHINGTON DC:  2007
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                      COMMITTEE ON ARMED SERVICES

                    JOHN WARNER, Virginia, Chairman

JOHN McCAIN, Arizona                 CARL LEVIN, Michigan
JAMES M. INHOFE, Oklahoma            EDWARD M. KENNEDY, Massachusetts
PAT ROBERTS, Kansas                  ROBERT C. BYRD, West Virginia
JEFF SESSIONS, Alabama               JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine              JACK REED, Rhode Island
JOHN ENSIGN, Nevada                  DANIEL K. AKAKA, Hawaii
JAMES M. TALENT, Missouri            BILL NELSON, Florida
SAXBY CHAMBLISS, Georgia             E. BENJAMIN NELSON, Nebraska
LINDSEY O. GRAHAM, South Carolina    MARK DAYTON, Minnesota
ELIZABETH DOLE, North Carolina       EVAN BAYH, Indiana
JOHN CORNYN, Texas                   HILLARY RODHAM CLINTON, New York
JOHN THUNE, South Dakota

                    Charles S. Abell, Staff Director

             Richard D. DeBobes, Democratic Staff Director

                                 ______

                        Subcommittee on Airland

                     JOHN McCAIN, Arizona, Chairman

JAMES M. INHOFE, Oklahoma            JOSEPH I. LIEBERMAN, Connecticut
JEFF SESSIONS, Alabama               JACK REED, Rhode Island
JOHN ENSIGN, Nevada                  DANIEL K. AKAKA, Hawaii
JAMES M. TALENT, Missouri            BILL NELSON, Florida
SAXBY CHAMBLISS, Georgia             MARK DAYTON, Minnesota
LINDSEY O. GRAHAM, South Carolina    EVAN BAYH, Indiana
ELIZABETH DOLE, North Carolina       HILLARY RODHAM CLINTON, New York

                                  (ii)


                            C O N T E N T S

                              ----------                              

                    CHRONOLOGICAL LIST OF WITNESSES
 Army Transformation and the Future Combat Systems Acquisition Strategy
                             march 1, 2006

                                                                   Page
Cody, GEN Richard A., USA, Vice Chief of Staff, United States 
  Army...........................................................     6
Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for 
  Acquisition, Logistics, and Technology.........................    18
Francis, Paul L., Director, Acquisition and Sourcing Management, 
  Government Accountability Office...............................    21
Graham, David R., Deputy Director, Strategy Forces and Resources 
  Division, Institute for Defense Analyses.......................    31

             Air Force and Navy Tactical Aviation Programs
                             march 28, 2006

Sullivan, Michael J., Director, Acquisition and Sourcing 
  Management Team, United States Government Accountability Office    77
Marron, Donald B., Acting Director, Congressional Budget Office..    92
Bolkcom, Christopher, Specialist in National Defense, 
  Congressional Research Service.................................    98
Hoffman, Lt. Gen. Donald J., USAF, Military Deputy, Office of the 
  Assistant Secretary of the Air Force for Acquisition...........   103
Kilcline, RADM Thomas J., Jr., USN, Director, Air Warfare 
  Division, United States Navy...................................   130
Enewold, RADM Steven L., USN, Program Executive Officer, Joint 
  Strike Fighter Program.........................................   134

                  F-22A Multiyear Procurement Proposal
                             july 25, 2006

Wynne, Hon. Michael E., Secretary of the Air Force...............   407
Walker, Hon. David M., Comptroller General of the United States..   411
Finley, Hon. James I., Deputy Under Secretary of Defense for 
  Acquisition and Technology.....................................   417
Newman, David B., Principal Analyst in Defense, Congressional 
  Budget Office..................................................   478
Nelson, J. Richard, Research Staff Member, Operational Evaluation 
  Division, Institute for Defense Analyses.......................   482
Bolkcom, Christopher, Specialist in National Defense, 
  Congressional Research Service.................................   485
Brian, Danielle, Executive Director, Project on Government 
  Oversight......................................................   494

                                 (iii)


DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR 
                                  2007

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

                               U.S. Senate,
                           Subcommittee on Airland,
                               Committee on Armed Services,
                                                    Washington, DC.

 ARMY TRANSFORMATION AND THE FUTURE COMBAT SYSTEMS ACQUISITION STRATEGY

    The subcommittee met, pursuant to notice, at 2:41 p.m. in 
room SR-232A, Russell Senate Office Building, Senator John 
McCain (chairman of the subcommittee) presiding.
    Committee members present: Senators McCain, Sessions, and 
Lieberman.
    Majority staff members present: Ambrose R. Hock, 
professional staff member; Gregory T. Kiley, professional staff 
member; and Elaine A. McCusker, professional staff member.
    Minority staff member present: Daniel J. Cox, Jr., 
professional staff member.
    Committee members' assistants present: Christopher J. Paul, 
assistant to Senator McCain; John A. Bonsell, assistant to 
Senator Inhofe; Arch Galloway II, assistant to Senator 
Sessions; Frederick M. Downey, assistant to Senator Lieberman; 
Elizabeth King, assistant to Senator Reed; and William K. 
Sutey, assistant to Senator Bill Nelson.

       OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

    Senator McCain. Good afternoon. The Airland Subcommittee 
meets today to receive testimony on Army Transformation and the 
Future Combat Systems (FCS). The hearing will be conducted in 
two panels. The first panel will testify on the budgetary 
aspects of Army transformation, and will specifically discuss 
Army force structure, Army aviation, and modularity in the 
communications program, complementary to the FCS.
    We welcome Secretary Bolton and General Cody, and we extend 
our profound respect to those who serve--and our thoughts and 
prayers are with their families--who are serving with great 
distinction in our Armed Forces--in the Army, in particular.
    The 2007 Army budget request of $110.4 billion is a 12.7-
percent increase over fiscal year 2006, authorized in 
appropriated levels of $99.3 billion. This increase is 
reflected primarily in the procurement account. 2007 reflects 
the first year the Army has budgeted for modularity in its base 
budget, instead of supplemental appropriations. Not included in 
the fiscal year 2006 almost $70 billion are of supplemental 
appropriations. Of the $70 billion for the Army in the 
supplemental, $15.2 billion in the procurement account funds 
modularity, force protection and recapitalization, equipment, 
and combat losses. This committee has jurisdiction over all of 
these areas, but, by funding these areas through the 
supplemental budget, has little oversight. This is a concern to 
me and other members of the committee.
    Yesterday, we learned from the press that the Army leaders 
sliced nearly 3 billion from their latest wartime supplemental 
spending request, under last-minute orders from the White 
House, foregoing money needed to upgrade a hard-worn fleet of 
heavy tanks and armored vehicles. The report goes on to say the 
budget-cutting decision is expected to shut down production 
lines, at least temporarily, on the Abrams tank and the Bradley 
fighting vehicle, resulting in long modernization delays for 
the aging platforms, and perhaps thousands of layoffs around 
the country.
    The Army's Abrams tank and Bradley fighting vehicle 
programs have been funded through supplemental budgets for 
their last several years. In some cases, the programs have been 
funded through earmarks to the base and supplemental budget 
requests, and I have opposed those emergency supplemental 
earmarks.
    After last year's Airland Subcommittee hearing on Army 
Transformation and the FCS, Secretary Harvey met with me and 
agreed to convert the FCS other transaction authority contract 
to a more traditional Federal Acquisition Regulation (FAR) Part 
15 contract. I congratulate the Army on that decision, and we 
look forward to receiving an update on the progress of the FCS 
contract conversion.
    FCS remains a particular concern, particularly the use of a 
lead systems integrator (LSI). That's why the FCS LSI is a 
topic of the second panel. Secretary Bolton, thank you for 
sitting on the second panel. You'll be joined by Paul Francis, 
Director of Acquisition and Sourcing Management, Government 
Accountability Office (GAO), and Dr. David Graham, Deputy 
Director, Strategy Forces and Resource Divisions, Institute for 
Defense Analyses (IDA).
    According to the report, IDA Review of FCS Management, Army 
documentation noted that one of the critical reasons to select 
the Boeing/Science Applications International Corporation 
(SAIC) as the LSI was because it would have an integrating 
role, not a producing one in developing FCS, opening up 
potential opportunities for non-LSI companies in FCS 
development.
    Additionally, the IDA report states that the LSI is 
intended to act as a neutral party in assessing program 
tradeoffs and in offering advice. Thus, in theory, the LSI 
should not have a financial stake in developing and building 
the individual elements of the system; rather, it should 
recruit and oversee the best of industry.
    In the case of FCS, Boeing has a large financial stake in 
the future of the program; thus, creating an inherent tension 
in Boeing's roles and responsibilities. The IDA review examined 
Boeing's formal ethics program in depth, looked briefly into 
the ethics programs and the other companies involved in FCS, 
and considered Government workforce ethics issues, as well. The 
report made several recommendations regarding improvement to 
the ethics program and we look forward to hearing how the Army 
has addressed these recommendations.
    I thank everyone for being here today. I look forward to 
your testimony and I want to thank Senator Lieberman for his 
leadership on this subcommittee and for continuing the 
bipartisanship this subcommittee has enjoyed over the past 6 
years.
    Senator Lieberman.

            STATEMENT OF SENATOR JOSEPH I. LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman. It is always a 
pleasure to work with you in support of our Nation's military.
    I want to welcome Assistant Secretary Bolton, General Cody, 
Mr. Francis, and Dr. Graham. Thank all of you for not only 
being here, but really, more fundamentally, for your continued 
military and governmental service to our country. We recognize 
the important jobs you undertake to ensure that our Army 
maintains its superiority worldwide.
    The President's budget request for the Army is 12 percent 
higher than last year's. That is good news--very good news. 
Some of that increase is a result of including the cost of the 
Army Modularity Program (AMP) in the base budget rather than in 
the emergency supplemental request. That, too, is good news. 
However, I'm concerned about other potential shortfalls in 
modularity and reset. It appears that the administration's 
fiscal year 2006 supplemental budget request covers only about 
$10.4 billion of the Army's estimated fiscal year 2006 $13.5 
billion requirement for reset, repair, recapitalization, and 
replacement of equipment of units redeploying from Iraq and 
Afghanistan. Also, the Army's estimate of an additional $20 
billion requirement for reset in fiscal years 2007 to 2011 
assumes that units will begin withdrawing in the summer of 2006 
from Iraq, and complete that withdrawal within 2 years. Should 
that assumption prove wrong, the program cost of reset will 
certainly require an increase. At this moment, it's hard to 
say, though we hope it does not prove wrong, whether it will or 
not.
    I remain concerned about the organization, force structure, 
and size of the Army. At this moment in time, the U.S. Army is 
comprised of truly the best and brightest soldiers in its 
history. The Army's service men and women are committed to 
their mission, exhibit courage beyond any normal expectations, 
and demonstrate impressive technological capabilities.
    The quality of our soldiers is not my concern. My concern 
is whether there are enough of them. Common sense dictates that 
we must question the Quadrennial Defense Review's (QDR) 
recommendation that the Army decrease its size at this point in 
time. Right now, there are about 500,000 Active solders in the 
Army, which is down from 800,000 at the end of the Cold War. 
Even though everyone acknowledges that we are now engaged in a 
long war against Islamist terrorism, the QDR suggests that this 
number should decrease to 482,000 by fiscal year 2011 which I 
think any of us will say, by 2011, we'll still be in this long 
war, unfortunately. I know of no instance in our Nation's 
history in which we cut our Army during wartime and I'd like to 
ask about that.
    In order to improve its deployability, the Army has 
proposed an increase in the number of combat brigades. As part 
of its modularity plan, the Army will reorganize from 33 
brigades to 42 brigades. But each of these new brigades 
contains only two maneuver battalions, instead of the 
longstanding standard of three. Under this plan, the Army will 
have more brigades, but fewer maneuver battalions and maneuver 
companies and I'd like to ask some questions about that.
    Finally, at this hearing I would welcome an update on the 
FCS. Last year, this committee was able to protect the FCS from 
potentially damaging legislation. But should supplemental 
budget request levels remain high, that program will 
undoubtedly come under increased funding pressure and we need 
to hear from you and work with you to protect that part of the 
Army's future.
    Mr. Chairman, I'd ask that my full statement be included in 
the record. I look forward to the testimony of the witnesses.
    Senator McCain. Without objection.
           Prepared Statement by Senator Joseph I. Lieberman
    Good afternoon and thank you all for attending. This hearing is an 
opportunity to continue the discussions about the Army's future plans, 
which we began at the full Senate Armed Services Committee hearing on 
February 14. Assistant Secretary Bolton, General Cody, Mr. Francis, and 
Dr. Graham, I want to thank you for coming here today to testify on 
these issues. I appreciate your continued military and, Government 
service, and recognize the important jobs you undertake to ensure that 
our Army maintains its superiority worldwide.
    The President's budget request for the Army is 12 percent higher 
than last year's. That is good news. Some of that increase is a result 
of including the cost of the Army modularity program in the base budget 
rather than in the emergency supplemental requests. I hope this hearing 
addresses any known shortfalls in resources for modularity and reset. 
It appears that the administration's fiscal year 2006 supplemental 
budget request covers only about $10.4 billion of the Army's estimated 
fiscal year 2006 $13.5 billion requirement for reset--the repair, 
recapitalization, and replacement of equipment for units redeploying 
from Iraq and Afghanistan. Also, the Army's estimate of an additional 
$20 billion requirement for reset in fiscal years 2007-2011 assumes 
that units will begin withdrawing from Iraq in the summer of 2006 and 
complete that withdrawal within 2 years.
    I remain concerned about the organization, force structure, and 
size of the Army. At this moment in time, the United States Army is 
comprised of the best and brightest soldiers in its history. The Army's 
service men and women are committed to their mission, exhibit courage 
beyond expectation, and demonstrate impressive technological 
capabilities. The quality of our soldiers is not the problem. The 
problem is that there are not enough of them.
    Common sense dictates that we must question the Quadrennial Defense 
Review's (QDR) recommendation that the Army decrease its size at this 
point in time. Right now, there are about 500,000 Active soldiers in 
the Army, which is down from 800,000 at the end of the Cold War. Even 
though we are engaged in a ``long war,'' the QDR suggests that this 
number should decrease to 482,400 by fiscal year 2011. I know of no 
instance in our Nation's history in which we cut our Army during 
wartime.
    At the very moment when our Nation's strategic challenges are 
expanding in scope to include irregular, catastrophic, and asymmetric 
threats, it is simply not sensible that the Army reduce its end 
strength to the level it was after the fall of the Soviet Union and 
before September 11. In fact, with an increase of 12 percent in the 
Army's budget for next year, it is hard to understand why a portion of 
these additional funds were not targeted towards expanding our ground 
forces.
    In order to improve its deployability, the Army has proposed an 
increase in the number of combat brigades. As part of its modularity 
plan, the Army will reorganize from 33 brigades to 42 brigades. But 
each of these new brigades contains only two maneuver battalions 
instead of the longstanding standard of three battalions. Under this 
plan, the Army will have more brigades, but fewer maneuver battalions 
and maneuver companies. I know that technology can multiply the 
effectiveness of our soldiers, but that improvement only goes so far. 
It is difficult to understand how smaller brigades engaged in irregular 
warfare will have the capability of covering the same territory as the 
previous components or providing commanders with the same tactical 
flexibility. Furthermore, with more brigades, there is a need for 
additional headquarters and overhead. Reputable outside voices have 
raised concerns about the Army's decisions. It is very important that 
we examine whether this reconfiguration is the best way to organize the 
Army's scarce resources.
    Engaging in combat with the enemy is only one of the tasks our 
soldiers must perform today. They must also control populations, repel 
insurgencies, perform humanitarian work, and defeat terrorists. With 
these added responsibilities, it seems sensible to conclude that we 
need more boots on the ground. In this respect, this budget and the QDR 
point us in the wrong direction.
    The transformation of our Army is not only a matter of 
reorganization. More robust education and training will play a vital 
role as the Army prepares for the complex strategic threats outlined in 
the QDR. Our soldiers need sophisticated training that will prepare 
them to think critically in the battlefield now, and even more 
importantly, in the future. A substantial investment in linguistics and 
cultural awareness is a good starting point. But the Army must make an 
ambitious pedagogical commitment that extends beyond these goals. That 
requires more time than ever before, and an Army training and 
educational base that is better than ever. We can't do that if our 
institutional Army is stripped of the numbers and quality of informed 
personnel it needs and if our soldiers are too busy to train and learn. 
Operational efficiency is not enough; the Army must produce soldiers 
who can think analytically.
    An important component of military transformation involves an 
investment in research and forward-thinking scientific innovations. But 
technology is not the whole picture. We also need to think about 
investing in human capital. To a large extent, the irregular threats we 
face in the future will be won on the ground. Our soldiers will be 
making difficult tactical decisions that can change a potentially fatal 
encounter to a strategic success. To train our soldiers adequately for 
these future challenges, the Army must invest in education. We cannot 
do that if we do not have enough soldiers in the Army to support our 
troops in combat. If the Army reduces its size, it becomes much harder 
to focus on important non-combat functions, such as education, which 
will enable the Army to meet its future strategic goals.
    At this hearing, I also welcome an update on Future Combat Systems 
(FCS). Last year this committee was able to protect FCS from 
potentially damaging legislation. But should supplemental budget 
request levels remain high, that program will undoubtedly come under 
increased funding pressure.
    I look forward to learning more about the progress the Army has 
made on FCS and its capabilities. It is my understanding that FCS 
relies on several dozen technologies, all of which contribute to the 
creation of a battle network. I am interested in learning more about 
the technologies that are essential for the development of FCS, and the 
risks associated with them. FCS is at a stage of development in which 
the Army should be able to provide this committee with a precise 
definition of the program. I hope that during this hearing, we will 
hear such a description.
    I look forward to hearing the testimony today, and I hope the 
discussion addresses both the Army's need for technological innovation 
and the structural requirements needed to wage the ``long war'' on 
terrorism.

    Senator McCain. We welcome Secretary Bolton and General 
Cody. As always, your full statement will be made part of the 
record, and we recognize and thank you for coming.
    Mr. Bolton. Mr. Chairman, Senator Lieberman, thank you very 
much for this opportunity. In the interest of time, I'll save 
my remarks----
    Senator McCain. I think you need to pull the microphone a 
little closer, Mr. Secretary. Thank you.
    Mr. Bolton. Thank you for this opportunity, and I'll save 
my remarks for the second panel. Thank you for your support and 
your guidance. I'll turn it over to General Cody, our Vice 
Chief.
    Senator McCain. Thank you.
    General Cody.

  STATEMENT OF GEN RICHARD A. CODY, USA, VICE CHIEF OF STAFF, 
                       UNITED STATES ARMY

    General Cody. Mr. Chairman, Senator Lieberman, Senator 
Sessions, thanks for the opportunity to speak to you today 
about our Army, our Army Transformation, and the Army Modular 
Force (AMF).
    A great deal has changed since I testified before you last 
year. I have carefully read your letter inviting me here, and 
I'm eager to answer your questions.
    That said, I'm going to keep my opening remarks rather 
brief, and focus on answering your questions.
    As many of the issues we will discuss today are complex, I 
have brought a few charts to assist in answering your 
questions. With your permission, Mr. Chairman, I would like to 
be able to show these at the appropriate time, things like 
organizational charts, to get to the complexity of the issues, 
so that I can better answer your questions. I've also provided 
some packets with these slides.
    On behalf of our Army's 600,000 soldiers that are on 
Active-Duty today around the world, more than 110,000 of them 
now serving in harm's way in Afghanistan and Iraq. I want to 
thank you for your support in providing our soldiers the 
mission-essential equipment and resources they need to 
prosecute this long war on terrorism.
    Our Army is at war, and it's also an Army in motion. We 
continue to transform, modernize, reset, and realign our global 
force posture while engaged around the world. We're 
aggressively evolving from a division-dependent force that was 
postured to deter and to wage war against traditional 20th-
century adversaries to a now more modular brigade-centric force 
designed to meet the challenges of both today's and tomorrow's 
asymmetric threats. Restructuring our brigade combat teams 
under Army modularity addresses the irregular warfare and 
counterinsurgency operations that we are now facing in Iraq and 
Afghanistan, as well as the full range of military operations 
we anticipate to be confronted within the future.
    Our modular brigade combat teams are more lethal, mobile, 
survivable, adaptable, sustainable, and ready for joint and 
expeditionary operations for the full range of military 
operations. Our Army modular brigades that we now have in 
combat with the 101st Airborne Division and with the 4th 
Infantry Division are the most versatile units we have ever 
fielded. In addition to their strategic and operational 
deployability, they remain flexible and fully capable of 
irregular warfare and the entire spectrum of military 
operations, to include both civil support and homeland defense 
missions. They will do this through the state-of-the-art 
command and control, as well as technology inserts.
    As we are building the modular brigades for our Active Army 
National Guard and Army Reserve components, our Army is moving 
ahead aggressively with the FCS program, our first major 
modernization program in more than 30 years that, simply put, 
is the most effective way for us to modernize our Army for 
future threats.
    Funding for the FCS program is critical to providing our 
soldiers the means to dominate the future fight. The FCS is not 
only a program of the future in which we will spin out mature 
technologies to our entire Army structure, we are today 
spiraling FCS-like technologies into our formation and 
cascading them across the force to increase the capabilities 
of, and provide greater protection for, our soldiers.
    2007 will be a pivotal year for the Army. Each of our 
Army's major initiatives, the Active component and Reserve 
component rebalance, Army modularity, the Integrated Global 
Positioning and Basing Strategy, Base Realignment and Closure 
(BRAC), operations in Iraq and Afghanistan, the temporary 
growth of 30,000 in the Active Force, and the reset and 
modernization of our equipment, all of those will be fully 
underway and fully integrated in fiscal year 2007.
    With your support, we're executing a fully integrated plan 
to best serve the Nation to deal with the challenges we face 
today, and will continue to confront tomorrow, as well as 
sustain this All-Volunteer Force. I assure you that our 
soldiers, the centerpiece of all that we do, continue to serve 
magnificently.
    I just returned from Kuwait and Iraq. Our soldiers know we 
are waging a long war, and they believe in their mission, the 
Soldier's Creed, and the Warrior Ethos. Their voluntary service 
is proof of their pride in each other and their confidence in 
their leadership and their unwavering patriotism. They are a 
solid green line in defense of this Nation forward.
    Our soldiers understand our Army values, and personify this 
Nation's highest ideals. Our Nation must remain equally 
committed to them by providing the resources they need to 
succeed in their mission. With your continued support, I know 
we will succeed.
    Thank you, again, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of General Cody follows:]
             Prepared Statement by GEN Richard A. Cody, USA
    Mr. Chairman, Senator Lieberman, and distinguished members of the 
committee, thank you for this opportunity to speak to you today about 
Army Transformation and the Army Modular Force. On behalf of our 
Secretary, Dr. Francis Harvey, our Chief of Staff, General Pete 
Schoomaker, and the approximately 600,000 soldiers on Active-Duty 
around the world--more than 110,000 of them serving in harm's way in 
Afghanistan and Iraq--let me offer a sincere ``thank you'' for your 
committed investment in our men and women in uniform. Our soldiers 
appreciate the support of this committee, and your tireless work to 
provide them the mission-essential resources to prosecute and win the 
war on terrorism.
    Our Army is an Army in motion. We continue to transform, to 
modernize, and to realign our global force posture to meet current 
demands and future challenges. The Army plan is driving change at an 
unprecedented pace. We are aggressively evolving from a division-
dependent force postured to deter and to wage war against traditional 
adversaries, to a modular brigade-centric force designed to meet the 
challenges of tomorrow's asymmetric enemy. With your support, we have 
resourced and are executing a fully integrated plan to best serve the 
Nation, to deal with the challenges we face today and will confront 
tomorrow, and to sustain our volunteer soldiers in this time of war. To 
execute The Army plan, we are depending upon continued Congressional 
assistance in several key areas: Expediting those wartime acquisitions 
essential to equipping and protecting our soldiers; maintaining 
investment in emerging technologies to complete conversion to the Army 
Modular Force and execute the Future Combat System (FCS) strategy; and 
sustaining the support of the American people whom we serve.
    To sustain the current mission posture for future commitments, and 
maintain risk at acceptable levels, the Army needs full funding of our 
request in the 2007 President's budget and supplemental funding. This 
supplemental funding is required for combat and contingency operations, 
and reset and replacement of equipment through at least 2 years beyond 
the conclusion of major operations. Prior to September 11, many of our 
units, especially within our Reserve components, were inadequately 
equipped due to years of insufficient modernization investment. To meet 
the needs of the combatant commanders for the global war on terrorism, 
we had to pool personnel, vehicles, and equipment from across the force 
to make some units whole before they deployed.
    Thanks to this committee and the administration, we have received 
unprecedented support to correct previous procurement deficits and 
broaden our operational capabilities to meet the complex challenges of 
the 21st century security environment. In addition, we are increasing 
the quality and the effectiveness of our principal fighting units, the 
Brigade Combat Teams (BCTs), by creating a rotational pool of 70 fully-
manned, equipped, and trained modular BCTs: 42 in the Active component 
and 28 in the Army National Guard. We will support these BCTs with more 
than 200 Active and Reserve support brigades, organized not just for 
the operational fight, but to provide essential capabilities to support 
civil authorities in homeland defense missions, including consequence 
management and disaster relief.
    To manage the rotation of these forces for the long war, the Army 
has developed a new force generation model to ensure units are at the 
desired state of readiness before they are scheduled to deploy. Our 
goal is to generate a continuous output of fully manned, equipped, and 
trained forces adequate to sustain one operational deployment in 3 
years for the Active component, and one operational deployment in 6 
years for the Reserve component. This model allows the Army to increase 
predictability for soldiers, families, and employers, improve 
availability of forces for combatant commanders, generate a continuous 
supply of 18-19 BCTs and the required support brigades, and surge up to 
an additional 15-19 BCTs in response to crises.
    To support global operations while transforming, we are resetting 
our force quickly and efficiently and providing for the well-being of 
our soldiers and their families. To take advantage of our current 
momentum, we are restoring our returning units to the required 
readiness levels, while simultaneously converting them to the new 
modular design and executing our re-stationing plan for an optimal 
footprint and in accordance with base realignment and closure (BRAC) 
and integrated global presence and basing strategy (IGPBS) decisions. 
We have already reset more than 20 major units. Many of these units 
have already returned to theaters of war in their new configurations. 
We are rebalancing capabilities within our three components to assure 
timely access to the right types of units and soldiers. We have 
determined the types of units and skills that are in greatest demand in 
today's security environment--including infantry, engineer, military 
police, military intelligence, Special Forces, chemical, civil affairs, 
and psychological operations--and have identified over 100,000 
positions to rebalance. We have accomplished more than half of this 
rebalancing and project completion by 2011. To achieve heightened 
readiness for missions at both at home and abroad, the Army's senior 
leadership is committed to fully manning, equipping, and training 
Reserve component forces. This will enable them to both serve as an 
operational force for the Nation and a ready force for State missions.
    Equally important, the Army is moving forward on the FCS, our first 
major modernization program in more than 30 years, that simply put, is 
the most effective way to modernize the Army for the future. Funding 
for the FCS program is critical to provide our soldiers the means to 
dominate the future fight. ``Spin outs'' of FCS advanced capabilities 
will increase the combat power, versatility, and survivability of our 
current formations. The first ``spin out,'' on track for delivery 
beginning in 2008, will introduce unattended ground sensors, non-line-
of-sight launch systems, the intelligent munitions system, and the 
first generation network to the force. These capabilities will enhance 
soldiers' understanding of their situation in dynamic, battlefield 
conditions. The second and third ``spin outs,'' on track for delivery 
beginning in 2010 and 2012 respectively, will introduce new types of 
unmanned aircraft systems and unmanned ground vehicles for our 
soldiers. These technologies will enable soldiers to employ greater 
numbers of sensors to see and find their enemies first. The fourth 
``spin out,'' on track for delivery beginning in 2014, will complete 
the Network. When BCTs are fielded with the full complement of FCS 
systems, these units will be able to generate significantly more 
capability. These new capabilities will directly benefit all U.S. 
ground forces, including the Marine Corps and Special Operations Forces 
from all Services.
    Even as we move forward with FCS and our many transformation 
initiatives, the American soldier remains the centerpiece of all that 
we do. The American military experience of the 20th century tells us 
that our soldiers' effectiveness depends upon a national commitment to 
recruit, train, and support them consistent with their service and 
sacrifices. This commitment must be underwritten by consistent 
investment in our recruiting and retention initiatives, in their 
equipment and infrastructure, and in our leader development programs. 
Meeting these goals for our Active and Reserve soldiers sustains the 
quality and effectiveness of our All-Volunteer Force.
    2007 will be a pivotal year for your Army. All of the Army's 
initiatives--Active component/Reserve component rebalance, Army 
modularity, IGPBS, BRAC, Reset/Modernization, +30,000 end strength, 
business transformation and Operations Iraqi Freedom and Enduring 
Freedom--will be fully underway, thoroughly integrated, and moving 
forward. The resources and commitment of this committee will be 
essential to interweave and accelerate each of these components to 
ensure the completion of our total Army transformation. Just as 
important will be the support to our families, communities, and the 
American people--truly, our extended Army family.
    I assure you that our soldiers continue to serve magnificently as 
we enter the fourth year of the war on terrorism. Soldiers know we are 
waging a long war, and they believe in their mission, the Soldier's 
Creed, and the Warrior Ethos. Our soldiers, 150 of whom I had the honor 
to re-enlist in Iraq 2 weeks ago, continue to stay in uniform at 
unprecedented rates. Their voluntary service is proof of their pride in 
each other and their leaders, and of their unwavering patriotism. Like 
the American soldiers of generations past, today's warriors are 
distinguishing themselves with tremendous acts of courage and valor in 
places like Baghdad, Samarra, An Najaf, Fallujah, Tal Afar, Mosul, and 
Khandahar. Our soldiers understand the Army's values and personify our 
Nation's highest ideals, demonstrated most poignantly by their 
willingness to sacrifice all so that others may live in peace and 
freedom. Our Nation must remain equally committed to them by providing 
the resources they need to succeed in their mission. With your 
continued support, I know we will succeed.

    Senator McCain. Thank you, General.
    I guess the first thing I'd like to talk about with you are 
the Guard and Reserve plans. I think you know very well, the 
Governors are in town, unfortunately for you, in time for this 
hearing. They feel very strongly that they are not receiving 
either the funding or the size. The Army, last year, said that 
there would be 43 Active component combat brigades and 34 Army 
National Guard combat brigades that would ensure the Army could 
maintain the 17-brigade force deployed with Active component 
brigades, having 2 years between rotations, and the Army Guard 
combat brigades having 5 years between rotations. For this 
request, the Army has modified its plan to increase the number 
of combat brigades in the Active and Reserve component. The 
Army will increase the Active component force structure to 42 
combat brigades, and increase the Army National Guard Force 
structure to 28 combat brigades. This action represents a 
reduction of one Active component brigade and six Army National 
Guard brigades from previous plans. Is that accurate?
    General Cody. It's accurate, Mr. Chairman, that we have 
changed our plan as we went through the QDR, as well as we 
continued to study the combat service support structure, the 
homeland security/homeland defense requirements, and the growth 
of the Special Operation Forces in the Army. If you remember, 2 
years ago our plan was to build 43 to 48 Active component 
brigades and 22 to 34 Army National Guard brigades. That was 
our intent as we looked at the plan. It was driven based upon a 
steady-state commitment of over 20 brigade combat teams in this 
long war.
    Coming out of the QDR, the analysis that was done was that 
the steady-state requirement for this long war would be 16 to 
18 brigade combat teams. As we continued to flesh out Army 
modularity, we had a shortfall and an imbalance in our combat 
service support. We also were equipment-challenged on the 
heavy-force side, especially in the Army National Guard, with 
the 10 heavy brigades, as well as the 19 heavy brigades in the 
Active Force, the Abrams and Bradley, and it did not appear 
that we would be able to fully equip all 10 of the heavy 
brigades in the Army National Guard.
    When we took all that together and went back through our 
force study analysis--we went through several iterations of 
this--what we decided to do was only grow to 42 Active 
brigades, and that would accommodate the growth in Special 
Operations Forces (SOF), on the Active side, rebalance and only 
build up to 28 fully-resourced, in terms of front-line 
equipment, in the National Guard, as well as fully-manned, and 
take those other brigades that we would have built as brigade 
combat teams, basically two infantry brigades and four heavy 
brigades, and restructure them into things that we needed to 
back up the shortage in combat service support on the Active 
side, but also be able to support homeland security/homeland 
defense.
    So, the total number of brigades in the Army National Guard 
will remain at 106. The makeup of the brigades will be 
different; 28 will be combat brigades, and then 78 will be 
combat support/combat service support, which gives us a better 
balance for the total Army, as well as giving the Governors and 
the Department of Homeland Security a better balance of 
transportation, military police, engineers, and other 
transportation-type units. The end strength will stay the same 
for the Guard. These are just the different formations that 
they'll have.
    Senator McCain. The current end strength of the Guard will 
stay the same. The authorized end strength for the Guard is 
350,000, rather than the present manning level of 333,000. The 
Guard claims that they can recruit to 350,000. So, what we're 
actually doing is saying we are not going to increase the size 
of the Guard any more than what they're presently manned at, 
not what they're authorized. Is that accurate?
    General Cody. I would not say that you're inaccurate, Mr. 
Chairman. Let me say how I see it, and then I'll see if I've 
answered your question.
    Senator McCain. Also, do you think that the Guard is 
accurate in saying they could recruit up to 350,000?
    General Cody. I think the National Guard--and I've talked 
to the adjutant generals (TAGs), and I've talked to the 
Governors, and I've certainly had many meetings with General 
Blum and General Vaughn--I think they'll be successful in 
bringing the Guard strength back up to 350,000 in the next year 
and a half. Remember how we got here.
    Senator McCain. But if we only fund them at 333,000----
    General Cody. We will fund them at whatever level they 
have. We will reprogram our dollars to fund at whatever end 
strength they come in at. This year, they're funded at----
    Senator McCain. That's funny, then why did we----
    General Cody. Sir, we----
    Senator McCain.--coming forward with a budget that puts 
them at 333,000? Go ahead, I'm sorry. Where do you get the 
money? If we're budgeting only for 333,000, if they can recruit 
up to 350,000, where do we get the money?
    General Cody. We'll have to reprogram the dollars. If they 
come in lower than 350,000--they're budgeted for 350,000, in 
2006. In 2007 the program decision memorandum-3 (PDM-3) put it 
at their current strength. The Secretary of Defense, the 
Secretary of the Army, and the President said, if they can make 
350,000, we will reprogram to pay and fully fund not just the 
military pay, but the operational dollars of whatever their end 
strength comes in at.
    Senator McCain. General, it doesn't compute, to me, if we 
have confidence that the Guard could recruit up to a certain 
level, that we would only come forward with a request for a 
lower level, and then say we're going to reprogram. But let me 
just discuss it. I don't want to take--there's a lot of 
questions that both my colleagues have. But we all know that 
the Guard is doing things that they've never done before. Even 
in World War II, they were just fully mobilized and became part 
of the regular Army. Now they're doing things that they've 
never done before, and they're doing it admirably. You'll be 
the first, I'm sure; you've testified to that many times. 
Therefore, we place great reliance on our TAGs and our Guard 
leaders when they tell us what they need and what they think 
they can do. They're not very happy right now. They're 
communicating with us, so, first of all, let me recommend that 
you, or the Chief of Staff of the Army, or the Secretary of 
Defense, somebody get all these guys in Washington and try to 
get some meeting of minds.
    General Cody. Yes, sir.
    Senator McCain. Because we're conflicted by the 
administration proposal versus what our TAGs are telling us. 
So, it would be helpful to us in our process if there was more 
agreement.
    I know there's always a certain amount of tension, but this 
is a unique situation, given what the Guard is being asked to 
do. So, that's a problem for us, and I think you can help solve 
it.
    But I guess the logical question if we're going to 
reprogram the money, if they can reach an end strength of 
350,000, do we have any ideas of what we're going to reprogram?
    General Cody. No, sir. But we have been reprogramming, and 
I know you don't want to hear this, but we have been 
reprogramming since I've been here, resourcing this war. You 
all have been very helpful to us in reprogramming.
    Senator McCain. Okay. I just want to mention one other 
thing. We, in the authorizing side--and I mentioned this to the 
Secretary of Defense in a full committee hearing--know that it 
costs additional money to fund a war in Iraq. We're tired of 
``emergency supplementals,'' and I would hope that we could 
adopt a policy like the Sense of the Senate Resolution we 
passed last year calling for regular funding for the war to be 
included in budgetary requests. We're going to get more active 
in that effort. We think we deserve the oversight--not 
``deserve,'' we feel oversight is our responsibility. When 
you're this many years in the war, ``emergency'' really doesn't 
fit the meaning of the word anymore.
    Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman.
    Senator McCain. I'm sure that's above your paygrade, too.
    General Cody. It is, sir. [Laughter.]
    Senator Lieberman. Although you're welcome to reach for it. 
[Laughter.]
    Thanks very much, Mr. Chairman.
    Let me take up a few of the questions that I raised in my 
opening statement. The first is on reset. This is the whole 
challenge of repairing, replacing, and recapitalizing equipment 
coming back from Iraq and Afghanistan. The Army reset 
requirement, as I read it, for fiscal year 2006, is $13.5 
billion, but the supplemental request only is $10.4 billion for 
that purpose. I guess the first question I want to ask is 
whether those are correct figures that I have. Second, if they 
are, how the Army will address that unfunded requirement of a 
pretty urgent need.
    General Cody. You are correct in the figures, $13.477 
billion is what we've put in. I know what came out in the title 
IX supplemental, but I don't know the figure yet coming out of 
the base supplemental. But I'm sure it's not going to be $13.7 
billion. It would be something short of that.
    Most of this is in our depot accounts and our depot 
outlays, and we will reprogram other dollars to keep our 
depots--that we're very proud of, and you've all helped us very 
much--to keep our depots running at the 25 to 27 million 
direct-labor hours that has basically kept his Army running.
    Senator Lieberman. From where will you reprogram?
    General Cody. Probably some of these are operational 
dollars that we can do. Some will be procurement dollars, 
because with some of this, there are three levels of reset. 
Senator, I know that you know them very well, but, just for the 
record, there's replacement, and recap, at the national level 
and then there is the first-level reset at the unit level. Most 
of what we're doing now is national level and replacement. 
We've lost almost two battalions worth of tanks.
    Senator Lieberman. Yup.
    General Cody. We've lost quite a few Stryker vehicles and 
we've lost 106 helicopters in this fight. So those are 
procurement dollars. Then there's also the recap that I think 
we're going to discuss later. We're not resetting the five 
different types of tanks we have right now. When we pull them 
back in, we're not resetting them back to their old standard, 
we're resetting them to the modernized standard of the Abrams 
Integrated Management (AIM) tank and the M1A3 system 
enhancement program (SEP) tank.
    Senator Lieberman. Right.
    General Cody. So there are procurement dollars associated 
with that, above and beyond just the maintenance reset. It is 
very complex, but we'll have to reprogram. We will keep our 
depots running at full throttle as we go through this.
    Senator Lieberman. The need here is real and urgent. Am I 
right to say that?
    General Cody. It is.
    Senator Lieberman. I mean, we've lost equipment. The stuff 
that we haven't lost, thank goodness, has taken some real wear 
and tear in the fight.
    General Cody. We think it's anywhere from 5 to 6 years 
worth of wear and tear on our track fleet and our tactical 
fleet, and probably 5 to 6 years of life on our airframes.
    Senator Lieberman. Okay. I'm sure we'll want to stay close 
to you on this and make sure that you don't feel the pressure 
to reprogram to support the urgent need for reset in a way that 
makes it hard for the Army to operate in other areas. So, we're 
going to keep in touch on that.
    Let me ask you about the numbers that continue to perplex 
me about the size of the Active Army, because I had to go 
around on this with Secretary Harvey at the full committee 
level, and he ended up saying--and I guess it was short term--
that, because of moving numbers of personnel out of the 
institutional Army, there might actually be an increase in the 
Active Army. But, long term, it's pretty clear it's going down 
and it's not so long, it's 4 or 5 years from now that the aim 
is to go down to 482,000. As I said, I don't know of any time 
when we've been at war--and this war is going to be long--when 
we've done that so, I wanted to ask you to reflect a little bit 
on that, and then I'll ask you a specific question. Do you have 
enough personnel? It's as direct as that.
    General Cody. I think we all know the answer today, that 
it's taken over 600,000 soldiers, Active, Guard, and Reserve, 
on Active-Duty status, to prosecute this global war on terror.
    Senator Lieberman. Right.
    General Cody. That's with a base of a 482.400 Active Force 
and a 300,000 National Guard Force, and about a 200,000 United 
States Army Reserve. We have the authority today, with 
emergency funding, to grow the Army by 30,000.
    Senator Lieberman. Right.
    General Cody. We're continuing to do that. That'll bring us 
up, and that will help us. Army modularity in synchronization 
with rotations of brigades in and out of Iraq, and in and out 
of Afghanistan. I think I testified last year that each time we 
do those rotations, it's larger than the Normandy invasion of 
World War II. We've done it now four times. So with that churn, 
we have to increase the Active Force, because we're 
transforming the force with different skill sets for these new 
brigade combat teams. We have growth in military intelligence 
by 9,000, because irregular war and counterinsurgency 
operations require more of that.
    So, we're growing the Army as fast as we can. I fully 
understand what the Secretary of the Army has testified to. He 
has given me the plan to execute, and that is to take our 
operational force, which started out with the 482,000 end 
strength. Inside the operational force was about 310,000 
soldiers and the rest of it was in the training accounts and 
the institutional Army.
    When we took the Army from 780,000, down to its present 
strength, we also cut the institutional force, we cut other 
things. So, what the Secretary has tasked us to do is to build 
this Army into the AMF, under the directive of the Chief of 
Staff, who started Army modularity. As we do that, we will 
rebalance the Active, Guard, and Reserve properly, but take the 
operational force and grow it to 355,000 inside of that 
482,000. What he testified, I believe, to you, Senator, was 
that he was going to take more out of the institutional Army 
and also decrease the Army's transient trainee, holdee, and 
student account to a certain level. How successful we are in 
2007, 2008, and 2009 in being able to do that will determine 
the end strength of the Army. My personal opinion is, it's 
going to be north of 482,400.
    Senator Lieberman. I appreciate your honesty in saying 
that. It alleviates my concern. So, hang in there, and keep 
fighting for what you need, because you're the people we ask--
--
    General Cody. Yes.
    Senator Lieberman.--to carry out these missions. You do it 
brilliantly, but we owe it to you to give you enough personnel 
to do it right.
    General Cody. What we don't know--and the Secretary has 
said this is our plan, and this is why it's complex--these new 
brigades we've built are enabling us to restructure our combat 
service support in a different way, because now we only have 
three chassis, versus the 13 different types of brigade combat 
teams we had. We still don't know is what the--because we're 
still half into modularity, but still fighting a war--combat 
service support full structure is really going to look like. 
We've guessed at it. We've modeled it. We're now executing some 
of it. But we think there are about 25,000 in there that we're 
unsure of. That's why I think, in the next 2 or 3 years, we'll 
be able to understand better how we can get to that 355,000 
operational Army that the Secretary and Chief have asked us to 
do, and whether we can get the savings and reroll the spaces 
out of the institutional Army.
    Senator Lieberman. A final quick question before the time 
is up. Last year, we were told that the optimal plan was to 
build 77 combat brigades. So, I wanted to ask why you decided 
to increase the number of noncombat brigades. Why didn't you 
decide to increase the number of noncombat brigades and still 
maintain last year's plan to build the 77 combat brigades? Of 
course, I worry that you're under pressure because of the 
reduced number of Active Army personnel.
    General Cody. Two things. First, because of the irregular 
warfare, we have a growth in the SOF on the Active side of 
about 7,700, and all of us agree that we need to do that, we 
need to grow our SOF, Civil Affairs, and Psychological 
Operations (PSYOPs) because we're really stretching the Reserve 
structure. I think 5 percent of Civil Affairs and PSYOPS was in 
the Active Force, the other 95 percent was in the Reserve 
Force. We're bringing that up to about a 15 to 85 rebalance. 
So, we had to subsume that underneath our end strength figure. 
That's one reason why we came back to only 42 brigades on the 
Active side, because what we want to do is not have 43 flags, 
and have them not fully-manned and fully-equipped. So, whatever 
flags we have, we're going to have fully-manned and fully-
equipped, which, by the way, wasn't the way it was when we 
started this war.
    On the National Guard side, it came down to, again, this 
rebalancing between the Active component and the Reserve 
component and we were challenged, quite frankly, to be able to 
provide all the equipment on the heavy brigade side. We were 
looking at options with 10 heavy brigades, which was part of 
the plan, of some of those brigades not being fully equipped. 
Then, as we went through our analysis of how much combat 
support we needed for homeland security, lessons learned from 
Hurricane Katrina, as well as what would be more useful to the 
Active component in this long war for rotation base for combat 
service support, we said we had enough heavy brigades in both 
structures. What we needed to do was restructure the combat 
service support.
    Senator Lieberman. Okay, my time is up. Thanks, General. 
Thanks, Secretary. I have a bunch of other questions, which I'd 
like to submit to you and ask your answers in writing.
    Thanks, Mr. Chairman.
    General Cody. Yes, sir. Thank you, Senator.
    Senator McCain. Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman. You so ably lead 
this committee, and no one's better experienced or prepared to 
lead it, and you have a good partner in Senator Lieberman.
    Senator McCain. Thank you.
    Senator Lieberman. Thank you.
    Senator Sessions. General Cody, I understand that the 
budget that's come out has required the Army to reduce, by as 
much as $3 billion, their reset capability and that this has 
real problems for us as we go forward. It strikes me that one 
of the lessons we learned from the first Gulf War is there's no 
way we can avoid the expense of resetting equipment that's been 
driven hard in harsh environments like the desert area. You say 
that, in fact, as we proceed, it looks like we might be even in 
a point where refurbishment lines would be broken and then have 
to be reconstituted, at greater cost.
    I understand you to say that that's not so, and you won't 
allow that to happen, but isn't it a concern for us? For 
example, the Anniston Army Depot, which does the M1A2 tank 
reset, looks like it would take a $588 million hit, and that 
this could break the line there. Why would we want to fund that 
through grabbing money from some other sources? Why wouldn't we 
continue with the plan that you've started out, to put that in 
the supplemental, since so much of the damage is a result of 
use in hostile environments, and pay for that in that way?
    General Cody. Thank you, Senator, for that question. Your 
figures are accurate. They reflect what I see. Let me give you 
a back-out strategic look first.
    As I've testified, we're not going to reset our tanks back 
to the five different configurations. We're going to modernize, 
as we reset these tanks, to the SEP and the AIM tank, the same 
with the Bradley, ODS, and the A3. Those help us as we start 
cascading the FCS technologies. So, the monies you're talking 
about right now, that we did not get in the fiscal year 2006 
supplemental, reflect about a $1.1 billion shortfall for the 
Abrams line, and about a $1.5 billion shortfall on the Bradley 
line.
    Now, when we submitted that, the Office of the Secretary of 
Defense (OSD), through my comptroller, came back and said, 
``We're not going to get that much money. This is how much 
we'll be short.'' But they are going to put it in the 2007 
title IX bridge supplemental that's supposed to come out in 
July 2006. If the money comes out in July or August 2006, the 
five tanks that come off the AIM and SEP line will not be 
broken. So, we don't see a slip.
    All this money that we're putting in for 2006 and 2007 is 
to give us five brigade combat teams of tanks and Bradleys; 
three of them for the National Guard, by the way. So, if the 
title IX money is put into the title IX money for 2007, we will 
not see a slip in either the Bradley line or the tank line. If 
that supplemental is slipped and comes in late, then you will 
see a break, and then we will be faced with reprogramming.
    Senator Sessions. So, you'll be focusing then, and 
dependent upon, the next supplemental.
    General Cody. The timing of it.
    Senator Sessions. You would agree--and I think all of us 
have seen it, time and again--but the most efficient, cost-
effective way to maintain any kind of major resource production 
or reset is to keep it on as steady a pace as possible to avoid 
the ups and downs that require overtime and more people to be 
hired, and then down periods in which you have to lay people 
off or carry people that you wouldn't otherwise have to.
    General Cody. We have gotten better, Senator, over the last 
3 years since I've been running this. We were flowing money to 
our depots 2 months at a time. We've gotten much better, 
through the help of this committee and from Congress, so it's 
been more predictable.
    My hope is--and hope is not a method--that what I've been 
told, that that first tranche of the title IX in 2007 is $50 
billion, and this money that was not in the 2006 would be 
pushed to that, it will come on time, and we'll be okay. What 
we don't need, though, is, in this base 2006, to push this 
money back in at the expense of something else, because we have 
a whole lot of other requirements that will just cause us now 
to unravel. We think as long as that title IX in 2007 comes in 
on time, we'll be okay, and the production line will stay at 
the capacity that we have.
    Senator Sessions. Secretary Bolton, is that consistent with 
your understanding? What are your thoughts about that apparent 
shortfall?
    Mr. Bolton. Senator Sessions, absolutely. My part of this 
is to look at the depots, and see what they require--what 
they're output's going to be, and then look for the sources, if 
they aren't forthcoming. I think General Cody has hit it right 
on the head on the supplemental. We talked about that over the 
last few days. We talked about it again this morning and that's 
why we're urging that we get on with the timing of this. The 
timing is absolutely critical. If we don't get it in the June/
July timeframe, we're going to have to break the lines. Then, 
as you've already pointed out, once you break the line, it's 
not a matter of ``the money comes, and then the folks come 
right back.'' Some of those folks are not coming back, and now 
you have to go out and replace them and, more importantly, the 
experience that went out the door.
    So, we're pushing very hard this morning--we're looking at 
it. My job now is to take a real hard look at Anniston, what's 
the drop-dead date to keep the pressure on the front office and 
also on the financial part of this, to get the money and make 
sure that someone's not pigeonholing the requirement.
    Senator Sessions. The pig-in-the-poke idea makes me a 
little nervous.
    Mr. Bolton. Yes, sir.
    Senator Sessions. But, beside that point, now let me ask 
General Cody briefly about the extended range of multipurpose 
unmanned aerial vehicles (UAVs) to be available for the Army at 
the tactical level. How are we doing on that? I know there's a 
competing interest out there. Is it critical, in your opinion, 
for the soldiers and their personal safety and ability to be 
effective combat warriors? If so, how are we doing to make sure 
we have that capability available at the brigade level and 
below?
    General Cody. Yes. Senator, the extended range multipurpose 
UAV, now called the Warrior, is an official program. We will 
buy 132 of them. They'll comprise 11 companies, at the tactical 
level. It'll be able to provide moving target indicators 
(MTIs), synthetic aperture radar, as well as electro-optic 
infrared (EOIR) sensors. I've looked at the sensors. They're 
much better than we have on the Apache right now. I mean, it's 
really promising. It'll have a heavy fuel engine, a loiter time 
of plus-20-some-odd hours. We're moving forward. I anticipate 
that we'll have four block zero here at the end of 2006 or 
early 2007. We'll do testing and integration. Right now, it's 
fully-funded and on track, and we are working with the United 
States Air Force, as well as the other Services, in the Joint 
UAV Center of Excellence to work the bigger issue, and that is 
a common ground station for all UAVs, so that as we employ them 
we have the horizontal integration on the joint battlefield. 
So, I'm very, very pleased with the progress, the support we've 
had from Congress, but, more importantly, the support we've had 
from the Joint Staff. The Warrior UAV will be out in the Army 
here as fast as we can get it.
    Senator Sessions. That's good news. Jointness is clearly 
the right way to go, because so much of that technology is 
going to be beneficial and critical for all the Services. If we 
can do more, cheaper and better, there would be, I think, some 
possibility here for UAVs.
    Thank you, Mr. Chairman.
    Senator McCain. Thank you very much.
    General, I hope you'll carry the message back that you need 
to talk to our Guard people and try and get everybody on the 
same page here. Okay?
    General Cody. Mr. Chairman, if I could just say, I've met 
with all the TAGs. I've talked to the Governors. Change is 
hard. By the way, there are a lot of Active-Duty people not 
happy with some of the changes we make. We rebalanced our air 
defense artillery, we've rebalanced Army aviation and taken 
core aviation and pushed it down, we've restructured the 
artillery, we're getting ready to move Fort Knox, the armor 
school, down to the infantry school and make it the maneuver 
center. So, we're going to continue to engage with the National 
Guard, as we also change them.
    I believe that the Secretary of the Army and the Chief of 
Staff of the Army's vision of converting fully manned, fully 
equipped Army National Guard brigades to make them an 
operational force versus a strategic force because of the world 
we live in today is the right way to go. I think, over time, 
this is going to be a much better force. The National Guard has 
served superbly. We've asked a lot of them. What we're trying 
to do now is get them out of their old equipment, get them in 
the right formations, and get them the opportunity to be 
trained up and be as they are today, an equal partner on the 
battlefield with us. I think it's going to be a good thing, 
when it's all said and done.
    But I do have some more work to do with the TAGs and the 
Governors, and I recognize that.
    Senator McCain. Thank you very much, General.
    Secretary, I think you're staying for the next panel.
    Mr. Bolton. Yes, sir, I am.
    Senator McCain. So, we'd ask Mr. Paul Francis, who's the 
Director of Acquisition and Sourcing Management of the GAO, and 
Dr. David Graham, the Deputy Director of Strategy Forces and 
Resources Division, IDA, to come forward.
    Now, Secretary Bolton, do you have an opening comment?
    Mr. Bolton. Yes, Mr. Chairman, I do.
    Senator McCain. All right, please proceed.
    Mr. Bolton. Thank you.

STATEMENT OF HON. CLAUDE M. BOLTON, JR., ASSISTANT SECRETARY OF 
      THE ARMY FOR ACQUISITION, LOGISTICS, AND TECHNOLOGY

    Mr. Bolton. Good afternoon, Mr. Chairman, Senator 
Lieberman, and distinguished members of this subcommittee. 
Thank you for the opportunity to appear before you to discuss 
the FCS acquisition strategy. I respectfully request that my 
written statement be made part of the record of this hearing.
    Senator McCain. Without objection.
    Mr. Bolton. Thank you, sir.
    In addition, on behalf of the Army leadership, members of 
the acquisition and logistics workforce, and our soldiers who 
serve with distinction throughout the world, I express my deep 
appreciation for the wisdom and guidance that you have 
provided. Your steadfast support for this critically important 
program has contributed significantly to our success.
    The FCS is the Army's primary modernization program. It is 
also the materiel centerpiece of our future modular force. FCS 
includes 18 systems, the network, and the soldier--18 plus 1 
plus 1. A significant contribution of FCS is that it will place 
advanced technologies in the hands of our soldiers in what we 
call spin-outs, increasing capabilities and providing greater 
protection to the current modular and fighting forces beginning 
in 2008.
    Mr. Chairman, 2006 is a critical year for the FCS. We have 
two major field experiments scheduled, one in April, another 
one in the fall, the Defense Acquisition Board (DAB) in-
progress review, which takes place in early May, and the 
interim preliminary design review, in August. All in all, there 
are more than 50 reviews scheduled this year.
    An important factor in program success is our lead systems 
integrator (LSI) management approach. The Army is on schedule 
to fully definitize the letter contract awarded to the Boeing 
Company, in September 2005, to continue the FCS system 
development and demonstration program.
    From my position, we are meeting the FCS challenge. My 
bigger challenge is ensuring that we have the right people and 
experience and expertise not only for the FCS, but for all the 
Army programs. During the next 3 to 5 years, nearly one-half of 
the Army's acquisition and logistics workforce will be 
retirement-eligible. Recruiting, retooling, and reshaping the 
workforce are vital to meeting the future challenges.
    That said, we are addressing these challenges with 
education, the establishment of the Army's life-cycle 
management commands, business transformation initiatives, and 
what I have termed the ``big A, little a'' acquisition process. 
That process begins when a soldier says, ``I want,'' and it 
ends when the soldier says, ``I got.''
    I included a chart that further explains my thinking on 
this, with my written statement.
    That concludes my opening remarks, Mr. Chairman. Again, I 
thank you and the members of this committee for your continuing 
wisdom and guidance and support. I look forward to your 
questions.
    [The prepared statement of Mr. Bolton follows:]
            Prepared Statement by Hon. Claude M. Bolton, Jr.
    Chairman McCain, Senator Lieberman, and distinguished members of 
the Senate Armed Services Committee, I would like to express my 
appreciation at this opportunity to appear before you to discuss the 
status of converting the Future Combat System (FCS) Brigade Combat Team 
(BCT) program's other transaction agreement (OTA) to a Federal 
Acquisition Regulation (FAR) Part 15 contract, its structure, its lead 
systems integrator (LSI) approach, the proposed incentive fee 
structure, the risks and challenges facing the program, and the 
progress being made to address these risks.
    The FCS BCT program is the principal modernization program for the 
Army and it is the materiel centerpiece of the Army's future modular 
force. It is an evolutionary acquisition program consisting of 18 
systems, the network, and the soldier (18+1+1). The FCS BCT is a 
networked family of integrated manned and unmanned systems providing 
mobile-networked command and control capabilities; autonomous robotic 
systems; precision direct and indirect fires; organic sensor platforms; 
and adverse-weather reconnaissance, surveillance, targeting, and 
acquisition. In addition, the FCS BCT program will develop and position 
spin outs of FCS BCT capabilities for procurement and fielding to 
current modular and fighting forces.
    Since the 2004 restructure announcement, the FCS BCT program 
continues to keep pace with its performance objectives and baseline. 
The FCS BCT program completed a Department of Defense (DOD) program 
review in June 2005 and successfully completed its System of Systems 
Functional Review in August 2005. The program's revised acquisition 
program baseline was approved in November 2005. Fort Bliss/White Sands 
Missile Range (WSMR) complex is the selected location for the 
evaluation BCT (EBCT). The program continues to move forward in 
completing all of the platform-based system functional reviews and 
transitioning into design and prototypical development activities. 
Further, the program is leaning forward in preparation for its Defense 
Acquisition Board (DAB) in-progress review scheduled for May 2006. The 
Non-Line of Sight Cannon (NLOS-C) continues to move ahead as the lead 
development vehicle for manned ground vehicles. The Army submitted a 
report to Congress and is moving forward to comply with congressional 
direction by building eight prototype cannon systems with delivery 
starting in calendar year 2008.
    2006 is a critical execution year for the program. It has over 52 
major reviews. It has extensive software and hardware deliveries and 
major field experiments in April 2006 and joint expeditionary force 
exercise JEFX-06, and Experiment 1.1 in the fall 2006. In addition, the 
program will have its interim preliminary design review (IPDR) in 
August 2006. The FCS BCT network is proceeding ahead as planned. For 
over 18 months, the FCS BCT program has acknowledged the risks, 
integration challenges, and synchronization issues associated with 
transport layer for Joint Tactical Radio System (JTRS) and Warfighter 
Information Network-Tactical. The FCS BCT program has worked and 
continues to work closely with the restructuring activities of both key 
transport layer programs to make sure these enablers support the 
integration master schedule of the FCS BCT program. The FCS BCT program 
has detailed risk mitigation plans in place to include the use of 
surrogates and pre-engineering development models (pre-EDMs) to ensure 
form, fit interchangeability, and to preserve the integration phased 
approach for maturing the integrated FCS platforms and common network. 
The Army is focusing hard to get it right on developing a common and 
integrated battle command network. In addition, it is important to note 
that the program has received its first seven JTRS cluster 1 pre-EDM 
radios for integration and experimentation support and use.
    In terms of critical technologies, 18 of the 49 critical 
technologies are rated with a technical readiness level (TRL) of 6. One 
is rated 8. The program is on schedule to have more than 23 rated TRL 6 
by December 2006 and it is on schedule to mature the rest by the 
Preliminary Design Review (PDR) in August 2008. Risk associated with 
the maturation of technologies was one of the contributing factors in 
the Army's decision to restructure the FCS BCT program and extend it by 
4 years. The current program plan significantly reduces the degree of 
concurrency and risk through both the spin out plan and the increased 
development time between milestones B and C. The program's maturity 
approach is consistent with DOD acquisition policy. It is important to 
note that the DOD policy requires the use of alternative technology 
that is mature and can meet the user's needs when the technology is not 
mature enough. The FCS BCT program remains at the heart of the Army's 
strategy to mitigate risk using the current to future force construct. 
At the same time, the Army is accelerating selected technologies to 
reduce operational risk by improving the current modular force's 
survivability, intelligence, surveillance, and reconnaissance, and 
joint interdependence.
    The FCS BCT program is a complex undertaking. The Army continues to 
use a LSI management approach for the FCS BCT program. To manage the 
complexity involved, a better approach was needed than having the 
Government operate as the ``integrator.'' Having over 19 independent 
prime contracts (one team partners) would only inhibit interoperability 
and integration. Today's weapon system programs with complex networking 
features require new, integrated, and single-step or common design 
processes that integrate horizontally across the board. Commonality in 
design of systems and subsystems is a new design imperative for complex 
programs. The keys to success are maximizing the use of a one-step 
design process for large scale horizontal integration and having one 
contract, one management baseline, and integrated program management 
and execution.
    In September 2005, the Army awarded a letter contract (referred to 
as an Undefinitized Contractual Action) on a sole-source basis to the 
Boeing Company for continuation of the FCS BCT system development and 
demonstration (SDD) program, which initially began under an OTA signed 
May 2003. The FCS BCT SDD contract was negotiated using FAR Part 15 
procedures and is fully compliant with the uniform contract format and 
all FAR required clauses. The use of the letter contract was essential 
in order to preserve the program's schedule and prevent disruption. As 
required, the contract must be fully definitized within 180 days. 
Currently, the Army is on schedule to fully definitize by the end of 
March 2006. I am aware of the recent Government Accountability Office 
report 06-66, DOD Has Paid Billions in Award and Incentive Fees 
Regardless of Acquisition Outcomes, and its concerns that there is 
little evidence that such incentives improve contractor performance and 
outcomes. I know that the Department is working on policy guidance 
changes. From my position, I believe the proposed fee structure 
arrangement for the FCS BCT SDD contract strikes the right balance 
between contract risks and motivation of contractor performance. The 
fee structure is different than typical contracts of this magnitude, it 
has concrete and measurable performance aimed at critical path 
performance activities.
    While I believe we are meeting the FCS challenge, my bigger 
challenge is ensuring we have the right people and expertise for the 
FCS and indeed all Army programs. Over the next 3 to 5 years, nearly 
half of the Army's acquisition workforce will be retirement eligible. 
Recruiting, retooling, and reshaping the workforce are vital if we are 
to continue meeting the challenges of the Army programs. We are 
addressing that challenge with education, establishment of the Life 
Cycle Management Command's, ``Big A, Little a'' (see attached) and Army 
Business Transformation initiatives. People have made our Army the 
world's best. It is therefore imperative that we appropriately focus on 
the people aspect of our program developments as we go forward into the 
future.
    The Army is fully committed to the FCS BCT program and to ensure 
that the program delivers what is expected and required of this 
program. We appreciate your wisdom, guidance, and strong support as we 
work to ensure that the FCS BCT program accomplishes its goal in 
support of the Army modular force initiative.
      
    
    
      
    Senator McCain. Thank you very much.
    Mr. Francis, welcome.

    STATEMENT OF PAUL L. FRANCIS, DIRECTOR, ACQUISITION AND 
     SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Francis. Thank you, Mr. Chairman.
    Mr. Chairman, Senator Lieberman, I'm pleased to be here 
this afternoon to talk about the FCS. FCS will be the 
centerpiece in the Army's plan to transform to a lighter, more 
agile, and capable force.
    I'll summarize my remarks here, and ask that my full 
statement be submitted for the record.
    The context for the FCS investment is important. Fiscal 
imbalances faced by the Government will continue to constrain 
discretionary funding. One of the single largest investments 
that the Government makes is in new weapons. Over the last 5 
years, the Department of Defense (DOD) has doubled its planned 
investments in new weapons from about $700 billion in 2001 to 
nearly $1.4 trillion in 2006. At the same time, development 
cost growth on new weapons maintains its historical level of 
about 30 to 40 percent. This is the lens through which we 
should look at new major investments, such as FCS, because more 
money may not be an option for the future. Rather, the key to 
getting better outcomes is to make individual programs more 
executable.
    My summary will cover two issues: first, the risk FCS 
faces, in terms of a good business case; and, second, the 
business arrangements for the program--namely, the contract and 
the LSI.
    There are a number of compelling aspects of the FCS 
program, and it's hard to argue with the program's goals. 
However, elements of a sound business case--namely, firm 
requirements, mature technologies, a knowledge-based 
acquisition strategy, a realistic cost estimate, and sufficient 
funding, are not yet demonstrably present. Specifically, it'll 
be several years before requirements are firmed up for 
individual systems.
    Technologies are progressing slower than predicted. Using 
the Army's standards, about 90 percent of the FCS technologies 
were to be mature today; the actual number is around 30 
percent. Requirements in technology dominate the acquisition 
strategy, and are going to push demonstration out to later in 
the program. The cost estimate is limited by the low level of 
knowledge available today. Even if accurate, the Army will need 
a substantial increase in budget levels to accommodate FCS 
production.
    The Army has made several changes to improve its approach 
to acquiring FCS. It has lengthened the schedule by 4 years, 
provided for spinning out technologies to the current forces, 
provided for more testing and an experimental unit, made cost 
estimates more realistic, and improved the contract provisions. 
Nevertheless, the program remains a long way from having the 
level of knowledge it should have had before it started product 
development. FCS has all the markers for risk that would be 
difficult to accept for any single system, much less a complex 
multisystem effort.
    These challenges are even more daunting in the case of FCS, 
not only because of their multiplicity, but because FCS 
represents a new concept of operations that is predicated on 
technological breakthroughs. Thus, technical problems which 
accompany immaturity not only pose traditional risks to cost, 
schedule, and performance, they pose risks to the new fighting 
concepts envisioned by the Army. We do not yet know if FCS is 
technically doable.
    As we consider the future of FCS, we must anticipate facts 
of life, like technologies not working out, tighter budgets, 
and changes in performance. It's important, therefore, that the 
business arrangements made for FCS, primarily the development 
contract and the LSI, preserve the Government's ability to 
adjust course as dictated by facts of life.
    The Army is currently negotiating a new FAR-based contract 
that provides more protection against conflict of interest, and 
a better fee structure for the Government. In my opinion, 
though, the risk and the scope of the program will dictate 
progress and cost, not the contract. The contract is not an 
insurance policy, and the Government still bears the burden of 
risk.
    As the details of the Army's new contract are worked out 
and its relationship with the LSI evolves, it'll be important 
to ensure that the basis for making additional funding 
commitments is transparent. Accordingly, markers for gauging 
knowledge must be clear, incentives must be aligned with 
demonstrating knowledge, and alternative courses of action must 
be kept viable. Most importantly, the knowledge must be put to 
use. DOD must keep itself in a position to change course as the 
program progresses.
    There are several opportunities to revisit the FCS business 
case. One is in May 2006, when the Defense Acquisition Board 
reviews the program. However, the new contract will be signed 
by then, so it could limit the board's range of actions. A key 
juncture will fall in 2008, when the preliminary design review 
is held. At that point, there should be sufficient demonstrated 
knowledge for FCS to make an informed go or no-go decision; in 
effect, the real commitment to product development.
    Mr. Chairman and Mr. Lieberman, this concludes my remarks, 
and I'd be glad to answer any questions.
    [The prepared statement of Mr. Francis follows:]
                 Prepared Statement by Paul L. Francis
    Mr. Chairman and members of the subcommittee: I am pleased to be 
here today to discuss the Department of the Army's Future Combat System 
(FCS), a networked family of weapons and other systems. FCS is in the 
forefront of efforts to help the Army transform itself into a lighter, 
more agile, and more capable combat force by using a new concept of 
operations, new technologies, and a new information network that links 
whole brigades together. This is a tremendous undertaking that will 
involve a total investment cost on the order of $200 billion.
    The context within which the FCS investment is being made is 
important. Fiscal imbalances faced by the Federal Government will 
continue to constrain discretionary spending. One of the single largest 
investments the Government makes is the development and production of 
new weapon systems. Over the last 5 years, the Department of Defense 
(DOD) has doubled its planned investments in new weapon systems from 
about $700 billion in 2001 to nearly $1.4 trillion in 2006. At the same 
time, research and development cost growth on new weapons maintains its 
historical level of about 30 to 40 percent. This is the lens that must 
be used to look at major new investments, such as FCS, because more 
money may not be an option for the future. Rather, the key to getting 
better outcomes is to make individual programs more executable.
    Today, I would like to discuss (1) the business case that is 
necessary for the FCS to be successful and (2) the related business 
arrangements for carrying out the FCS program.
                                summary
    The critical role played by U.S. ground combat forces is 
underscored today in Operation Iraqi Freedom. That the Army should 
ensure its forces are well equipped with the capabilities they will 
need in the coming years is unquestioned. Moreover, the top-level goals 
the Army has set for its future force seem inarguable: to be as lethal 
and survivable as the current force, but significantly more sustainable 
and mobile. However, the Army's approach to meeting these needs--
embodied in the FCS and its complementary systems--does raise 
questions.
    On the one hand, the FCS is the result of the Army leadership's 
taking a hard look at how it wants its forces to fight in the future. 
Army leadership has had the courage to break with tradition on FCS; it 
would have likely been much easier to win support for successor 
vehicles to the Abrams and Bradley. On the other hand, FCS does not 
present a good business case for an acquisition program. It is 
necessary that a major new investment like FCS have a compelling, well-
thought out concept, but this alone is not sufficient. FCS began the 
product development prematurely in 2003, and today is a long way from 
having the level of knowledge it should have had before committing the 
high level of resources associated with a new product development 
effort. The elements of a sound business case--firm requirements, 
mature technologies, a knowledge-based acquisition strategy, a 
realistic cost estimate and sufficient funding--are not yet present. 
FCS has all the markers for risks that would be difficult to accept for 
any single system. They are even more daunting in the case of FCS not 
only because of their multiplicity but because FCS represents a new 
concept of operations that is predicated on technological 
breakthroughs. Thus, technical problems, which accompany immaturity, 
not only pose traditional risks to cost, schedule, and performance; 
they pose risks to the new fighting concepts envisioned by the Army.
    We are still early in the long journey that FCS entails. Many 
decisions lie ahead that will involve trade-offs the Government will 
make. Facts of life, like technologies not working out, reductions in 
available funds, and changes in performance parameters, must be 
anticipated. It is important, therefore, that the business arrangements 
made for FCS, primarily the development contract and the lead system 
integrator approach, preserve the Government's ability to adjust course 
as dictated by facts and circumstances. At this point, the $8 billion 
to be spent on the program through the end of fiscal year 2006 is a 
small portion of the $200 billion total. DOD needs to guard against 
letting the buildup in investment from limiting its decision making 
flexibility as essential knowledge regarding FCS becomes available. As 
the details of the Army's new FCS contract are worked out and its 
relationship with the lead system integrator evolves, it will be 
important to ensure that the basis for making additional funding 
commitments is transparent. Accordingly, markers for gauging knowledge 
must be clear, incentives must be aligned with demonstrating such 
knowledge, and provisions must be made for the Army to change course if 
the program progresses differently than planned.
                               background
    The FCS concept is part of a pervasive change to what the Army 
refers to as the Future Force. The Army is reorganizing its current 
forces into modular brigade combat teams, meaning troops can be 
deployed on different rotational cycles as a single team or as a 
cluster of teams. The Future Force is designed to transform the Army 
into a more rapidly deployable and responsive force and to enable the 
Army to move away from the large division-centric structure of the 
past. Each brigade combat team is expected to be highly survivable and 
the most lethal brigade-sized unit the Army has ever fielded. The Army 
expects FCS-equipped brigade combat teams to provide significant 
warfighting capabilities to DOD's overall joint military operations. 
The Army is implementing its transformation plans at a time when 
current U.S. ground forces are playing a critical role in the ongoing 
conflicts in Iraq and Afghanistan.
    The FCS family of weapons includes 18 manned and unmanned ground 
vehicles, air vehicles, sensors, and munitions that will be linked by 
an information network. These vehicles, weapons, and equipment will 
comprise the majority of the equipment needed for a brigade combat 
team. The Army plans to buy 15 brigades worth of FCS equipment by 2025.
Elements of a Business Case
    We have frequently reported on the importance of using a solid, 
executable business case before committing resources to a new product 
development. In its simplest form, this is evidence that (1) the 
warfighter's needs are valid and can best be met with the chosen 
concept, and (2) the chosen concept can be developed and produced 
within existing resources--that is, proven technologies, design 
knowledge, adequate funding, and adequate time to deliver the product 
when needed.
    At the heart of a business case is a knowledge-based approach to 
product development that demonstrates high levels of knowledge before 
significant commitments are made. In essence, knowledge supplants risk 
over time. This building of knowledge can be described as three levels 
or knowledge points that should be attained over the course of a 
program:

         First, at program start, the customer's needs should 
        match the developer's available resources--mature technologies, 
        time, and funding. An indication of this match is the 
        demonstrated maturity of the technologies needed to meet 
        customer needs.
         Second, about midway through development, the 
        product's design should be stable and demonstrate that it is 
        capable of meeting performance requirements. The critical 
        design review is that point of time because it generally 
        signifies when the program is ready to start building 
        production-representative prototypes.
         Third, by the time of the production decision, the 
        product must be shown to be producible within cost, schedule, 
        and quality targets and have demonstrated its reliability and 
        the design must demonstrate that it performs as needed through 
        realistic system level testing.

    The three knowledge points are related, in that a delay in 
attaining one delays the points that follow. Thus, if the technologies 
needed to meet requirements are not mature, design and production 
maturity will be delayed.
                   objectives, scope, and methodology
    To develop the information on the Future Combat System program's 
progress toward meeting established goals, the contribution of critical 
technologies and complementary systems, and the estimates of cost and 
affordability, we interviewed officials of the Office of the Under 
Secretary of Defense (Acquisition, Technology, and Logistics); the Army 
G-8; the Office of the Under Secretary of Defense (Comptroller); the 
Secretary of Defense's Cost Analysis Improvement Group; the Director of 
Operational Test and Evaluation; the Assistant Secretary of the Army 
(Acquisition, Logistics, and Technology); the Army's Training and 
Doctrine Command; Surface Deployment and Distribution Command; the 
Program Manager for the Future Combat System (Brigade Combat Team); the 
Future Combat System Lead Systems Integrator; and other contractors. We 
reviewed, among other documents, the Future Combat System's Operational 
Requirements Document, the Acquisition Strategy Report, the Baseline 
Cost Report, the Critical Technology Assessment and Technology Risk 
Mitigation Plans, and the Integrated Master Schedule. We attended and/
or reviewed the results of the FCS System of Systems Functional Review, 
In-Process Reviews, Board of Directors Reviews, and multiple system 
demonstrations. In our assessment of the FCS, we used the knowledge-
based acquisition practices drawn from our large body of past work as 
well as DOD's acquisition policy and the experiences of other programs. 
We conducted the above in response to the National Defense 
Authorization Act for Fiscal Year 2006, which requires GAO to annually 
report on the product development phase of the FCS acquisition. We 
performed our review from June 2005 to March 2006 in accordance with 
generally accepted auditing standards.
         improved business case is needed for the fcs's success
    An improved business case for the FCS program is essential to help 
ensure that the program is successful in the long run. The FCS is 
unusual in that it is developing 18 systems and a network under a 
single program office and lead system integrator in the same amount of 
time that it would take to develop a single system. It also started 
development with less knowledge than called for by best practices and 
DOD policy.
While Progress Has Been Made, Requirements Still Remain Uncertain
    The Army has made significant progress defining FCS's system of 
systems requirements, particularly when taking into account the 
daunting number of them involved--nearly 11,500 at this level. Yet 
system-level requirements are not yet stabilized and will continue to 
change, postponing the needed match between requirements and resources. 
Now, the Army and its contractors are working to complete the 
definition of system level requirements, and the challenge is in 
determining if those requirements are technically feasible and 
affordable. Army officials say it is almost certain that some FCS 
system-level requirements will have to be modified, reduced, or 
eliminated; the only uncertainty is by how much. We have previously 
reported that unstable requirements can lead to cost, schedule, and 
performance shortfalls. Once the Army gains a better understanding of 
the technical feasibility and affordability of the system-level 
requirements, trade-offs between the developer and the warfighter will 
have to be made, and the ripple effect of such trade-offs on key 
program goals will have to be reassessed. Army officials have told us 
that it will be 2008 before the program reaches the point which it 
should have reached before it started in May 2003 in terms of stable 
requirements.
FCS Success Hinges on Numerous Undemonstrated Technologies and 
        Complementary Programs
    Development of concrete program requirements depends in large part 
on stable, fully mature technologies. Yet, according to the latest 
independent assessment,\1\ the Army has not fully matured any of the 
technologies critical to FCS's success. Some of FCS's critical 
technologies may not reach a high level of maturity until the final 
major phase of acquisition, the start of production. The Army considers 
a lower level of demonstration as acceptable maturity, but even against 
this standard, only about one-third of the technologies are mature. We 
have reported that going forward into product development without 
demonstrating mature technologies increases the risk of cost growth and 
schedule delays throughout the life of the program. The Army is also 
facing challenges with several of the complementary programs considered 
essential for meeting FCS's requirements. Some are experiencing 
technology difficulties, and some have not been fully funded. These 
difficulties underscore the gap between requirements and available 
resources that must be closed if the FCS business case is to be 
executable.
---------------------------------------------------------------------------
    \1\ Technology Readiness Assessment Update, Office of the Deputy 
Assistant Secretary of the Army for Research and Technology, April 
2005.
---------------------------------------------------------------------------
    Technology readiness levels (TRL) are measures pioneered by the 
National Aeronautics and Space Administration and adopted by DOD to 
determine whether technologies were sufficiently mature to be 
incorporated into a weapon system. Our prior work has found TRLs to be 
a valuable decisionmaking tool because they can presage the likely 
consequences of incorporating a technology at a given level of maturity 
into a product development. The maturity levels range from paper 
studies (level 1), to prototypes tested in a realistic environment 
(level 7), to an actual system proven in mission operations (level 9). 
Successful DOD programs have shown that critical technologies should be 
mature to at least a TRL 7 before the start of product development.
    In the case of the FCS program, the latest independent technology 
assessment shows that none of the critical technologies are at TRL 7, 
and only 18 of the 49 technologies currently rated have demonstrated 
TRL 6, defined as prototype demonstration in a relevant environment. 
None of the critical technologies may reach TRL 7 until the production 
decision in fiscal year 2012, according to Army officials.\2\ Projected 
dates for FCS technologies to reach TRL 6 have slipped significantly 
since the start of the program. In the 2003 technology assessment, 87 
percent of FCS's critical technologies were projected to be mature to a 
TRL 6 by 2005. When the program was looked at again in April 2005, 31 
percent of the technologies were expected to mature to a TRL 6 by 2005, 
and all technologies are not expected to be mature to that level until 
2009.
---------------------------------------------------------------------------
    \2\ When the program started seven of 32 technologies were rated at 
TRL 6 and one was at TRL 7.
---------------------------------------------------------------------------
FCS Acquisition Strategy Will Demonstrate Design Maturity After 
        Production Begins
    The knowledge deficits for requirements and technologies have 
created enormous challenges for devising an acquisition strategy that 
can demonstrate the maturity of design and production processes. 
Several efforts within the FCS program are facing significant problems 
that may eventually involve reductions in promised capabilities and may 
lead to cost overruns and schedule delays. Even if requirements setting 
and technology maturity proceed without incident, FCS design and 
production maturity will still not be demonstrated until after the 
production decision is made. Production is the most expensive phase in 
which to resolve design or other problems.
    The Army's acquisition strategy for FCS does not reflect a 
knowledge-based approach. Figure 1 shows how the Army's strategy for 
acquiring FCS involves concurrent development, design reviews that 
occur late, and other issues that are out of alignment with the 
knowledge-based approach outlined in DOD policy.
      
    
    
      
    Ideally, the preliminary design review occurs at or near the start 
of product development. Doing so can help reveal key technical and 
engineering challenges and can help determine if a mismatch exists 
between what the customer wants and what the product developer can 
deliver. An early preliminary design review is intended to help 
stabilize cost, schedule, and performance expectations. The critical 
design review ideally occurs midway into the product development phase. 
The critical design review should confirm that the system design is 
stable enough to build production-representative prototypes for 
testing.
    The FCS acquisition schedule indicates several key issues:

         The program did not have the basic knowledge needed 
        for program start in 2003. While the preliminary design review 
        normally occurs at or near the start of product development, 
        the Army has scheduled it in fiscal year 2008, about 5 years 
        after the start of product development.
         Instead of the sequential development of knowledge, 
        major elements of the program are being conducted concurrently.
         The critical design review is scheduled in fiscal year 
        2010, just 2 years after the scheduled preliminary review and 
        the planned start of detailed design. The timing of the design 
        reviews is indicative of how late knowledge will be attained in 
        the program, assuming all goes according to plan.
         The critical design review is also scheduled just 2 
        years before the initial FCS low-rate production decision in 
        fiscal year 2012, leaving little time for product demonstration 
        and correction of any issues that are identified at that time.

    The FCS program is thus susceptible to late-cycle churn, which 
refers to the additional--and unanticipated--time, money, and effort 
that must be invested to overcome problems discovered late through 
testing.
FCS's Higher Costs May Result in Funding Challenge
    The total cost for the FCS program, now estimated at $160.7 billion 
(then year dollars), has climbed 76 percent from the Army's first 
estimate. Because uncertainties remain regarding FCS's requirements and 
the Army faces significant challenges in technology and design 
maturity, we believe the Army's latest cost estimate still lacks a firm 
knowledge base. Furthermore, this latest estimate does not include 
complementary programs that are essential for FCS to perform as 
intended, or all of the necessary funding for FCS spin-outs. The Army 
has taken some steps to help manage the growing cost of FCS, including 
establishing cost ceilings or targets for development and production; 
however, program officials told us that setting cost limits may result 
in accepting lower capabilities. As FCS's higher costs are recognized, 
it remains unclear whether the Army will have the ability to fully fund 
the planned annual procurement costs for the FCS current program of 
record. FCS affordability depends on the accuracy of the cost estimate, 
the overall level of development and procurement funding available to 
the Army, and the level of competing demands.
    At the start of product development, FCS program officials 
estimated that the program would require about $20 billion in then-year 
dollars for research, development, testing, and evaluation and about 
$72 billion to procure the FCS systems to equip 15 brigade combat 
teams. At that time, program officials could only derive the cost 
estimate on the basis of what they knew then--requirements were still 
undefined and technologies were immature. The total FCS program is now 
expected to cost $160.7 billion in then-year dollars, a 76-percent 
increase. Table 1 summarizes the growth of the FCS cost estimate.

             TABLE 1: COMPARISON OF ORIGINAL COST ESTIMATE AND CURRENT COST ESTIMATE FOR FCS PROGRAM
                                       [In billions of then-year dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                     Revised
                                                                    Original      estimate (as      Percentage
                                                                    estimate       of 1/2006)        increase
----------------------------------------------------------------------------------------------------------------
Research, development, testing, and evaluation.................           $19.6           $30.5              56
Procurement....................................................           $71.8          $130.2              81
                                                                ------------------------------------------------
  Total........................................................           $91.4          $160.7             76
----------------------------------------------------------------------------------------------------------------
Source: Army (data); GAO (analysis and presentation).

    According to the Army, the current cost estimate is more realistic, 
better informed, and based on a more reasonable schedule. It accounts 
for the restructure of the FCS program and its increased scope, the 4-
year extension to the product development schedule, the reintroduction 
of four systems that had been previously deferred, and the addition of 
a spin-out concept whereby mature FCS capabilities would be provided, 
as they become available, to current Army forces. It also reflects a 
rate of production reduced from an average of 2 brigade combat teams 
per year to an average of 1.5 brigades per year. Instead of completing 
all 15 brigades by 2020, the Army would complete production in 2025. 
This cost estimate has also benefited from progress made in defining 
system of systems requirements.
    Figure 2 compares the funding profiles for the original program and 
for the latest restructured program.
      
    
    
      
    The current funding profile is lower than the original through 
fiscal year 2013, but is substantially higher than the original after 
fiscal year 2013. It still calls for making substantial investments 
before key knowledge has been demonstrated. Stretching out FCS 
development by 4 years freed up about $9 billion in funding through 
fiscal year 2011 for allocation to other Army initiatives. Originally, 
FCS annual funding was not to exceed $10 billion in any 1 year. Now, 
the cost estimate is expected to exceed $10 billion in each of 9 years. 
While it is a more accurate reflection of program costs than the 
original estimate, the latest estimate is still based on a low level of 
knowledge about whether FCS will work as intended. The cost estimate 
has not been independently validated, as called for by DOD's 
acquisition policy. The Cost Analysis Improvement Group will not 
release its updated independent estimate until spring 2006, after the 
planned Defense Acquisition Board review of the FCS program.
    The latest cost estimate does not include all the costs that will 
be needed to field FCS capabilities. For instance,

         Costs for the 52 essential complementary programs are 
        separate, and some of those costs could be substantial. For 
        example, the costs of the Joint Tactical Radio System Clusters 
        1 and 5 programs were expected to be about $32.6 billion (then-
        year dollars).\3\
---------------------------------------------------------------------------
    \3\ The ongoing operational assessment of the Joint Tactical Radio 
System functionality could result in a program restructure, which would 
have an impact on the program's costs.
---------------------------------------------------------------------------
         Some complementary programs, such as the Mid-Range 
        Munition and Javelin Block II, are currently not funded for 
        their full development. These and other unfunded programs would 
        have to compete for already tight funding.
         Procurement of the spin-outs from the FCS program to 
        current Army forces is not yet entirely funded. Procuring the 
        FCS items expected to be spun out to current forces is expected 
        to cost about $19 billion, and the needed installation kits may 
        add $4 billion. Adding these items brings the total required 
        FCS investment to the $200 billion range.

    Through fiscal year 2006, the Army will have budgeted over $8 
billion for FCS development. Through fiscal year 2008, when the 
preliminary design review is held, the amount budgeted for FCS will 
total over $15 billion. By the time the critical design review is held 
in 2010, about $22 billion will have been budgeted. By the time of the 
production decision in 2012, about $27 billion will have been budgeted.
    The affordability of the FCS program depends on several key 
assumptions. First, the program must proceed without exceeding its 
currently projected costs. Second, the Army's annual procurement 
budget--not including funds specifically allocated for the modularity 
initiative--is expected to grow from between $11 billion to $12 billion 
in fiscal year 2006 to at least $20 billion by fiscal year 2011. The 
large annual procurement costs for FCS are expected to begin in fiscal 
year 2012, which is beyond the current Future Years Defense Plan period 
(fiscal years 2006-2011). FCS procurement will represent about 60-70 
percent of Army procurement from fiscal years 2014 to 2022. This 
situation is typically called a funding bow wave.\4\ As it prepares the 
next Defense Plan, the Army will face the challenge of allocating 
sufficient funding to meet the increasing needs for FCS procurement in 
fiscal years 2012 and 2013. If all the needed funding cannot be 
identified, the Army will have to consider reducing the FCS procurement 
rate or delaying or reducing items to be spun out to current Army 
forces. However, reducing the FCS procurement rate would increase the 
FCS unit costs and extend the time needed to deploy FCS-equipped 
brigade combat teams.
---------------------------------------------------------------------------
    \4\ The term bow wave is used to describe a requirement for more 
funds just beyond the years covered in the Future Years Defense Plan 
that are subject to funding constraints.
---------------------------------------------------------------------------
                       fcs business arrangements
    Given the risks facing the FCS program, the business arrangements 
made for carrying out the program will be critical to protecting the 
Government's interests. To manage the program, the Army is using a lead 
system integrator (LSI), Boeing. As LSI, Boeing carries greater 
responsibilities than a traditional prime contractor. The Army is in 
the process of finalizing a new Federal Acquisition Regulation (FAR)-
based contract in response to concerns that the previous Other 
Transaction Agreement was not the best match for a program of FCS's 
size and risks. This contract will establish the expectations, scope, 
deliverables, and incentives that will drive the development of the 
FCS.
Program Management with A Lead System Integrator
    From the outset of the FCS program, the Army has employed a 
management approach that centers on the LSI. The Army did not believe 
it had the resources or flexibility to field a program as complex as 
FCS under the aggressive timeline established by the then-Army Chief of 
Staff. Although there is no complete consensus on the definition of 
LSI, generally, it is a prime contractor with increased 
responsibilities. These responsibilities may include greater 
involvement in requirements development, design and source selection of 
major system and subsystem subcontractors. The Government has used the 
LSI approach on other programs that require system-of-systems 
integration. The FCS program started as a joint Defense Advanced 
Research Projects Agency and Army program in 2000. In 2002, the Army 
competitively selected Boeing as the LSI for the concept technology 
demonstration phase of FCS. The Army's intent is to maintain the LSI 
for the remainder of FCS development.
    Boeing and the Army established a relationship to work in what has 
become known as a ``one-team'' management style with several first tier 
subcontractors to develop, manage, and execute all aspects of the FCS 
program. For example, Boeing's role as LSI extends beyond that of a 
traditional prime contractor and includes some elements of a partner to 
the Government in ensuring the design, development, and prototype 
implementation of the FCS network and family of systems. In this role, 
Boeing is responsible for (1) engineering a system of systems solution, 
(2) competitive selection of industry sources for development of the 
individual systems and subsystems, and (3) integrating and testing 
these systems to satisfy the requirements of the system of systems 
specifications. Boeing is also responsible for the actual development 
of two critical elements of the FCS information network--the System of 
Systems Common Operating Environment and the Warfighter-Machine 
Interface.
    The Army participates in program decisions such as make/buy and 
competitive selection decisions, and it may disapprove any action taken 
under these processes. The decision structure of the program is made up 
of several layers of Integrated Product Teams. These teams are co-
chaired by Army and LSI representatives. Government personnel 
participate in each of the integrated product teams. This collaborative 
structure is intended to force decision making to the lowest level in 
the program. Decisions can be elevated to the program manager level, 
and ultimately the Army has final decision authority. The teams also 
include representation of the Army user community, whose extensive 
presence in the program is unprecedented.
    The advantages of using an LSI approach on a program like FCS 
include the ability of the contractor to know, understand, and 
integrate functions across the various FCS platforms. Thus, the LSI has 
the ability to facilitate movement of requirements and make trade-offs 
across platforms. This contrasts with past practices of focusing on 
each platform individually. However, the extent of contractor 
responsibility in so many aspects of the FCS program management 
process, including responsibility for making numerous cost and 
technical tradeoffs and for conducting at least some of the 
subcontractor source selections, is also a potential risk. As an 
example, many of the subcontractor source selections are for major 
weapon systems that, in other circumstances, would have been conducted 
by an Army evaluation team, an Army Contracting Officer and a senior-
level Army source selection authority. These decisions, including 
procurement decisions for major weapons systems, are now being made by 
the LSI with Army involvement. This level of responsibility, as with 
other LSI responsibilities in the program management process, requires 
careful Government oversight to ensure that the Army's interests are 
adequately protected now and in the future.
    Thus far, the Army has been very involved in the management of the 
program and in overseeing the LSI. It is important that as the program 
proceeds, the Army continue to be vigilant about maintaining control of 
the program and that organizational conflicts of interest are avoided, 
such as can arise when the LSI is also a supplier. As discussed in the 
next section, the Army intends the new contract to provide additional 
protection against potential conflicts.
Contracting Arrangements
    The Army and Boeing entered into a contractual instrument called an 
Other Transaction Agreement (OTA). The purpose of the OTA was to 
encourage innovation and to use its wide latitude in tailoring 
business, organizational, and technical relationships to achieve the 
program goals. The original OTA was modified in May 2003 and fully 
finalized in December 2003 for the Systems Development and 
Demonstration phase of the FCS program. The latest major modification 
to the OTA, to implement the 2004 program restructuring, was finalized 
in March 2005.
    Questions have been raised about the appropriateness of the Army's 
use of an OTA for a program as large and risky as FCS. The Airland 
Subcommittee held a hearing in March 2005 which addressed this among 
other issues. In particular, concern has been raised about the 
protection of the Government's interests under the OTA arrangement and 
the Army's choice to not include standard FAR clauses in the OTA. In 
April 2005, the OTA was modified by the Army to incorporate the 
procurement integrity, Truth in Negotiations, and Cost Accounting 
Standards clauses.
    In April 2005, the Secretary of the Army decided that the Army 
should convert the OTA to a FAR-based contract. A request for proposals 
was issued by the Army on August 15, 2005. An interim letter contract 
was issued on September 23, 2005. The Systems Development and 
Demonstration work through September 2005 will be accounted for under 
the OTA and all future work under the FAR-based contract. Boeing/SAIC 
and all of the FCS subcontractors were to submit a new certifiable 
proposal for the remainder of Systems Development and Demonstration and 
that will be the subject of negotiations with the Army. The Army 
expects the content of the program--its statement of work--will remain 
the same and they do not expect the cost, schedule, and performance of 
the overall Systems Development and Demonstration effort to change 
materially. The target date for completion of the finalized FAR 
contract is March 28, 2006. In the coming months, we will be taking a 
close look at the new contract as part of our continuing work on FCS 
that is now mandated by the National Defense Authorization Act for 
Fiscal Year 2006.
    The FAR-based contract is expected to include standard FAR clauses, 
including the Truth in Negotiations and Cost Accounting Standards 
clauses. The letter contract includes Organizational Conflict of 
Interest clauses whereby Boeing and SAIC can not compete for additional 
FCS subcontracts. Also, other current subcontractors can compete for 
work only if they do not prepare the request for proposals or 
participate in the source selection process.
    The last major revision of the OTA in March 2005 had a total value 
of approximately $21 billion. Through September 2005 the Army and LSI 
estimate that about $3.3 billion will be chargeable to the OTA. The FAR 
based contract will cover all activity after September 2005 and is 
expected to have a value of about $17.4 billion. Both the OTA and the 
FAR-based contract will be cost plus fixed fee contracts with 
additional incentive fees. According to the Army, the fee arrangement 
is designed to address the unique relationship between the Army and the 
LSI and to acknowledge their ``shared destiny'' by providing strategic 
incentives for the LSI to prove out technologies, integrate systems, 
and move the program forward to production, at an affordable cost and 
on schedule. In the OTA, the annual fixed fee was set at 10 percent of 
estimated cost and the incentive fee available was 5 percent.
    The Army plans to change the fee structure for the FCS program in 
the new contract. The request for proposals for the new contract 
proposed a 7-percent fixed fee and an 8-percent incentive fee. The OTA 
established 10 distinct events where LSI performance will be evaluated 
against predetermined performance, cost, and schedule criteria. (Those 
events are expected to be retained in the FAR contract.) One event has 
already occurred--the System of Systems Functional Requirements Review 
was held in August 2005. The next event is called the Capabilities 
Maturity Review and it is expected to occur in June or July 2006. As 
the details are worked out, it is important that the new contract 
encourage meaningful demonstrations of knowledge and to preserve the 
Government's ability to act on knowledge should the program progress 
differently than planned.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to answer any questions that you or members of the subcommittee 
may have.
Contacts and Staff Acknowledgements
    For future questions about this statement, please contact me at 
(202) 512-4841. Individuals making key contributions to this statement 
include Robert L. Ackley, Lily J. Chin, Noah B. Bleicher, Marcus C. 
Ferguson, William R. Graveline, Guisseli Reyes, Michael J. Hesse, John 
P. Swain, Robert S. Swierczek, and Carrie R. Wilson.

    Senator McCain. Thank you very much.
    Dr. Graham, welcome.

STATEMENT OF DAVID R. GRAHAM, DEPUTY DIRECTOR, STRATEGY FORCES 
     AND RESOURCES DIVISION, INSTITUTE FOR DEFENSE ANALYSES

    Dr. Graham. Thank you. It's an honor to be here.
    Let me begin by saying that I think this committee is on to 
a very important set of issues. FCS is one example of an 
emerging class of programs that involve a lot of integration 
across platforms, involve multiple Services, corporations, and 
corporate interests. So, coming to grips with how the 
Department is going to manage those programs is a very 
important challenge before the Department, and the Government 
as a whole.
    Other examples, if you look at the joint tactical radio 
system, theater air and missile defense, command, control, 
communications, computers, intelligence, surveillance, and 
reconnaisance systems, there's a whole range of challenges 
ahead of us that present the same kind of problems that we're 
talking about with FCS today.
    Our study was completed in 2004. It provides a snapshot of 
what we saw in the program at that time. By way of context, I 
have to say that we were asked by the Army to look at the 
challenges that we saw for them to execute the FCS program as 
it went forward. So, our recommendations were aimed 
specifically at the execution of that program. We gave the Army 
18 recommendations, some of which are important in the context 
of today's discussions.
    Because of our approach to this, we were again advising the 
Army on the things that we saw needed to be done to execute the 
program. So, we weren't doing a broader public policy review of 
a lot of these issues; and that, in some cases, has led us to 
make recommendations that are specific to the program, but not 
be germane to the broader issues.
    Now, I've been asked to comment on two things today. One is 
the LSI, the second is the ethics issues relating to FCS.
    The bottom line with respect to the LSI is consistent with 
what Mr. Francis just said. You have a program here where there 
are a lot of very important decisions that remain to be made. 
The Army requires the ability to stand back from the 
competitive interests of the participants in the program and 
make judgments about what is in the best interest of the Army. 
We concluded there's a lot at stake for all of the companies 
that are involved in this program, so there is a need for the 
Army to have its own capability to judge where they are at any 
point in time, and what makes the most sense going forward. 
That was the focus of our recommendations to the Army at that 
time. We said they needed to identify the kinds of decisions 
that would need to be made, and create a process within the 
Army, the corporate Army, for getting those decisions made, and 
then provide that guidance back to the contractors. They 
needed, as Mr. Francis said, an effective risk assessment and 
management process. They needed their own internal mechanisms 
for assessing the status of the program, and options. Finally, 
they needed an independent test capability. So, we were focused 
on strengthening the Army's ability to provide its own 
perspective and views on the program.
    With respect to ethics, we were asked to see if there was 
anything that was going to come back and bite the Army due to 
the business setup that they had. We looked very carefully at 
Boeing and what they had done, in response to the issues with 
the other programs and a little bit at the other contractors.
    Basically, what we found was that Boeing, by the time we 
looked at the program, had undergone three or four pretty in-
depth independent reviews--Senator Rudman was involved in that, 
among others--and had put together a lot of formal structures, 
to guarantee the integrity of the program. So, what we found 
was that, in terms of the formal structures, they had done a 
lot. Boeing had really bent over backwards to make the case, so 
they could win back the confidence of their customer.
    We did not do an in-depth field survey of how these new 
programs had been implemented. So one of the things we told the 
Army was that they should adopt a policy of ``trust, but 
verify,'' in order to understand how the contractors were 
implementing these programs. Boeing had already agreed with the 
Air Force to institute a set of external oversight activities. 
We recommended that the Army piggyback on those. Boeing had 
also set up a number of--they created a new independent vice 
president and so forth. So we thought the Army should continue 
to monitor those things.
    In addition, as part of the Rudman review, Boeing agreed to 
set up a pretty stringent screening process for new employees 
coming onboard if they had Government background. Our 
recommendation there was that they ought to look 
retrospectively at the people who came into the corporation 
before those provisions were set in place.
    So, that concludes the recommendations that we have made to 
Boeing or to the Army on that program.
    [The prepared statement of Dr. Graham follows:]
                 Prepared Statement by David R. Graham
    IDA findings on the use of the Lead System Integrator program 
structure for the Army's FCS program.\1\
---------------------------------------------------------------------------
    \1\ This statement is based on the IDA study report for this task. 
David R. Graham, Amy A. Alrich, Richard P. Diehl, Forrest R. Frank, 
Anthony C. Hermes, Robert C. Holcomb, Dennis O. Madl, Michael S. Nash, 
J. Richard Nelson, Gene Porter, David A. Sparrow, and Michael D. Spies, 
IDA Review of FCS Management, (Alexandria, Virginia, Institute for 
Defense Analyses, IDA P-3929), August 2004.
---------------------------------------------------------------------------
    I was the study director for the Institute for Defense Analyses's 
(IDA) 2004 review of Future Combat System (FCS) program management. IDA 
performed this review at the request of then-Acting Secretary of the 
Army, Les Brownlee, and the Office of the Under Secretary of Defense 
(Acquisition, Technology, and Logistics).
    The IDA report provides a snapshot of the program in mid-2004, and 
it describes 18 substantial actions we identified as necessary to 
manage the program effectively. Our recommendations included actions to 
address risks associated with the topics of interest for this hearing: 
the Army's employment of a Lead System Integrator (LSI) and the ethical 
programs associated with FCS. I have submitted an extract from our 
report for the record.
                the army's employment of an lsi for fcs
    Let me begin with three observations on the rationale for employing 
an LSI for managing FCS:

         The Army established a LSI for the FCS program in 
        order to capitalize on industry expertise in structuring, 
        integrating, and managing complex development programs.
         The Boeing-SAIC team was selected to act as the LSI 
        because of its experience in technical management and program 
        integration. Boeing has considerable experience in integrating 
        other large complex programs, including the NASA International 
        Space Station since 1997, and the Missile Defense Agency (MDA) 
        Ground-Based Mid-Course Defense (GMD) program since 1998.
         In DOD's view, an LSI is legally equivalent to 
        employing a prime contractor that is focused primarily on 
        system engineering, system integration, system planning, and 
        control of the family of systems production.\2\
---------------------------------------------------------------------------
    \2\ Acting Under Secretary of Defense (Acquisition, Technology, and 
Logistics) letter report on DOD's use of Lead Systems Integrators, 31 
March 2004. DOD indicates that an LSI is legally equivalent to a prime 
contractor.

    Our overall findings were that the LSI concept has worked 
satisfactorily in other contexts, and we discovered nothing to indicate 
such an approach cannot work for the FCS program.
    At the same time, we found that the Army's use of an LSI for FCS 
involves some significant management challenges.

         The underlying challenge is that the successful 
        execution of the FCS program requires ongoing strong, 
        independent Army involvement to address design and development 
        issues that are fundamental to the Army's future. At the time 
        of our review, the operational requirements document and key 
        performance parameters were being revised in parallel with FCS 
        program development. There were also major technical risks that 
        would require downstream adjustments in program plans and 
        expectations.
         The Army had the formal processes in place for 
        overseeing and engaging on these issues with the FCS program. 
        But, we saw potential weaknesses in the execution of the FCS 
        management structure.\3\ The FCS employs the ``one-team,'' 
        which inter-mixes Government and industry experts in integrated 
        product teams (IPTs) co-chaired by Government and LSI 
        officials, and relies heavily on Boeing's management 
        information system for information and analyses. This creates 
        inherent tensions in the roles of Army participants--teammate 
        vs. customer representative, and in the roles of industry 
        representatives--teammate vs. representative of corporate 
        management and stockholders.
---------------------------------------------------------------------------
    \3\ The Army's formal framework includes the UA Board of Directors 
to support FCS execution, assist in building interfaces between FCS and 
other Army acquisition activities, and to protect the Army's corporate 
interests in the FCS program. In 2003, the Army established the TRADOC 
Futures Center. The Futures Center provides an Army focal point for 
defining FCS capability needs and for arbitrating those major 
requirements decisions that have broad Army implications.

                 From the contractor's perspectives, there are 
                tens of billions of dollars at stake in upcoming 
                decisions regarding the composition of FCS units to be 
                fielded, as well as the capabilities that will be 
                assigned to each element of FCS.
                 Boeing LSI personnel also face thorny dilemmas 
                in the ``one team'' construct: The LSI is intended to 
                act as a neutral party in assessing program tradeoffs 
                and in offering advice. Thus, in theory, the LSI should 
                not have a financial stake in developing and building 
                the individual elements of the system; rather, it 
                should recruit and oversee the best of the industry. 
                Boeing, however, has a large financial stake in the 
                future of the program.
                 On the Government side, many staff are dual-
                hatted as IPT members while performing their 
                Governmental responsibilities, including oversight of 
                contractor cost and schedule performance, setting user 
                requirements, conducting operational and live-fire 
                testing, and establishing system architectures.

    Given these internal tensions, we felt the Government faced the 
risk of becoming too heavily reliant on its industry partners. Success 
with the FCS program requires a strong cadre of ``smart buyers'' on the 
Government side, who are looking out for the Army's interests, and are 
equipped to counter-balance corporate incentives in order to keep the 
FCS program focused on delivering an integrated and effective unit of 
action.
    We advocate three actions to strengthen the Army's ability to shape 
the FCS program:

          1. A corporate Army process for identifying and resolving key 
        FCS decisions.
          2. An Army institutional capability to develop independent, 
        corporate Army perspective on FCS cost, schedule, and 
        performance issues. We recommended five specific 
        responsibilities for the organization assigned this job:

                  -  Independent assessments of cost, schedule, and 
                performance
                  -  Support for FCS program reviews
                  -  Support for Training and Doctrine Command (TRADOC) 
                quarterly futures reviews
                  -  Assessments of the ``one-team's'' management 
                information systems
                  -  Strategic risk assessments with associated 
                contingency options for FCS to enable the program to 
                continue to adjust as development matures

          3. Army test activities that continue their collaboration in 
        support of the Army's FCS development efforts, but in a way 
        that ensures their independence.
                                 ethics
    The IDA review examined Boeing's ethics initiatives in some depth, 
looked briefly into the ethics programs in the other companies involved 
in FCS, and considered Government workforce ethics issues as well. My 
comments today will focus on Boeing.
    In the 2 years prior to the IDA review, Boeing had commissioned a 
series of external reviews to address some serious ethical problems 
unrelated to the FCS program. Such violations led to Boeing's debarment 
from the Air Force's Evolved Expendable Launch Vehicle program. One 
review, ``The Boeing Company: An Assessment of the Ethics Program,'' 
was performed by the Ethical Leadership Group at the request of the Air 
Force.\4\ Former Senator Warren Rudman performed two additional ethics 
reviews at the request of Boeing.\5\ R. William Ide, a former president 
of the American Bar Association, conducted a third review that focused 
on Boeing's legal department.
---------------------------------------------------------------------------
    \4\ Ethical Leadership Group, Wilmette, IL, October 2003.
    \5\ Paul, Weiss, Rifkind, Wharton, and Garrison, LLP, ``A Report to 
the Chairman and Board of Directors of the Boeing Company Concerning 
the Company's Ethics Program and its Rules and Procedures for the 
Treatment of Competitor's Proprietary Information,'' (Washington, DC: 
November 3, 2003) and ``A Report to the Chairman and Board of Directors 
of the Boeing Company Concerning the Company's Policies and Practices 
for the Hiring of Government and Former Government Employees,'' 
(Washington, DC: February 26, 2004).
---------------------------------------------------------------------------
    These external reviewers found Boeing's ethics activities to be 
understrength, integrated too closely with the business and operating 
units, too narrowly focused, and not sufficiently aggressive in 
addressing issues. The Ethical Leadership Group noted that more than 90 
percent of Boeing employees participating in their study were aware of 
the Boeing ethics hotline; however, a significant percentage of those 
same employees also felt that complaints would not be acted upon 
thoughtfully, in a timely manner, and worse, would subject the 
complainant to retaliation.
    In response to the recommendations of these reviews, Boeing 
management took many steps to strengthen needed enforcement mechanisms, 
provide stronger awareness of the company's commitment to ethical 
behavior, and strengthen the mechanisms for reporting and investigating 
potential violations. (These are detailed in the IDA report.)
    Boeing has, in particular, realigned its corporate structure to 
increase the independence of corporate governance functions, including 
establishing:

                  -  A Senior Vice President (VP) for Internal 
                Governance (reports to CEO and separately to the 
                Board's audit committee)
                  -  An Integrated Defense Systems Compliance Review 
                Board--chaired by the President of Boeing
                  -  Direct reporting lines for all Ethics Advisors to 
                Headquarters VP for Ethics

    With these and other actions, Boeing makes a strong case that they 
are making every effort to ``win back the trust of their customers''; 
IDA did not, however, audit execution at Boeing so we can only report 
on these actions and the formal processes that Boeing has put in place.
    Our report recommended three additional steps for the Army to help 
ensure that ethical issues would not harm the FCS program:

          1. The Army should adopt a policy of ``trust but verify'' 
        with regard to the ethics programs of the FCS industry 
        participants.

                  -  In the case of Boeing, the Army should take 
                advantage of planned future Air Force surveillance 
                activities. As part of an administrative agreement to 
                address Boeing's prior problems, Boeing will hire a 
                special compliance officer, approved by and reporting 
                directly to the Air Force. Boeing also will agree to a 
                follow-up independent audit 30 months after the 
                agreement takes effect.
                  -  The Army also should task the tier 1 
                subcontractors, through Boeing, to assess lessons 
                learned from the Boeing independent reviews and, where 
                relevant, adopt these lessons learned in their own 
                operations.

          2. We recommend that the Army should also require all 
        contractors to screen current employees who have Government 
        backgrounds for possible FCS conflict of interest exposure. 
        Relevant disqualification letters also should be obtained. The 
        Rudman report recommended careful screening of future hires. 
        Boeing agreed to do this, but we were also concerned about 
        risks associated with those already hired before the Rudman 
        review.
          3. A comprehensive personnel-tracking program should be 
        implemented within FCS to help manage conflict of interest 
        exposure for all program participants; it should be geared 
        especially toward containment of proprietary information within 
        the FCS ``firewall.''

    Senator McCain. Thank you very much, Dr. Graham.
    On the Rudman report, Rudman said that we should have well-
known former Pentagon officials who go to work for defense 
contractors, and we put it in the defense authorization bill, 
and then it was removed in conference. Do you think we still 
need that, Dr. Graham?
    Dr. Graham. I think it's important to avoid conflict of 
interest of people coming from Government into industry.
    Senator McCain. Mr. Francis?
    Mr. Francis. I would agree, Mr. Chairman.
    Senator McCain. Secretary Bolton, I'm very concerned, 
obviously, as we all are, about the cost escalation of defense 
procurement. We've talked about it a lot, and we have been 
concerned about the failure to bring costs under control on a 
broad variety of programs. Outside of the F-22, or Joint Strike 
Fighter (JSF) program, this is the biggest single defense 
procurement and the total fixed and incentive fee earned to 
date by the manufacturers under the LTA is $424.1 million. This 
is fixed and incentive fees--fixed fee of $280.7 million and 
incentive fee of $143 million. Meanwhile, the cost of the 
program has gone up 76 percent. What's the rationalization for 
paying incentive fees--as I understand, maximum incentive 
fees--when the cost escalation and the program has been 
delayed? How do you rationalize that?
    Mr. Bolton. Mr. Chairman, I'll break it down into a couple 
of parts here. The cost growth in the program has been driven 
by the Army, not by the contractor.
    Senator McCain. How is that driven by the Army?
    Mr. Bolton. Sir, when we started this program, when the 
Army took the program over and baselined it in 2003, it was a 
program that was aimed at a field date of 2010. In 2004, after 
several months of study by the Army--and in several areas, 
aviation being one, and FCS and others--our leadership made a 
determination that the soldiers on the battlefield deserved the 
best available technology as soon as possible.
    Senator McCain. Something they didn't, I assume, in 2003.
    Mr. Bolton. That is true. That is true. For the FCS, sir. 
We were providing, and have been providing, to the battlefield 
technologies from the technical base and off-the-shelf 
resulting in programs like the rapid equipping, rapid fielding 
initiatives. But our new Chief of Staff at the time said, ``I 
want to take whatever technologies are available and ready out 
of this FCS and put it in the field as soon as possible.'' When 
that decision was made, we restructured the program and wound 
up with four spirals, initially, to take technology that was 
maturing at that time and put it into the field. The first 
spiral starts in 2008. That will look at increased network 
capability, unattended sensors on the battlefield, as well as 
two or three other technologies we believe will be ready and 
can be used by our current forces. As we laid out those 
spirals, which happened on a 2-year center, starting in 2008, 
the program grew.
    We also added 4 more years to take care of the concerns 
that had already been raised by the GAO and others about 
maturing technologies. The Army elected, at that time, to add 4 
more technologies, to come to a total of 18, that we had taken 
out previously, before 2003. So, the program and scope changed. 
When it changed, the cost of that program changed, as well.
    Senator McCain. Was the contract renegotiated?
    Mr. Bolton. At that point, we actually modified the 
contract vehicle that we had. So, we--at that point--and this 
is 2004--went ahead and put in a new baseline. That baseline 
was not approved by OSD, for reasons we can go into later, 
until November 2005. However, in the self-assessment report 
that we delivered to Congress in December--I think it was 
December 2004--we explained how we had restructured, how we, 
the Army, had increased the size of this program, and that we 
would update the costs as soon as we had an official baseline, 
from OSD.
    Senator McCain. When was that cost updated?
    Mr. Bolton. That was updated in November of last year.
    Senator McCain. Whew, boy.
    Mr. Bolton. If I just----
    Senator McCain. This is an interesting scenario.
    Mr. Bolton. Yes, sir.
    Senator McCain. In 2003, we enter into a contract; 2004, we 
decide to change it; 2005, we notify Congress; and, during that 
period of time, the contractor gets maximum incentive fees.
    Mr. Bolton. Yes, sir, because he did exactly what we asked 
him to do.
    Senator McCain. It's stunning.
    Mr. Bolton. If I could use----
    Senator McCain. Stunning.
    Mr. Bolton. It's just----
    Senator McCain. It's quite stunning. You--they ask you--you 
just--there's no such thing as a contract. You just ask them to 
do more things, and then the cost escalates, and then we ask 
them to do some more things, and then the cost escalates.
    Senator Lieberman. We pay more.
    Senator McCain. Yes, and we pay more. So, we give them more 
incentives. How do you--that's the damnedest way of doing 
business I've ever--no private corporate could stay in 
business.
    Mr. Bolton. I reflect back on why we did it. We thought it 
was the right thing to do. We had technologies that were going 
to mature over time. This Chief of Staff did not want to wait 
to have all technologies available at once in 2010. He thought 
soldiers deserved to have the technology when it's available 
and we restructured the program. To me, that's a good premise.
    Senator McCain. Mr. Francis, has the GAO commented on this 
process?
    Mr. Francis. We haven't. We have talked, in general. We 
have a report out now that talks about how awarding incentive 
fees works, or, maybe more appropriately, doesn't work. I think 
in this situation we have reported on FCS, and I do think the 
restructuring was the right thing to do, because the program, 
as approved in May 2003, I don't believe, was executable.
    Senator McCain. But if you structure a contract, don't you 
sign a new contract?
    Mr. Bolton. You actually ``mod'' the contract. That is you 
have a signed contract, and the legal way to hold someone 
accountable is to modify that contract signed by a contracting 
officer. In this case, it was a grants officer.
    Mr. Francis. The contract has to be written in such a way 
that allows for the risk in the program and this program has a 
lot of risk, which the Government bears. I think I'll come back 
to what I had said in my opening remarks, which is, the 
contract itself isn't going to be any better than the program. 
The program should have been in better shape when it started. 
You brought up the corporate example. A corporate example, 
would have had a very tight business case, so that you wouldn't 
have an unpleasant discovery like this. In the contract at the 
time, and in the current one, it would still work that way. If 
the Government were to decide that the program can't be 
executed as planned, it would revise the cost and schedule 
estimate, and the basis for the fee would be reset, and the 
contractor would be judged against the new cost and schedule 
estimate.
    Senator McCain. Would you agree that there was a much lower 
level of scrutiny or accounting because it was originally an 
Office of Technology Assessment (OTA) contract?
    Mr. Francis. Mr. Chairman, I don't know that the contract 
type would have made a difference at that point. I think the 
risks in the program would have overpowered any contract 
instrument.
    Senator McCain. Dr. Graham?
    Dr. Graham. That's been our view at IDA. I was here a year 
ago and said we had told the Army we thought they had 
sufficient visibility of costs and sufficient authority to 
control the contractor under the OTA to execute the program 
effectively. The OTA that was in use at that time, as I said, 
had a lot of FAR-like provisions put into it by the Army. I 
agree wholeheartedly and my colleagues at IDA also agree 
wholeheartedly with Mr. Francis. At that time, we saw that the 
uncertainty in the program, the technological risks, and the 
ability to manage those things was the big challenge to the 
program. We didn't see the OTA itself as the centerpiece of the 
issue.
    Senator McCain. In your report, Dr. Graham, you made 
several observations regarding the LSI. Boeing has a major 
financial stake in the program, receives about one-third of the 
program's fund for its work as the LSI and for developing a 
system of systems common operating environment; thus, creating 
an inherent tension in Boeing's roles and responsibilities. Do 
you think we should be addressing what seems to be a conflict 
of interest?
    Dr. Graham. Again, our approach to the Army was that the 
Army had to be able to develop its own independent views on 
cost, schedule, and performance so that it could be an equal, 
or better, partner in this relationship. That was the solution 
that we recommended a year ago.
    The risk that we saw was that the program was set up under 
what they call a ``one-team'' management structure where you 
had integrated product teams--I don't know, 15 or so of those--
looking at different aspects of the program. LSI 
representatives would come together with Government 
representatives and a lot of the Government representatives 
were dual-hatted, so they had to come together and work in this 
partnership, while, at the same time, carrying out their 
governmental responsibilities.
    At the time we looked at the program, we were somewhat 
concerned that the Government side may not have the horsepower 
that was needed for them to engage effectively in all cases. 
So, we were a little concerned that this IPT process might 
become dominated by the contractor side, just because of the 
resources that they had to bring to bear on these processes.
    So, that's why our recommendations were aimed toward 
strengthening the Government's ability to engage in that 
process.
    Senator McCain. Mr. Francis? Comment on this LSI issue?
    Mr. Francis. Yes, Mr. Chairman. I think I would agree with 
Dr. Graham that these are definitely concerns, in the 
continuing interest of the LSI. Ideally, you'd want the LSI to 
be financially indifferent to the outcome of the program. In 
this case, Boeing does have a stake in it. You mentioned the 
system of systems, common operating environment. There's 
another element of software they're working on. Plus, they have 
responsibility for systems engineering, which will continue 
into production.
    I will say the contract that's being negotiated right now 
does limit Boeing's future involvement in subcontracts, and 
essentially prevents it. So, that's better. But still, I think, 
short of starting over with a different contracting 
arrangement, from here on in the Army will have to try to 
mitigate the risk with Boeing, versus eliminating it.
    Senator McCain. Secretary Bolton, my understanding is the 
latest cost is $161 billion for the FCS. Is that accurate?
    Mr. Bolton. The contract I'm negotiating right now is $17 
billion. If you include what we will estimate the first units 
of action, 15 of those and then-year dollars, you can get out 
to about 160. If it's in base-year dollars, it's 125.
    Senator McCain. Do you foresee any further cost 
escalations?
    Mr. Bolton. It's hard for me to answer that, because 2 or 3 
years ago when I looked at 2010, I did not anticipate the Army 
wanting to make a change to put technology into the field as 
quickly as we're doing in the spin-outs. So, I don't know what 
the future entails. I do know that if I can stay to the 
baseline that I have right now, we have a good chance of 
keeping the cost where it is today.
    Senator McCain. Do you share that optimism, Mr. Francis?
    Mr. Francis. I'm afraid I don't. I'd like to be optimistic, 
but, in this case, on the FCS, the base of knowledge right now 
for developing an estimate is very low, the schedule is very 
tight, and our analysis shows that a lot of things are going to 
come together late in the program when the burn rate, if you 
will, for the dollars is very high. So, I think it will be very 
difficult for the program to execute within the current 
estimate.
    Senator McCain. Dr. Graham, do you have an opinion?
    Dr. Graham. There are features the networking and so forth, 
that just involve unproven technologies. I think it's very hard 
to even describe what FCS ultimately will look like, much less 
predict the cost of it.
    Senator McCain. Well, that's comforting. [Laughter.]
    Dr. Graham. But, on the other hand, as I said, there are 
several programs in DOD which are driving toward a level of 
integration that is needed to take the next step in military 
capability. There just are tremendous challenges in pulling off 
those programs.
    Mr. Bolton. Mr. Chairman, if I could add----
    Senator McCain. Yes, Mr. Secretary.
    Mr. Bolton.--a little bit to this, because my task is to 
bring the program in once I have the requirement--if I have the 
resources to bring it in--and then to apply every tool we have 
to stay within those resource bounds. I've tried to explain why 
it grew. Not driven by the contractor, but we, the Army, said 
we had to do this.
    Now, if the Secretary and the Chief had said, ``Okay, this 
is it, that's the money you have, now go make it happen.'' We 
have put in--while we don't use the business-case approach--
that's not the DOD way of doing this type of program--we do 
have, in place of that, a strategy, and acquisition strategies, 
that take all of the things, in terms of requirements and 
readiness for technology and so forth, into account, and, for 
each one of the technologies that we are pursuing, the 8 that 
are now--the 49 that are ready to go now, in terms of level 
six--23 by the end of this year--by the time we get to the 
preliminary design review in 2008, all of them will be at the 
level that the DOD says it has to be for this program to go 
forward--and for each one of those, there is a detailed risk 
mitigation plan and an off-ramp, which means if this technology 
is not ready on that day, I take a technology that already 
exists, that's here. That's how we're going to control this. 
What that means is, if we took all these technologies and, 
boom, we have the FCS, and here's its capability--if we don't 
get all those technologies, I'll take something else in lieu 
of, and it'll be a little less, but it'll still be a whole heck 
of a lot more than what we have today.
    So, my challenge is, once I understand the requirements and 
have the resources to stay within, we're going to do everything 
we can to stay there.
    Senator McCain. I appreciate that very much, Mr. Secretary. 
The problem that we're facing--and I'm a student of history--is 
that sooner, rather than later, we're going to start seeing a 
leveling off of defense spending.
    Mr. Bolton. Yes, sir.
    Senator McCain. There's just too great a deficit. Here we 
are--history shows that we go in these constant----
    Mr. Bolton. Yes, sir.
    Senator McCain.--cycles--so here we are with $2 billion 
destroyers, $14 billion aircraft carriers, a doubling of the 
cost of the FCS to $161 billion. There's going to come a 
terrible collision here and if we don't keep the cost down, it 
may be great technology, but we're not going to be able to buy 
it.
    Mr. Bolton. Mr. Chairman, I agree. I, too, have looked at 
history in this business for at least the last 100 years, and 
I've seen the same cycles. I ask my folks, ``what are we going 
to do if, 2 or 3 years from now, the budget is cut in half? How 
do we prioritize?'' What are we going to do with this program? 
We're already looking at that, expecting, one day, for reasons 
completely outside of this department, that we're going to have 
to live with that.
    Senator McCain. One of the places you could start is not 
paying off incentive bonuses for contracts that fall behind in 
schedule and increase in cost.
    Mr. Bolton. Mr. Chairman, I will do that----
    Senator McCain.--and if you think that it's justified, we 
have a difference of opinion.
    Mr. Bolton. Yes, sir.
    Senator McCain. Go ahead, please.
    Mr. Bolton. We may. What I've tried to explain is that in 
this case, this contractor--actually, the group of 
contractors--did exactly what the Army wanted done. We, the 
Army, changed. The analogy I use--when I build a house and I go 
in there and I say, ``I'm going to pay this much for a four 
bedroom, two-car garage.'' Now my mother-in-law is going to 
come and visit. That's after I've signed the contract. I need 
another room. I need handicap ways of getting in and out.
    Senator McCain. A lot of times, I say, ``Mom, we can't 
afford it.'' [Laughter.]
    Mr. Bolton. Sir, you may be able to get away with that. I 
can't. [Laughter.]
    Senator McCain. Well, I mean----
    Mr. Bolton. But the point I'm trying to drive is that if 
the owner decides to make a change, and the contractor is doing 
exactly what you asked him to do, why do you penalize the 
contractor?
    Senator McCain. If you are a student of history, Mr. 
Secretary, you'll go back and see, in the 1980s, we had fixed-
cost contracts.
    Mr. Bolton. Yes, sir.
    Senator McCain. We had fixed-cost contracts. We didn't have 
incentive contracts and somehow we got completely away from 
that. For doing their job, I'm not sure that people deserve 
incentives. Again, in the corporate world, you go enter into a 
contract with somebody, and they do the job, and you pay them 
their money. You don't have to have ``incentive contracts,'' 
particularly in this case, of 141--or 400--a half a billion 
dollars, total. That's not the way to negotiate contracts. 
That's not the way we used to negotiate contracts. We used to 
say, ``Here's the cost.'' If you renegotiated the cost, fine, 
then you got a new cost. You didn't need an incentive. Are 
there penalties in this contract for failure to perform?
    Mr. Bolton. You don't get the incentive.
    Senator McCain. That's what I thought.
    Mr. Bolton. But let me point out--because it reflects back 
to what the GAO has just recently said--we have no award fee 
with the LSI. There is no award fee.
    Senator McCain. There's just incentive fees.
    Mr. Bolton. The incentive fee, which is a very small 
percentage of all the contracts that are let in DOD--you're not 
going to find a whole lot who have incentive fees.
    Senator McCain. Half a billion dollars this time.
    Mr. Bolton. The reason you don't is because the incentive 
fee has to be extremely objective. In fact, the two that 
they've gotten so far were go/no-go, either you do exactly what 
we say--in that case, it was to definitize the OTA; the other 
was an extremely important part for this program, otherwise who 
could not go forward, and that was the systems of systems 
functional requirements review. Without that, the program 
literally could not go forward. So we put an incentive on that. 
Then, within that, we broke out exactly what the contractor had 
to do.
    So, we can disagree on that. The fixed-price contracts that 
I went through, back in the 1980s, or the cost-plus, back in 
the 1970s, and you go back to the 1950s, you'll find it going 
the other way, and they ran afoul for the same reason that any 
contract would run afoul. As Mr. Francis already has pointed 
out, it is not the contract type that I worry about, it's the 
people actually executing the contract, both on the Government 
side and the contractor, that I worry about. Do they have the 
expertise, training, and experience to do that work?
    Senator McCain. I guess we could extend this discussion for 
a long time, but there are benefits of old age, Mr. Secretary. 
I remember when President Reagan came in, and Secretary of the 
Services gave fixed-cost contracts with penalties associated, 
not incentive contracts that caused us to spend hundreds of 
millions of dollars in addition because they did their job.
    So, we're going to work every way from this side to 
eliminate those kinds of contracts so we can save hundreds of 
millions of dollars, because I'm sure there are defense 
contractors out there who will do the job, and be satisfied 
with being paid, as most corporations in America are, for just 
getting the job done.
    Secretary Lieberman--Senator Lieberman.
    Senator Lieberman. Well, thank you for that nomination. 
[Laughter.]
    Senator McCain. Secretary Lieberman. [Laughter.]
    Senator Lieberman. If you offer it, I might accept it. 
[Laughter.]
    I agree with all the questions and the comments that 
Senator McCain has made. We're in a crisis here, because we are 
asking the military to do more. We're not giving you the 
resources to do it, and there's a definite--taken from here to 
fill this gap. So, as we said in the last panel, we have this 
tremendously urgent need to reset the force coming out of Iraq 
and Afghanistan. So, how are you going to do it? You reach into 
the institutional Army. That begins to affect training and 
education and other aspects of the institutional Army. As I 
said before, I don't think we have enough personnel in the 
Active Army.
    Acquisition is a critical part of this, and somehow we have 
to figure out how to buy you what you need and get it at a 
better price. This is because, otherwise, we're ultimately 
going to compromise our security.
    I have just a couple of questions to add. I want to start, 
Secretary Bolton, with you, about the FCS, and just repeat what 
I said briefly in my opening statement. As you well know, there 
was a run made at this program, a serious run, of altering it 
significantly in the House last year. Chairman Hunter led the 
drive. That's a very significant person to be raising these 
questions. On the Senate side, Senator McCain and I and others 
worked hard to protect the program, because we believe in it.
    Mr. Bolton. Right.
    Senator Lieberman. But you're going to be challenged a lot, 
as you've been today, reasonably, you'll be challenged by those 
who are not as supportive and it's important that your friends 
challenge you, too.
    The GAO has asserted that the FCS does not represent a good 
business case for an acquisition program. In the written 
testimony that Mr. Francis has given us, he said that the 
elements of a sound business case are firm requirements, mature 
technologies, a knowledge-based acquisition strategy, a 
realistic cost estimate, and sufficient funding and he 
concludes that those are not present in the FCS. As he said in 
his oral testimony, FCS has all the markers for risks that 
would be difficult to accept for any single system; they are 
even more daunting in the case of FCS, not only because of 
their multiplicity, but because FCS represents a new concept of 
operations that is predicated on technological breakthroughs.
    So, Mr. Secretary, do you agree with the GAO that the FCS 
program is not based on a solid business case?
    Mr. Bolton. That's difficult for me to answer. As I 
mentioned earlier, DOD does not process programs using a 
business case.
    Senator Lieberman. Yes.
    Mr. Bolton. What the GAO----
    Senator Lieberman. Maybe we should.
    Mr. Bolton. I'll leave that to the Department. I have my 
personal opinions, but I'm not going to speak for the 
Department. So, what we have done----
    Senator McCain. We'd be glad to hear your personal opinion, 
Secretary Bolton.
    Senator Lieberman. Yes, really. [Laughter.]
    Mr. Bolton. I do agree with a lot of what the GAO and what 
the Defense Acquisition Performance Assessment (DAPA) report 
has put out.
    Senator Lieberman. Right.
    Mr. Bolton. But we have a process. In order for me to get 
the program through the building, I follow that process.
    Senator Lieberman. Yes.
    Mr. Bolton. The GAO would like to have a higher level of 
technology maturity--a seven, at least, and probably an eight, 
which is a prototype. The DOD says, ``Six is what you need to 
get through these particular milestones.''
    When I look at that, I can agree with a lot of it, but it 
requires a lot of changes outside of what I call the ``small 
`a' acquisition,'' program management, contracting, so forth. 
In fact, if you look at the DAPA, if I could just go on a 
little bit of a tangent here, where they look for 6 years from 
milestone ``a'' to fielding, it sounds great. But then you must 
realize that everything changes. The threat community has to 
adjust to input from the requirement community, who has to 
speed up their process, the resourcing has to speed up; of 
course, the acquisition needs to speed up, all the testing, if 
you're going to stay within that; and the technology has to be 
at least seven or eight.
    What Mr. Francis talked about, we have already been doing 
for the last 3\1/2\ years. Look at the Stryker. We went from an 
idea to a full combat deployed brigade in 4 years. Not just the 
vehicle, but the entire brigade. We did all the requirements, 
all the resourcing, all the acquisition, all the testing, 
trained the soldiers, and put them over in northern Iraq. Four 
years. The vehicle itself probably takes 15 years, 10 to 15 
years, to do that. If you look at what Mr. Francis said, here 
and also in previous GAO reports, you will find that we 
followed that. We don't use the same terms, but we followed 
that.
    Senator Lieberman. That's a good model, and that's a good 
example. I think as you look to the GAO definition of a sound 
business case--firm requirements, mature technologies, 
knowledge-based acquisition strategy, realistic cost estimates, 
efficient funding--those are standards that----
    Mr. Bolton. Yes, sir.
    Senator Lieberman.--we ought to hold the Pentagon to. If 
it's not operating on a good business case, then it ought to--
you have a very impressive background that you bring to this 
job, and I'd just urge you to look at it in those terms and 
shake up the system if you have to.
    Mr. Bolton. As a matter of fact, I've already asked my 
chief scientist to go and see what it would take for us to move 
from six to eight. I know that's not what the GAO's looking 
for; the seven would be fine with them. No, eight.
    Senator Lieberman. Yes.
    Mr. Bolton. That's a prototype. It's going to stay in the 
lab, and we're going to prototype this and put it out. On the 
resourcing side and the test side, we've asked the same 
questions, so I can come back to my leadership over this year 
and see what we can do about this.
    There is a caution here. I have not thought through this, 
but I do see it, and I can't get over this hurdle. What I have 
described, and what the GAO has described, this knowledge-based 
acquisition is great, as long as your horizon is 12, 18 months, 
24 max. Why? Because that's what business uses.
    Senator Lieberman. Sure.
    Mr. Bolton. If you get longer than that, you have lost 
market share. You're out of there.
    Senator Lieberman. You've lost more money.
    Mr. Bolton. Yes, sir. We're doing that on the battlefield 
today. What's our problem? We're barely staying ahead of the 
adversary, in terms of technology. What we want to do is be 
able to have technology that gives you some deterrence that's 
more than 18 months long--2 years, 5 years, 10 years. When you 
do that, you have to push technology a little harder than your 
adversary. Now, granted, I have not thought through this, but 
I'm trying to figure out, ``how do I do this and not get into 
the same cycle that business has all the time?''
    Senator Lieberman. Yes.
    Mr. Bolton. I have not been able to solve that.
    Senator Lieberman. Mr. Francis, what's your advice to the 
Secretary, at this point? Because I know you feel that that FCS 
program has been allowed to proceed into systems development 
and demonstration prematurely.
    Mr. Francis. Yes, Senator Lieberman. Our view is that, 
really, right now the FCS is in a technology development phase, 
and I think what Secretary Bolton said about the Stryker is 
apropos. I think that's what mature technology enables you to 
do.
    Senator Lieberman. Right.
    Mr. Francis. You can move that, quickly. In a case like 
FCS, I think when we're talking technology and maturity levels, 
I think where we would part company is, even if we were to 
accept the--a standard of six, if you'll go along with the 
levels here even the DOD policy is to have all your key 
technologies at six when you start, which would have been May 
2003. What we're talking about here is, if everything goes as 
planned, we might be there in 2008. So, my view is, the first 5 
years of the program is dominated by technology development. 
We're going to have to develop the technologies but right now 
the program is approved, and the contract will be for all of 
development, going even beyond the product decision. So, I 
think that's the mismatch. I think the issue it raises is, if 
you want to pursue a solution like this, and you have to invent 
technologies, how would you do it in the current system? 
Because it's very difficult to get big money before you get to 
milestone B. So, programs want to get to milestone B so they 
can get access to the bigger bang. So, there is a structural 
issue there.
    Mr. Bolton. I would just add that it is true that the 
Department looks for level six. But also in that same 
paragraph, unless you have a risk mitigation plan or an off-
ramp, that's also an option, and that's what the OSD staff will 
look to, and did on this program. That's why they approved us 
with the level of technology we had.
    Senator Lieberman. Let me just ask a final question. We're 
going to keep asking you about the one I just asked, which is 
on the LSI question. In the IDA review of FCD management 
report, it says, ``Army documentation noted that one of the 
critical reasons to select Boeing SAIC as the lead systems 
integrator was because it would have an integrating role, not a 
producing one, in developing FCS. This opens up potential 
opportunities for non-LSI companies and FCS development.''
    As you've said, in the case of the FCS, Boeing now has a 
significant financial stake in the future of the program, which 
does create a tension in Boeing's roles and responsibilities. I 
know you talked earlier, Dr. Graham, about the tension, in a 
sense, between the Pentagon personnel and the LSI. I want you 
to focus for a moment on this other part of the equation. I 
know that in your report you state that the LSI is intended to 
act as a neutral party in assessing program tradeoffs, in 
offering advice. That's 3 years since that report. Has your 
opinion changed regarding the LSI's role in program 
development? Are you worried about a conflict in roles here, 
and the impact it may have on the program?
    Dr. Graham. We are concerned, for all the reasons we've 
just talked about, that if FCS remains a dynamic program, there 
are lots of decisions yet to be made that will shape the 
program. On the corporate side, there are financial interests, 
as well as interests in the outcome or the Government interest. 
The Government needs to have an effective countervailing 
capability to stand above all of this fray and identify what's 
best for the Army----
    Senator Lieberman. Right.
    Dr. Graham.--and then shape the program accordingly. That's 
how we see it.
    Senator Lieberman. Okay. Do you have an opinion on this 
question of the LSI also having a development role in the 
program?
    Dr. Graham. I've thought a lot about that. The real 
dilemma, I think, is that, on the one hand, you want somebody 
who's a neutral party----
    Senator Lieberman. Right.
    Dr. Graham.--on the other hand, you need somebody who is 
big enough and knowledgeable enough and engaged enough in the 
program that they can manage the details. I think that's the 
tradeoff that we saw. I don't think we saw a way of creating an 
LSI that would be pure in this theoretical sense.
    Senator Lieberman. Yes.
    Dr. Graham. So, we saw it as building the capability in the 
Government as--that was the solution that----
    Senator Lieberman. So, you followed the program. Do you 
think the Army has set up enough systems to avoid adverse 
consequences of the dual roles that Boeing is playing?
    Dr. Graham. We were impressed by the Army's engagement when 
they restructured the program. That started to happen as our 
study was coming to conclusion and I don't have any insight as 
to what they've done since then.
    Senator Lieberman. Okay. Mr. Francis, do you have an 
opinion on this question, about the LSI also being involved in 
FCS development?
    Mr. Francis. Yes. I think where I would start is with the 
solution that we're trying to manage. I'm not talking just FCS 
here, but if our process is generating solutions that require 
multiple inventions of new technologies, and the solutions 
outstrip the Service's abilities to integrate and the solution 
also requires significant growth in future budget, I think the 
first question I'd ask is, are we arriving at the right 
solutions? Are these indications that maybe we are thinking too 
grandly? Now, if you agree, then, that the solution is the 
right thing to do, then I think our options are limited, in 
terms of management. If our abilities are outstripped, then you 
end up having to go to something like an LSI and put in the 
safeguards against that.
    Senator Lieberman. In other words, ideally the Army itself 
might have played an LSI role. Is that what you mean?
    Mr. Francis. Yes. In the past, that's what would have been 
done. Of course, the scope of the program would have been much 
smaller.
    Senator Lieberman. Right.
    Mr. Francis. This isn't a fact; I'll raise it as a 
concern--it is, what happens over time? Because I think the 
Army has done a lot of good things to try to safeguard itself 
against that risk. But what happens as the workforce ages over 
time? I worry about people who were once doers, Army people 
who----
    Senator Lieberman. The workforce of the Army.
    Mr. Francis.--who worked for the Army are now overseeing 
and participating on teams and I think they'd be in pretty good 
shape to watch the store, if you will. But, over time, as those 
people retire, we'll have people who were never doers----
    Senator Lieberman. Right.
    Mr. Francis.--now being the overseers. I would worry about 
that equation.
    Senator Lieberman. Yes. Me, too.
    Secretary Bolton, I want to give you the last word. In one 
sense--I don't have the exact words Mr. Francis raised in his 
question, but to ask, based on what we see, whether--and I 
think you'll be asked this, this session--this is too grand a 
program, whether we're reaching beyond our means here.
    Mr. Bolton. Yes, there are those folks who would claim that 
I look at a glass half full, and some of my critics might say 
half empty. I've always just looked at the glass.
    Senator Lieberman. Yes.
    Mr. Bolton. I might be an optimistic realist, but that's 
just the way I am. I believe we can do this. When I came to 
this position, I told the Chief of Staff at that time, and the 
Secretary, ``There is no way you'll ever do this program. With 
the processes that you have in place today, it will not work.''
    Senator Lieberman. Yes.
    Mr. Bolton. When we went to the milestone B meeting, we 
have a model that I use that we put in place that looks at 
probability of success, that looks at all aspects of the 
program, both inside and out, and we had gone from my zero 
percent to, like, 60. But what changed in that year and a half 
was the way we were doing business, as Mr. Francis already 
alluded.
    We chose an LSI because I needed someone to integrate this. 
I then decided that the heart and soul of integration here is 
that middleware, that software. It's kind of like framing a 
house, half of the general contractors who build houses are 
also the framers, because it's important. You can change the 
foundation if you find something late, you can do a lot of 
things, but if that frame is off, everything else does not 
work. So, we told the LSI, ``You're going to do that, and 
you're going to do the weapon interface,'' because that's what 
the crew interfaces with. That's all they do.
    Senator Lieberman. Yes.
    Mr. Bolton. That's all they do.
    Senator Lieberman. So, you don't worry about the conflict 
with them being involved in programming at all.
    Mr. Bolton. I don't worry about the conflict because when I 
get to production--and I'm working on that now, in terms of 
what we're going to do in production--there is no production 
for this LSI. There is no production. The production is done by 
the other 18 contractors.
    Now, we safeguard this. We put a two-star out there. He has 
a staff. They're 24/7 with the LSI. Every quarter, they get 
together with two three-stars, who oversee what they're doing. 
It's a Government meeting, looking at every aspect. There's 
only one person sitting at the table from the LSI, and that's 
the program manager from the LSI side. The two-star then takes 
that direction and goes back to the LSI and says, ``This is 
what we need to do.'' Every quarter, I sit down with the 
Secretary of the Army and all the chief executive officers and 
get the briefing from that team out there to figure out what 
they need to do the job right. Then we have live-in triple 
audit, or the audit folks. We have the House Appropriations 
Committee Survey and Investigations Team. We have the GAO. We 
have our own folks looking at this, day-in and day-out.
    I think we can do this. As I said earlier, to the 
chairman's concern, if you don't perturbate this anymore--and I 
don't mean you, sir--the Army, in terms of the fundamental 
requirements--we can do this. We also have to change a whole 
lot more, in terms of the management we're doing, and also the 
process we're going to go through, tests being one of them. We 
have never done a system-of-systems test like this in the DOD.
    Senator Lieberman. Right.
    Mr. Bolton. So we're trying to figure out how to do that 
and not break this apart and cost us more time and money.
    Senator Lieberman. It's a big plan. The motivations for it 
are excellent. I would just say, based on what we've heard 
today and what I know you're going to hear in both houses this 
year, that in too many programs, as Senator McCain and I have 
both said today, the status quo for acquisitions is not working 
and we're heading toward a real confrontation, or toward--not a 
confrontation, but toward the kind of succession of subtle, but 
ultimately very damaging, decisions to borrow from here to pay 
this bill, and we're not going to have the military we want to 
have. So, as I said before, you bring a great record to your 
position, and I urge you to not hesitate to shake it up. Just 
say, ``The status quo is not working,'' and, in the interest of 
the Army, be willing to do things that are bold and 
unprecedented to make it better.
    In the meantime, thank you all for your testimony. It's 
been very helpful.
    Senator McCain. Sounds to me like you have too many 
generals, Secretary Bolton.
    Thank you very much. This hearing is adjourned.
    [Questions for the record with answers supplied follow:]
               Questions Submitted by Senator John McCain
                            army restructure
    1. Senator McCain. General Cody, last year, the Army asserted that 
43 Active component combat brigades and the 34 Army National Guard 
(ARNG) combat brigades would ensure the Army could maintain a 17 
brigade force deployed with Active component brigades having 2 years 
between rotations and the ARNG combat brigades having 5 years between 
rotations. With the fiscal year 2007 budget request, the Army, 
supported by the Quadrennial Defense Review (QDR), has modified its 
plan to increase the number of combat brigades in the Active and 
Reserve component. The Army will increase the Active component force 
structure to 42 combat brigades and will increase the ARNG force 
structure to 28 combat brigades. This action represents a reduction of 
one Active component combat brigade and six ARNG brigades from previous 
plans. How will fewer combat brigades impact the anticipated ``dwell'' 
time in the U.S. between rotations?
    General Cody. Prior to QDR 2006, the Army had developed a plan for 
34 combat brigades and 72 support brigades in the ARNG and 43 combat 
brigades and 75 support brigades in the Active component. This provided 
up to 20 combat brigades for a steady state of operations. Based on 
analysis associated with the 2006 QDR, the Army determined the need to 
be able to supply 18 to 19 combat brigades in a steady state of 
operations and surge another 18 to 19 combat brigades to respond to 
major combat operations. As a result, the Army is restructuring to form 
a rotational pool of 70 brigade combat teams and 211 supporting 
brigades of various types among the three components. The Army's plan 
is to transition to cyclic readiness under the Army force generation 
model. This will place forces on deployment cycles of one rotation 
every 3 years for the Active component and one rotation every 6 years 
for the Reserve component. At endstate, the Army provides a sustained 
deployment posture of modular, trained, ready, cohesive, and rapidly 
deployable and employable Army forces in predictable patterns to meet 
requirements for continuous full-spectrum operations while retaining 
the capability to surge combat power for major combat operations.

    2. Senator McCain. General Cody, do you believe that the QDR has 
taken into consideration the ARNG's State mission, especially homeland 
defense and disaster relief?
    General Cody. Yes sir, I do. While the Department of Defense (DOD) 
does not specifically create unique capabilities to address State-only 
needs, we consider State needs when determining the force mix between 
Active and Reserve components and how Army capabilities are distributed 
across the 54 States and Territories. In years past, we sought to 
ensure that every State had an appropriate amount of several key 
capabilities, including command and control, communications, aviation, 
transportation, medical, and engineering. Since then, Congress has 
authorized the creation of 55 weapons of mass destruction civil support 
teams--one for each State (except California which will host two such 
teams), Territory, and the District of Columbia. More recently, the 
National Guard Bureau has identified 10 key capabilities that each 
State and Territory should maintain: aviation, engineering, civil 
support teams, security, medical, transportation, maintenance, 
logistics, command and control, and communications. For States that do 
not host all of these Army capabilities, the National Guard Bureau 
encourages States to leverage regional capabilities through emergency 
management assistance compacts with neighboring States. Additionally, 
the Army and the National Guard Bureau work together to manage the 
operational deployments of Guard troops for the global war on terror in 
an effort to ensure that each State has at least 50 percent of its 
Guard forces available for State missions and homeland defense.

                           modularity funding
    3. Senator McCain. General Cody, I understand the Army intends to 
maintain the National Guard at its authorized end strength of 350,000. 
However, I understand the fiscal year 2007 budget request funds the 
Guard at an end strength of only 333,000. How does the Army intend to 
make up the funding shortfall and how will that be transmitted to 
Congress?
    General Cody. The Army is committed to funding the ARNG up to the 
350,000 strength level. The Army fully funded the National Guard for 
350,000 in the fiscal year 2006 budget. The Army will recommend 
modifying the fiscal year 2007 budget to address the additional 
personnel and associated training costs required for up to 350,000, and 
is in the process of identifying the sources to meet this commitment. 
In affecting this modification, the Army will follow prescribed 
procedures and congressional notification requirements.

    4. Senator McCain. General Cody, will funding an additional 17,000 
soldiers in the Guard impact the Guard's force structure?
    General Cody. Funding an additional 17,000 soldiers will allow the 
ARNG to restructure its authorized end strength of 350,000 to a force 
structure allowance of 342,000 with a personnel training account of 
8,000. Within its operational force, the ARNG is building toward 28 
brigade combat teams in a total of 106 brigades. The goal is to 
rebalance its operational force structure to meet warfight 
requirements, current operational demands, and potential homeland 
defense missions without decreasing existing end strength or 
capabilities within the individual states. The Army is working 
collaboratively with the Chief of the National Guard Bureau, the 
Director of the ARNG, and the Adjutants General Association of the 
United States Force Structure Committee to optimize these proposed 
force structure changes. The results of this effort will ensure the 
right mix of capabilities across the States and within the 106 
brigades.

    5. Senator McCain. General Cody, the ARNG asserts that there is a 
$318 million shortfall in its equipment accounts for modularity. Is 
this true? If so, will the Army fund this requirement?
    General Cody. National Guard force structure adjustments resulting 
from the 2005 QDR caused a $262 million decrement to National Guard 
equipping accounts in fiscal year 2007. This force structure decision 
is currently being refined by the Army and National Guard leadership in 
consultation with the State Adjutants General. The outcome of this 
decision will determine force structure, equipment requirements, and 
the funding strategy. Given the post-September 11 security environment 
and increased utilization of all components, the Army is committed to 
fully equipping all units--Active, Guard, and Reserve--with priority to 
the ``next deploying'' units and ``State mission equipment'' 
requirements.

    6. Senator McCain. Secretary Bolton and General Cody, the fiscal 
year 2007 budget request represents the first year that the Army has 
included modularity in its base budget request. Will the Army continue 
to fund its modularity initiative in the base budget requests?
    Mr. Bolton and General Cody. Yes. The Army has programmed known 
modularity requirements for fiscal years 2007-2011 in the base budget.

    7. Senator McCain. Secretary Bolton and General Cody, 2 years ago 
at this time, the Army estimated modularity costs at $28 billion. Last 
year, the estimate was raised to $48 billion. The Army has stated that 
it required $5 billion per year over the period of fiscal years 2005-
2011 for its modularity initiative. In last year's Program Budget 
Decision Memorandum 753, the Department increased the Army's top line 
by $5 billion in each of the fiscal years 2007-2011 for modularity to 
be included in the President's budget request. The DOD and the Army 
said they would use fiscal year 2005 and fiscal year 2006 supplemental 
appropriations to cover the fiscal years 2005-2006 requirement. The 
fiscal year 2006 enacted bridge supplemental and supplemental budget 
request included $5 billion. However, the fiscal year 2006 supplemental 
request was expected to include $3 billion in additional funding for 
Abrams tanks and Bradley Fighting Vehicles required for modularity, but 
that request was dropped in the final stages of formulation before it 
was sent to Congress. It appears that the Army is underestimating the 
cost of modularity. What is the cost of modularity over the fiscal 
years 2005-2011 period?
    Mr. Bolton and General Cody. The Army estimates the total cost of 
the modularity initiative at $52.5 billion through fiscal year 2011. 
For fiscal year 2005, the cost was $5 billion, for the current fiscal 
year, 2006, the cost is $6.5 billion. The fiscal year 2007 budget 
request for modularity is $6.6 billion. The remaining years are 
estimated at: fiscal year 2008, $7.6 billion; fiscal year 2009, $9.1 
billion; fiscal year 2010, $9.2 billion; and fiscal year 2011, $8.5 
billion.

    8. Senator McCain. Secretary Bolton and General Cody, the Army has 
estimated that the cost of modularity is $48 billion. Does this include 
Reserve component equipment? If not, how does the Army intend to fund 
these Guard requirements?
    Mr. Bolton and General Cody. Yes, the $48 billion includes Army 
Reserve and ARNG equipment.

    9. Senator McCain. General Cody, the committee understands that the 
Army intends to ``pure fleet'' its Active component heavy modular 
brigades with M1A2 Safety Enhancement Program (SEP) tanks and M2A3 
Bradley Fighting Vehicles and its ARNG heavy brigades with M1A1 AIM 
tanks and M2A2 Bradley ODS vehicles. Are you concerned that the Active 
component and the Reserve component will have a different mix of tanks 
and Bradley Fighting Vehicles? What is the operational impact?
    General Cody. The Army plan is to migrate to a two variant fleet of 
Abrams and Bradley from its current six variants of the Abrams tank and 
four variants of the Bradley Fighting Vehicle. The Active component 
will have both M1A2SEP/M2A3 and M1A1AIM/M2A2ODS heavy brigade combat 
teams and the ARNG will be upgraded from its older M1A1/M2A2 fleet to 
the M1A1AIM/M2A2ODS. Abrams and Bradley fight as a team. The objective 
is to field similar capabilities (i.e., M1A2SEP/M2A3 Bradley and AIM/
ODS) in vehicles to the same unit. The Abrams tank and the Bradley 
Fighting Vehicle will remain the dominant maneuver systems through 
2050, while complementing the Future Combat Systems (FCS) and overall 
modular force structure. As FCS Units of Action are fielded, M1A2SEP/
M2A3s will be cascaded and AIM/ODSs will be retired from the fleets.

                             army aviation
    10. Senator McCain. General Cody, I understand that the Army 
reduced the number of ARNG aviation brigades in order to increase the 
aviation force structure of the Special Operations Command. Can you 
please tell us whether a Guard heavy aviation brigade or a Guard 
aviation expeditionary brigade (AEB) was reduced, the aviation assets 
associated with this brigade, and the rationale for this reduction?
    General Cody. There is a pending decision to convert one ARNG 
combat aviation brigade (expeditionary) (CAB-E) to an ARNG sustainment 
or engineer brigade but it has no relationship with any increase in 
Army Special Operations aviation. The decision to convert one ARNG CAB-
E was done for several reasons: 1) to better balance combat arms, 
combat support, and combat service support across the ARNG; and 2) to 
ensure the ARNG has seven fully resourced CABs vice eight partially 
resourced CABs (the ARNG will retain the same number of aircraft as 
currently planned). If this decision is implemented, the ARNG could 
expect to lose an aviation support battalion and an attack battalion 
headquarters but will keep the CAB headquarters. All other assets are 
expected to be redistributed to fully resource equipment shortfalls 
across the other seven Reserve component CABs.

    11. Senator McCain. Secretary Bolton, it appears that Army aviation 
faces a dilemma. It needs all its helicopters to meet today's 
operational challenges, yet it also needs to upgrade a good portion of 
the fleet to meet tomorrow's challenges. How will you meet the Army's 
operational and readiness challenges if you have a large proportion of 
your helicopters being upgraded back in the continental U.S.?
    Mr. Bolton. The Army has several ongoing efforts to ensure we meet 
the combatant commander's (COCOM) requirements for Army Aviation 
aircraft. These include preset, reset, recapitalization (RECAP), OH-58D 
SEP, and modernization. Preset is our program to install the latest 
mission equipment packages to prepare our aircraft for combat. Reset is 
our program to restore our aircraft to pre-deployment conditions upon 
return from combat operations. For both of these programs we typically 
induct no greater than 50 percent of a unit's aircraft to ensure our 
aviators have sufficient aircraft for training. RECAP and OH-58D SEP 
are programs to upgrade key components to improve safety and extend the 
life of our platforms. The OH-58D SEP induction rate is contracted for 
2 aircraft per month while our RECAP induction rates are 20 aircraft 
per year for the UH-60A and 3-5 for the CH-47D. Our modernization 
strategy differs depending on the type aircraft. We are modernizing our 
OH-58D and UH-60 fleets with new build Armed Reconnaissance Helicopter 
(ARH) and UH-60M aircraft, negating any requirement to induct existing 
airframes. Our greatest modernization challenge will be in the CH-47 
and AH-64 fleets. In order to modernize these aircraft while 
simultaneously conducting the global war on terrorism, the Army will be 
forced to use a combination of stay behind equipment and cross leveling 
programs to ensure mobilizing and deploying units are properly 
resourced to meet the COCOM's requirements.

    12. Senator McCain. Secretary Bolton and General Cody, the Army has 
over 500 helicopters deployed to Iraq and Afghanistan alone. How many 
helicopters can you afford to pull off line for upgrades and still 
perform your mission?
    Mr. Bolton and General Cody. The Army has several ongoing efforts 
to ensure we meet the COCOM requirements for Army aviation aircraft. 
These include preset, reset, RECAP, OH-58D SEP, and modernization. 
Preset is our program to install the latest mission equipment packages 
to prepare our aircraft for combat. Reset is our program to restore our 
aircraft to pre-deployment conditions upon return from combat 
operations. For both of these programs we typically induct no greater 
than 50 percent of a unit's aircraft to ensure our aviators have 
sufficient aircraft for training. RECAP and OH-58D SEP are programs to 
upgrade key components to improve safety and extend the life of our 
platforms. The OH-58D SEP induction rate is contracted for two aircraft 
per month while our RECAP induction rates are 20 aircraft per year for 
the UH-60A and 3-5 for the CH-47D. Our modernization strategy differs 
depending on the type aircraft. We are modernizing our OH-58D and UH-60 
fleets with new build ARH and UH-60M aircraft, negating any requirement 
to induct existing airframes. Our greatest modernization challenge will 
be in the CH-47 and AH-64 fleets. In order to modernize these aircraft 
while simultaneously conducting the global war on terrorism, the Army 
will be forced to use a combination of stay behind equipment and cross 
leveling programs to ensure mobilizing and deploying units are properly 
resourced to meet the COCOM's requirements.

    13. Senator McCain. Secretary Bolton, when budgets are tight, as 
they often seem to be, it appears that aircraft survivability equipment 
(ASE) does not get the funding it should. Considering the rather 
alarming number of helicopter losses in Afghanistan and Iraq, please 
reassure me that your modernization plan adequately addresses ASE. What 
are the most promising ASE upgrades for existing aircraft?
    Mr. Bolton. Army senior leadership made ASE and force protection a 
top priority for Army aviation and is using funds from the Comanche 
termination and programmed funding to address critical ASE 
requirements. The fiscal year 2007 budget request includes $2 billion 
for aircraft survivability equipment through the Future Years Defense 
Program (FYDP)--more than double what was in fiscal year 2005's FYDP. 
In the immediate aftermath of the November 2003 ``shootdown'' of an 
Army CH-47 Chinook helicopter, the G3 of the Army approved immediately 
upgrading the entire deployed Chinook fleet with an improved Infrared 
(IR) Countermeasure Flare Dispenser (ALE-47). On January 14, 2004, the 
acting Secretary of the Army and Chief of Staff of the Army approved 
accelerating the acquisition of the ``next generation'' ASE system the 
Common Missile Warning System (CMWS). CMWS detects an incoming missile 
and dispenses the appropriate counter measure, removing the ``Man-in-
the-Loop'' requirement of older ASE systems. Installation of the CMWS 
commenced in November 2004 and continues in theater. The deployed CH-47 
fleet has since been upgraded from the ALE-47 to CMWS. All theater 
aircraft will be CMWS equipped by September 2006. Industry is currently 
at maximum rate production.
    There have been 14 helicopter losses in Iraq and Afghanistan 
attributed to missile/rockets engagements. To counter the IR missile 
threat the Army is aggressively procuring the most advanced systems 
available, beginning with CMWS which is a subcomponent of the Advanced 
Threat Infrared Countermeasures System (ATIRCM). The complete ATIRCM 
consists of two components; CMWS and a laser jam head. The laser jam 
head in conjunction with CMWS will detect an incoming missile and with 
a directed laser defeat that missile by jamming the missile seeker. The 
laser jam head development is in low rate initial production (LRIP) for 
testing, with expected fielding in fiscal year 2010. In addition to 
active countermeasures, passive ASE is also being fielded to include 
engine suppressors and heat shielding of critical components to reduce 
aircraft IR signatures.
    These actions continue to be funded through a combination of Army 
reprogramming, congressionally supported global war on terror 
supplemental funding, and the redistribution of Comanche program 
funding.

    14. Senator McCain. Secretary Bolton, how and why will the ARH and 
Light Utility Helicopter (LUH) be more survivable than the aircraft 
they replace?
    Mr. Bolton. The ARH will replace the OH-58D helicopter. The ARH 
will provide the crew with a greater power margin, better infrared 
missile countermeasures, more survivable crew stations, and more 
crashworthy fuel systems.
    The LUH will replace OH-58A/C, UH-1, and return some UH-60 
helicopters to combat formations. The procurement of a Federal Aviation 
Administration (FAA) certified Commercial/Non-Developmental Item 
solution precludes designing-in additional specific aircraft 
survivability equipment attributes. The LUH operational missions are 
not envisioned to require significant survivability capabilities as the 
LUH is to be employed in non-combat environments. The LUH will 
generally have unrestricted operational freedom. The LUH will initially 
meet the 1989 FAA standards for crashworthy seats and fuel tanks with 
an objective of meeting the 1994 FAA standards.

                            aviation funding
    15. Senator McCain. General Cody, has the Army backed away from its 
commitment to use the $14.6 billion made available by the termination 
of Comanche for the Army aviation restructure?
    General Cody. No, the Army is committed to fixing Army aviation as 
directed by the Chief of Staff. Equally important is the continued 
commitment of Congress to maintain fully resourced aviation programs. 
If either of these two commitments wanes, Army aviation will not be 
able to reach its required modernization in support of the current 
fighting force or integration into the future force.

                        light utility helicopter
    16. Senator McCain. General Cody, I understand that the AEBs will 
be augmented with LUH for Active Army installation support and for 
State and homeland defense missions. I support the notion that we 
should use a helicopter that is cheaper to acquire and less costly to 
operate for Army installation support. However, I question the Army's 
desire to add a low-density, less-capable, and nondeployable helicopter 
in the AEBs. Based on the use of ARNG aircraft in Operation Iraqi 
Freedom (OIF) and Operation Enduring Freedom (OEF) as well as in 
response to natural disasters such as Hurricanes Katrina and Rita, has 
the Army reevaluated its plans to acquire the LUH for ARNG AEBs?
    General Cody. The acquisition objective for the LUH is 322 
aircraft. The LUH acquisition facilitates the rapid retirement of the 
aging UH-1 and OH-58NC fleets. These aircraft are at the very end of 
the useful life spectrum, and the LUH will add increased capability to 
units currently struggling to keep the UH-1 and OR-58NC aircraft 
flying. The LUH will operate worldwide in permissive environments only; 
however, the primary use of the LUH will be within the continental 
United States, Alaska, Hawaii, Europe, and all U.S. territories and 
possessions. The LUH will provide an affordable, modular, and 
standardized single airframe capable of conducting all missions 
currently being done by the UH-1 and OH-58A/C aircraft. After LUH 
fielding, the National Guard will have an increased capability to meet 
its diversified set of missions. The Army supports the Capabilities 
Development Document approved by the Joint Requirements Oversight 
Council (JROC) on 25 April 2005, and looks forward to improving the 
operational effectiveness of the end user.
    If the Army had the LUH during disaster assistance operations such 
as Hurricane Katrina and Hurricane Rita, we would: have a single 
aircraft system designed to perform medical evacuation, personnel 
recovery and rescue, reconnaissance, and command and control; have an 
aircraft capable of 100 percent communication with military and 
civilian emergency services (police, fire, medical, etc.); and have an 
aircraft that was capable of performing the full range of missions in 
support of disaster and humanitarian relief, drug interdiction, and 
homeland security.

    17. Senator McCain. General Cody, why is it not worth the 
additional cost to acquire more Black Hawks and avoid a separate low-
density fleet of helicopters that the Army cannot employ in non-
permissive environments?
    General Cody. The analysis of alternatives reviewed five potential 
courses of action to replace the aging UH-1 and OH-58C fleets. One of 
the alternatives was to pure fleet the LUH with procurement of new UH-
60M aircraft. Pursuing the alternative to procure new UH-60M aircraft 
would have led to procurement and operational support costs three to 
four times higher than the commercial/nondevelopmental item options 
that can meet the mission required capabilities.

    18. Senator McCain. Secretary Bolton, I understand that the Army 
reduced the number of ARNG aviation brigades by one so that the Army 
could add a Special Operations Forces aviation element. The aviation 
brigade came from the ARNG. Did this impact the requirement for the 
LUH? If so, how does this affect the unit cost of the LUH?
    Mr. Bolton. The Army is considering the conversion of one ARNG CAB-
E to an ARNG sustainment or engineer brigade. This decision has nothing 
to do with any increase in Army special operations aviation. A 
reduction in ARNG aviation brigades may or may not result in a 
reduction to the LUH procurement objective. If the ARNG were to reduce 
its requirement for LUHs it would not impact the unit cost of the 
aircraft because the LUH is procured under a firm fixed price contract 
and the Army is not obligated to procure 322 aircraft.

                    armed reconnaissance helicopter
    19. Senator McCain. Secretary Bolton, the Director, Operational 
Test and Evaluation Fiscal Year 2005 Annual Report highlighted the 
aggressive ARH schedule and recommended that the Army begin integration 
testing for mission equipment as early as possible. How is the ARH 
program structured to mitigate risk?
    Mr. Bolton. The building of the System Development and 
Demonstration (SDD) airframes remains the primary program focus and 
these will be involved in early testing efforts. One of these SDD 
airframes, designated as the Mission Equipment Aircraft, is utilized 
for down selection testing of the Target Acquisition Sensor suite. The 
addition of a sixth SDD airframe as an engine prototype aircraft 
further reduces overall conflicts for testing aircraft. Additionally, 
the program uses a software integration laboratory for software 
development and testing prior to integration onto testing aircraft. The 
testing strategy is streamlined to eliminate a separate developmental 
test followed by operational testing. Also, risk review boards between 
the program office and Bell occur regularly to discuss identified 
mitigation steps for integration into the master program schedule.

    20. Senator McCain. Secretary Bolton, the requirement for the ARH 
is for an off-the-shelf helicopter. Isn't this a step backward in terms 
of performance?
    Mr. Bolton. The Bell Helicopter proposal significantly leverages 
aspects of previous Bell commercial helicopter successes. The ARH 
performance requirements are Army directed and improve upon the 
performance capabilities of the currently deployed OH-58D aircraft. The 
selected Bell proposal baseline for the ARH meets or exceeds the Army 
defined threshold performance requirements. Specifically, the 
operational radius, cruise speed, and range estimates demonstrate 
significant off-the-shelf capabilities beyond the current Army 
reconnaissance helicopter.

    21. Senator McCain. Secretary Bolton, I can understand how a 
utility helicopter can capitalize on commercial products, but the ARH 
is a combat helicopter. To be effective and survivable, shouldn't this 
helicopter's performance exceed commercial standards?
    Mr. Bolton. Yes, the military should require the best possible 
performance in all combat aircraft. The Bell proposed baseline for the 
ARH meets or exceeds the Army defined threshold performance 
requirements in the ARH capability development document.

     warfighter information network-terrestrial/joint network node
    22. Senator McCain. Secretary Bolton, the Joint Network Node (JNN) 
is based on commercial off-the-shelf equipment. Concurrent with JNN, 
the Army competitively awarded the Warfighter Information Network-
Terrestrial communications program to two contractors, one of which 
also builds the JNN. Given that the JNN is commercially-based 
equipment, why wasn't the contract competed when the JNN requirement 
was originally identified?
    Mr. Bolton. The JNN equipment and services were purchased under 
unusual and compelling urgency to meet critical requirements of units 
that were deploying in support of OIF/OEF and purchased using contracts 
already in place. Any other source would have required a new 
contracting effort that would not have met the schedule. Failure to 
provide this equipment and support services on time would have 
significantly impacted the units' ability to support OIF/OEF, thereby 
jeopardizing successful mission accomplishment. For clarification in 
the future, Warfighter Information Network-Tactical (WIN-T) stands for 
WIN-T.

    23. Senator McCain. Secretary Bolton, I understand that the Army 
has completed JNN fielding to units either deployed or deploying to 
Iraq and Afghanistan. Why should the Army continue to field JNN when 
the program has not been operationally tested nor has it been through 
the Joint Capability Integration and Development System (JCIDS) 
process?
    Mr. Bolton. The JNN Network (JNN-N) is vital to a unit's ability to 
communicate in Iraq and Afghanistan. The unit's Mobile Subscriber 
Equipment (MSE) does not provide the connectivity required to operate 
in Iraq and Afghanistan. When a unit receives their JNN-N equipment 
their current signal equipment is replaced and in some cases MSE 
shelters are reconfigured for JNN equipment. Signal soldiers are also 
replaced to facilitate JNN operations. Once a unit converts to JNN we 
cannot remove their JNN equipment or the unit becomes combat 
ineffective with no means to communicate or train.
    The Army Test and Evaluation Command (ATEC) provided a system 
assessment (SA) January 31, 2006. The SA cover letter states:

        ``2. The SA provides an independent assessment of the JNN-N 
        capabilities and limitations for the purpose of:

                (a) improving JNN-N development, integration, and unit 
                training;
                (b) mitigating risk;
                (c) preparation for more effective future evaluation.

        3. The SA supports the ATEC position that JNN-N is capable of 
        providing the warfighter communications backbone requirements 
        in a stability and support operations environment. JNN-N 
        requires further testing to properly determine Effectiveness, 
        Suitability and Survivability for full spectrum operations.''

    The JNN-N has an initial operational test scheduled in June 2006 to 
address the issues of effectiveness, suitability, and survivability for 
full spectrum operations. The Army is also in the process of making JNN 
a formal program of record and expects a Milestone C/Full Rate 
Production decision (MSC/FRP) fourth quarter fiscal year 2006.
    The JNN-N requirements document (Bridge to Future Network--
Capabilities Production Document with JNN-N Annex) is currently in JROC 
staffing for approval. The approved document is required prior to the 
MSC/FRP decision in fourth quarter, fiscal year 2006.

    24. Senator McCain. Secretary Bolton, what is the Army's plan to 
complete the required documentation and testing so that JNN can be 
fielded using fiscal year 2006 and fiscal year 2007 requested funding?
    Mr. Bolton. The Army plans to make JNN a program of record in 
fourth quarter, fiscal year 2006. An initial operational test is 
scheduled for June 2006. The JNN-N requirements document (Bridge to 
Future Network-Capabilities Production Document with JNN-N Annex) is 
currently in JROC staffing for approval. All required programmatic 
documentation is currently in various phases of completion to support a 
MSC/FRP decision in fourth quarter, fiscal year 2006. Our plan is to 
obligate the main supplemental dollars as soon as possible after the 
MSC/FRP decision.

                        lead systems integrator
    25. Senator McCain. Dr. Graham, in your report you made several 
observations regarding the Lead Systems Integrator (LSI):

        --  Boeing has the major financial stake in the FCS program and 
        will receive about one-third of programmed funds ($4.9 billion) 
        for its work as the LSI, and for developing the System-of-
        Systems Common Operating Environment (SoSCOE) for the FCS 
        information network, thus creating an inherent tension in 
        Boeing's roles and responsibilities;
        --  The Army-Boeing agreement does not anticipate future rounds 
        of competition for FCS systems or components as the program 
        transitions to production. Nor does it appear that the current 
        agreement provides the Army access to technical information 
        sufficient to enable future rounds of competition;
        --  The Army should adopt a policy of ``Trust But Verify'' with 
        regard to the ethics programs of the FCS industry participants 
        and seek to address the kinds of gaps in prior hiring practices 
        identified in the review of Boeing ethics practices conducted 
        by Senator Warren Rudman by requiring that all contractors 
        involved in the FCS program screen current employees who have 
        Government backgrounds for possible FCS conflict of interest 
        exposure; and
        --  Industry and Government members of the FCS ``One-team'' 
        will face substantial pressures to vie for outcomes favorable 
        to Boeing stockholders.

    Would you agree that there should be DOD policy or regulation that 
provides firm guidance for the use of LSIs in DOD programs?
    Dr. Graham. The Institute for Defense Analyses (IDA) report 
provides a snapshot of the program in mid-2004, and it describes 18 
substantial actions to manage the program effectively. The IDA review 
did not address broader public policy issues, such as the costs and 
benefits of possible changes in policy or regulation with regard to the 
establishment of LSIs. In general, there is not a single optimal 
Government-industry relationship, since each project must take into 
account the scope and complexity of the task, and the capabilities of 
the Government and industry participants.
    However, in the context of FCS, we recommended a number of steps to 
strengthen the Army's independent ability to shape the execution of the 
program. There are inherent tensions when an LSI has a financial stake 
in the future shape and success of a program. In theory, alternative 
Government-industry LSI arrangements could span a spectrum from a 
strictly engineering and advisory activity to an arrangement with 
essentially the same business interests as are involved in a prime 
contract. As the industrial partner's financial interests in the 
outcome of the program grow, it becomes increasingly challenging for 
executives to set aside their corporate interests in advising their 
Government partners. The IDA report emphasized that the Government 
customer is responsible to ensure it has an adequate capability to 
independently assess program objectives and progress in order to ensure 
Government interests are served over the life of the program.
    The FCS management approach intermixes Government and industry 
experts through the ``One-team'' structure of integrated product teams 
(IPTs) co-chaired by Government and LSI officials, and relies heavily 
on Boeing's management information system for information and analyses. 
This results in inherent tensions in the roles of Army participants--
teammate vs. customer representative, and in the roles of industry 
representatives--teammate vs. representative of corporate management 
and stockholders.
    To achieve an effective balance in the roles of Government and 
industry participants in the ``One-team'' management structure, IDA 
recommended that the Army strengthen its institutional capability for 
establishing a corporate Army perspective on FCS cost, schedule, and 
performance issues. A corporate perspective would assist both FCS 
program participants as well as the Army's senior leadership in 
addressing the competing interests within the ``One-team,'' and in 
balancing broader joint and Army-wide programmatic factors, in order to 
keep the FCS program focused on delivering an integrated and effective 
unit of action.

    26. Senator McCain. Dr. Graham, do you think it would be helpful to 
the Department if they received congressional intent on LSIs?
    Dr. Graham. The Army's acquisition strategy for the FCS program 
calls for a significant amount of competition at the level of 
individual systems and technologies within the overall system of 
systems. We have yet to further evaluate the program's execution of 
this issue.
    The IDA study did not examine this question, and it would be 
difficult to respond without specific details about the proposed 
statement of intent. However, the key principle--that the Government is 
responsible for the cost, schedule, and performance of all industrial 
efforts--is well established in law and intent. The execution 
challenges in carrying out the Government's responsibilities require 
judgment and flexibility.

    27. Senator McCain. Secretary Bolton, how does the DOD define a 
LSI?
    Secretary Bolton. Section 805 of the National Defense Authorization 
Act for Fiscal Year 2006 defines ``lead system integrator,'' for the 
purpose of that section, as either with or without system 
responsibility. Specifically, it provides that:

          ``Lead system integrator with system responsibility'' means a 
        prime contractor for the development or production of a major 
        system if the prime contractor is not expected at the lime of 
        award, as determined by the Secretary of Defense for purposes 
        of this section, to perform a substantial portion of the work 
        on the system and the major subsystems.
          ``Lead system integrator without system responsibility'' 
        means a contractor under a contract for the procurement of 
        services whose primary purpose is to perform acquisition 
        functions closely associated with inherently governmental 
        functions with regard to the development or production of a 
        major system.

    DOD has no other definition of an LSI.

    28. Senator McCain. Secretary Bolton, how does the Army define a 
LSI?
    Mr. Bolton. The Army's LSI management approach was devised to 
tackle today's program complexity and integration challenges. The LSI 
maximizes the use of an integrated, single step design process across 
functions to promote effective and efficient horizontal integration of 
a large scale system-of-systems. The linchpin of the LSI approach is 
integrated program management and execution by the LSI. This is 
affected through one contract and one management baseline. The LSI is 
the focal point for the Government program manager office, not its 
substitute; the Government under this approach does not abrogate its 
responsibility to perform functions that are inherently governmental.

    29. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham, 
has the Army outsourced its program management responsibilities with 
regards to acquisition? Please provide an explanation for your 
response.
    Mr. Bolton. No. The Army is structured in a way that the program 
executive officers (PEOs) and project/product managers (PMs) are 
responsible for managing Army acquisition programs, using Army and 
Defense acquisition policy, guidance, and processes. Their 
responsibilities include providing oversight of a cross-functional team 
of acquisition professionals, including contractors, in order to meet 
program objectives, goals, and overall mission.
    Today's complex weapon system programs necessitate analysis on the 
best management approach. Where warranted, the LSI approach is 
instituted rather than the prime contractor management methodology. 
This approach was devised to tackle today's program complexity and 
integration challenges. If instituted, the LSI's integrated program 
management approach does not replace the Government PM's exercise of 
discretion and authority, but rather, the LSI becomes the focal point 
for the Government PM office, not its substitute.
    Mr. Francis. While the Army has not ``outsourced'' its 
responsibilities on FCS, it has decided to share a large part of those 
responsibilities with the LSIs. LSIs are, in essence, prime contractors 
with increased program management responsibilities. While this is true 
in the case of the FCS program, the Government and the LSI are each 
represented on the program's IPTs. The Government, with few exceptions, 
is expected to be involved in all major program decisions. For example, 
Boeing conducted source selection boards to competitively award major 
subcontracts for key systems and subsystems of the complete FCS. The 
Government provided oversight and final agreement to the awards. In 
addition, the Government also provides this same oversight in the 
selection of lower tier subcontracts.
    Dr. Graham. No. Our review found that the Army remains responsible, 
and that it recognizes and accepts this responsibility. The 
recommendations in the IDA review focused on ways to strengthen the 
Army's execution of these responsibilities.

    30. Senator McCain. Dr. Graham, in your report ``IDA Review of FCS 
Management,'' you stated ``that the LSI is intended to act as a neutral 
party in assessing program tradeoffs and in offering advice. Thus, in 
theory, the LSI should not have a financial stake in developing and 
building the individual elements of the system; rather, it should 
recruit and oversee the best of industry.'' It's been 3 years since the 
report. Are there inherent organizational conflicts of interest 
associated with programs in which the LSI has a financial interest in 
developing and building the individual elements of a system?
    Dr. Graham. This question is addressed in the answer to question 
25.

    31. Senator McCain. Mr. Francis, what is your view regarding the 
role of the LSI in program development?
    Mr. Francis. Although there is no consensus on the definition of 
LSI, in general, an LSI is a prime contractor with increased program 
management responsibilities. These responsibilities have included 
greater involvement in requirements development, design, and source 
selection of major system and subsystem contractors. The Government 
also has used the LSI approach on programs that require system-of-
systems integration.
    Our observations to date are that the FCS LSI structure allows for 
a number of potential efficiencies, but that it also carries a number 
of potential risks. Among the potential efficiencies is the LSI's 
overarching responsibility to know, understand, and integrate functions 
across the various FCS platforms--instead of focusing on one 
``stovepiped'' platform at a time, as has often been the case in the 
past. This is particularly important in that the LSI has the ability to 
facilitate movement of requirements and make trade-offs across 
platforms. However, the extent of contractor responsibility in so many 
aspects of the FCS program management process, including responsibility 
for making numerous cost and schedule tradeoffs and for conducting at 
least some of the subcontractor source selections, is also a potential 
risk. As an example, many of the LSI's subcontractor source selections 
are for major weapon systems that, in other circumstances, would have 
been conducted by an Army evaluation team, an Army Contracting Officer, 
and a senior-level Army source selection authority. These decisions, 
including those on the scale of procuring a major weapon system, are 
being made by the LSI with some level of Army involvement. (We have not 
reviewed the Army's oversight of the LSI or how FCS source selections 
have been conducted.) This level of responsibility, as with other LSI 
responsibilities in the program management process, requires careful 
Government oversight to ensure that the Army's interests are adequately 
protected now and in the future. While we understand that the Army has 
a number of oversight processes in place, we have not yet evaluated 
them to know how well they are working.

    32. Senator McCain. Secretary Bolton, has the Army taken any action 
to preclude the LSI from bidding FCS contracts? Has the DOD issued any 
policy in this regard? What is it?
    Mr. Bolton. Yes. The Federal Acquisition Regulation (FAR)-based 
contract awarded September 23, 2005, contains an ``Organizational 
Conflicts of Interest'' clause at H-106 that incorporates FAR subpart 
9.5 ``Organizational and Consultant Conflicts of Interest (OCI).'' This 
clause specifies that the LSI (Boeing and SAIC) is specifically 
prohibited from competing for work at any tier during the course of 
this contract. Additionally, Boeing is contractually required to flow 
down an OCI provision in all subcontracts.

    33. Senator McCain. Secretary Bolton and Dr. Graham, has the Army 
turned Government responsibility over to the LSI?
    Mr. Bolton. No. The Government's PM is ultimately accountable for 
the execution of the FCS acquisition program baseline. The LSI role in 
FCS is principally integration; the Army's LSI management approach was 
devised to tackle today's program complexity and integration 
challenges. The linchpin is integrated program management and execution 
(one design process, one contract, and one performance management 
baseline). The approach promotes effective and efficient large-scale 
systems development and horizontal integration. The LSI provides a 
focal point to enable the overarching responsibilities of the 
Government PM, Army acquisition leadership, and DOD oversight. This 
management approach does not abrogate any inherently governmental 
functions; the LSI is not a substitute for the Government PM office.
    Dr. Graham. No. As noted in answering question 29, the Government 
is legally responsible for program outcomes. The FCS contract gives the 
Government formal control over program cost, schedule, and performance. 
In fact, the IDA report notes that the Army undertook a major 
restructuring of the program in parallel with the IDA review of the FCS 
program.

    34. Senator McCain. Secretary Bolton, Dr. Graham, and Mr. Francis, 
IDA's August 2004 report states, ``At the LSI level, the Office of 
Technology Assessment (OTA) agreement laid the groundwork for Boeing to 
continue as the LSI through initial production and into full rate 
production.'' It goes on to say, ``At the subcontractor level, current 
FCS program plans do not position the Army to conduct future 
competitions at the major end-item level. . .'' In your opinion, is it 
prudent for the Army to position itself to depend on an LSI through the 
life cycle of the program?
    Mr. Bolton. The Army is not dependent upon the LSI for the life 
cycle management of the FCS program. The role of the LSI for low-rate 
initial production (LRIP) and full-rate production will be analyzed 
more in depth as the program proceeds through system operational design 
(SOD). The Army is in the process of developing an enterprise-based 
production strategy or follow-on procurement plan for the program.
    Dr. Graham. Some ongoing role for the LSI is likely to be a 
practical necessity: support of operations, maintenance, and 
evolutionary upgrades of FCS capabilities will be an enormous 
industrial undertaking. The IDA review concluded that the Army might 
benefit from continuing to rely upon an LSI--Boeing or a follow-on 
Services' contractor--for configuration and technical data management 
for the FCS system of systems. In addition, follow on competition for 
production (and associated follow on support) could be run either by 
the Army or by the LSI. IDA did not address the criteria or method for 
reaching such a decision.
    Mr. Francis. It is not prudent for the Army to prematurely position 
itself to depend on an LSI through the life cycle of the program. The 
Army must protect its ability to make choices on the FCS program, 
including the possible choice to discontinue the use of an LSI for the 
later phases of the program. It is also important that the LSI have 
financial indifference--that is, ideally, Boeing should not have a 
stake in the outcome of the program. According to the Army's 
acquisition strategy report, the Army plans to maintain the LSI for all 
FCS development throughout the acquisition and perhaps into the 
procurement phase. The Army feels that competition is not feasible at 
the prime contractor level through the development process, but the 
program intends to foster competition over the life cycle by 
incentivizing competition at the system, subsystem, and component 
levels. However, we do not anticipate that there will be extensive 
competition at the FCS system level, particularly for the manned ground 
vehicles.

    35. Senator McCain. Secretary Bolton, does the Army intend to 
compete FCS systems or components as the program transitions to 
production?
    Mr. Bolton. As in any acquisition, competition will be a key factor 
in deciding how the Army will acquire post-SOD phase requirements. 
Appropriate decisions on future competitions for FCS systems and 
components outside of the SDD phase will be made by Army and DOD 
leadership at identified decision points (post-LRIP) for the program, 
as described in the FCS acquisition strategy report. Risk versus 
schedule and cost will be appropriately weighed at that time to reach 
these programmatic decisions.
    These decision points include procurement of long lead materials, 
initiation of LRIP, and initiation of full rate production.

                            ethics programs
    36. Senator McCain. Secretary Bolton, according to the report, 
``IDA Review of FCS Management,'' one particularly sensitive issue 
raised by IDA was Boeing's system for hiring former Government 
employees into the FCS program. The Rudman review, authored by former 
Senator Rudman, found that, contrary to Boeing policy, the company did 
not have Government advisory letters on file for every former 
Government employee. According to the IDA report, the FCS program 
office had not requested copies of these letters from Boeing. What is 
the status of this critical IDA recommendation?
    Mr. Bolton. More than 200 actions have been implemented by Boeing 
to strengthen and improve its ethics processes, procedures, and 
personnel. Boeing revised numerous policies and procedures to include 
code of conduct and guidelines for employees. Boeing also improved 
ethics training (new employee orientation and Boeing Leadership Center) 
and hiring and employment practices as follows:

        - Established policies and procedures for former competitor 
        employees
        - Set up conflict of interest requirements
        - Procedures for recruiting and hiring of Government employees
        - Set up Office of Internal Governance (Ethics and Business 
        Conduct)

                - Internal audits conducted
                - Compliance assessment team/compliance review board
                - Ethics and business conduct committee
                - External audits conducted
                - Audit committee

    37. Senator McCain. Secretary Bolton, will you provide this 
subcommittee a written statement from Boeing and the Army that you have 
fully completed this action?
    Mr. Bolton. Yes; the Government has formally requested the advisory 
letters and this subcommittee will be formally notified after the 
copies have been received.

    38. Senator McCain. Secretary Bolton, what formal oversight 
procedures are in place and will they be listed in the formal FAR Part 
15 contract for Government and industry personnel to fully understand?
    Mr. Bolton. Post-employment restrictions are covered by 18 U.S.C.   
207, 41 U.S.C.   423 and FAR Part 3. Specifically, 41 D.S.C.   423 
prohibitions and restrictions are implemented through FAR Part 3, which 
required insertion of FAR 52.203-8 and 52.203-10 in the FCS SDD FAR-
based contract that places prohibitions and restrictions on certain 
categories of procurement officers when contacted by offerors regarding 
non-Federal employment. The FCS SDD FAR-based contract also includes 
other contract clauses to protect the integrity of the procurement 
process.
    The Program Manager, FCS Brigade Combat Team (PM FCS BCT) maintains 
oversight over Boeing's ethics program by reviewing Boeing's monthly 
ethics issues and metrics report, and Boeing's annual ethics report. 
This information is further reviewed at the monthly IPT tag up meetings 
that include Army leadership. The IPT process is the preferred approach 
for development, review, and oversight of the acquisition process since 
it was adopted by the Secretary of Defense in 1995.
    Additionally, in 2003, the Department of the Air Force and Boeing 
entered into an interim administrative agreement that requires Boeing 
to maintain its ethics and compliance policies, programs, and 
procedures. It also requires the appointment of an independent special 
compliance officer (SCO) who reports directly to the Air Force and to 
the Boeing chief executive officer. The Air Force, through SCO, 
provides oversight to Boeing's ethics and compliance policies, 
programs, and procedures. The Office of Army General Counsel (OGC) 
maintains close coordination with the Air Force Office of General 
Counsel with regard to Boeing's ethics and compliance policies, 
programs, and procedures.

    39. Senator McCain. Secretary Bolton, the IDA report was critical 
of the FCS management structure. The LSI ``one-team'' concept cannot 
guarantee that Government or industry partners in the FCS program will 
behave appropriately to reduce the likelihood of inappropriate behavior 
or violation of law. The IDA recommendation is quite clear: it is 
imperative that the Army look after its own interests on the FCS 
program and not expect industry participants--no matter how well-
intentioned--to act independently of their explicit contractual 
obligations and financial interests. The Army needs an institutional 
capability to assess and manage competing corporate interests. I 
understand that Boeing and the Army negotiated a set of additional 
firewall arrangements to permit the flow of contractor proprietary data 
to and from the FCS program to ensure technical coordination and 
effective interoperability with complementary systems. Has this process 
been accepted by the subcontractors to the FCS contract? Do they feel 
that their proprietary data is being protected?
    Mr. Bolton. Boeing and the Army negotiated a clause at FCS FAR 
contract paragraph H-106(g) that requires Boeing to protect all third 
party proprietary data that it receives in the course of the FCS 
contract performance and to use this data only for the purpose for 
which it was furnished. Boeing is continuing to work the non-
disclosure, limited access, and all limited transfer agreements with 
its ``one team'' partners to ensure that all such arrangements are 
understood and institutionalized. The primary goal of this effort is to 
protect the ``one team'' partner's proprietary information. The Army 
believes that the measures taken to date will adequately protect 
proprietary data.

    40. Senator McCain. Secretary Bolton, has there been an independent 
review of these additional firewall arrangements? If so, who conducted 
these reviews and what were the results?
    Mr. Bolton. Yes, I understand that the Government Accountability 
Office (GAO) (Audit 120456) and previous audits requested firewall 
data, but to our knowledge did not comment or study them. Results will 
be provided if such reviews are completed.

    41. Senator McCain. Secretary Bolton, have the Army General Counsel 
and Army Inspector General reviewed the firewall agreements?
    Mr. Bolton. The use of firewall as a mitigation strategy to address 
the potential for a conflict of interest based upon impaired 
objectivity was examined not only by IDA, but also by the OGC in their 
investigation of the firewalls. Neither IDA, nor OGC, objected to the 
use of the firewall as a mitigation strategy for potential conflicts 
arising as a result of an OTA. In addition, the firewalls were entered 
into under the concept technology development agreement with Defense 
Advanced Research Projects Agency (DARPA) and their use was coordinated 
with DARPA representatives. This review continues with regard to the 
recently awarded FAR-based contract with Boeing.
    Further, OGC and the U.S. Army Tank Automotive-Armaments Command 
legal counsel supporting PM FCS BCT have reviewed Boeing's FCS Source 
Selection Plan that governs the conduct of the LSI as well as its 
subcontractors on organizational conflicts of interest. They have also 
reviewed provision H-130(g), the Non-Disclosure of Sensitive Government 
Program Information in the FCS FAR contract.

    42. Senator McCain. Secretary Bolton, how often do you review and 
update these agreements?
    Mr. Bolton. The firewall agreements are periodically reviewed and 
updated, especially prior to source selection activities by the 
procurement contracting officer (PCO), Tank and Automotive Command 
(TACOM) counsel, and LSI counsel.

    43. Senator McCain. Secretary Bolton, the IDA report made several 
recommendations regarding the ethics programs associated with the FCS 
program. Specifically, the report recommended that the Army ``adopt a 
policy of `trust but verify' with regard to the ethics programs of the 
FCS industry participants.'' How has the Army implemented this policy?
    Mr. Bolton. Boeing has implemented more than 200 actions to 
strengthen and improve ethical training, processes, reporting, and 
auditing within its corporate structure. Boeing has established an 
Office of Internal Governance to oversee ethics and business conduct. 
Internal and external audits are being conducted. To better monitor, PM 
FCS BCT receives a monthly ethics issues and metrics report and is 
further reviewed in a monthly meeting that includes Army leadership. 
Additionally, Boeing revised numerous policies and procedures to 
include code of conduct and guidelines for employees. Hiring and 
employment practices have also been improved to address former 
competitor employees, conflict of interest requirements, and hire of 
former or retired Government employees.

    44. Senator McCain. Secretary Bolton, the IDA report also said that 
``[t]he Army should seek to redress the kinds of gaps in prior hiring 
practices identified in the Rudman report by requiring that all 
contractors involved in the program screen current employees who have 
Government backgrounds for possible FCS conflict of interest exposure. 
Relevant disqualification letters also should be obtained.'' Has the 
Army completed this recommendation?
    Mr. Bolton. Boeing's FCS legal office has verified conflict of 
interest reviews in accordance with Boeing policy for all Boeing FCS 
employees and consultants. All newly hired employees and new 
consultants are subject to the existing Boeing policies for conflict 
reviews prior to employment discussions (for current Government 
employees) and prior to assignment (for former Government employees).
    Boeing implemented a firewall tracking system on February 28, 2005, 
which supports implementing and tracking ethics related actions 
recommended by IDA.

government accountability office report on award fees/criteria for the 
                        award of incentive fees
    45. Senator McCain. Secretary Bolton, I understand that the 
original FCS Office of Technology Assessment (OTA) contract included a 
base fee of 10 percent and a potential incentive fee of 5 percent. How 
much of the potential incentive fee was earned by the LSI and what was 
the criteria on which the incentive fee was based?
    Mr. Bolton. Only one incentive fee event was held under the OTA, 
and the entire incentive fee was earned by the LSI for that event. The 
LSI met the established cost, schedule, and performance criteria 
required to earn this incentive fee.

    46. Senator McCain. Secretary Bolton, how much of the criteria were 
event-driven, such as conducting the Systems Functional Review by a 
certain date?
    Mr. Bolton. All of the criteria were event driven.

    47. Senator McCain. Secretary Bolton, how is the LSI incentivizing 
the subcontractors to the FCS contract?
    Mr. Bolton. The LSI uses award fee provisions, tied to cost, 
schedule, and performance, to motivate its ``one team'' partners, with 
the exception of small businesses. The LSI uses cost-plus-fixed-fee 
contracts with its small businesses to simplify the accounting burden 
and guarantee greater fee.

    48. Senator McCain. Secretary Bolton, have all of the contracts 
awarded by the LSI been definitized? If not, why not? What is the 
impact on the program and the contract conversion?
    Mr. Bolton. The LSI continues to award new subcontracts. For the 
major subcontractors, these contractors are performing the same effort 
under the FAR-based contract definitization process as they did under 
the OTA. The requirements or subcontractors' scope of work transferred 
intact from the OTA to the FAR contract. Flow-down of FAR-based changes 
and clauses are ongoing since the Government definitized the SDD 
contract and reached agreement with Boeing on March 28, 2006. Contract 
modifications are ongoing. The program will remain nearly unaffected by 
the ``one team'' partner contract modifications.

    49. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham, 
I understand that the new FCS contract will be a cost plus fixed and 
incentive fee contract. In the undefinitized contract action/FAR Part 
15 Contract, a fixed fee of 7 percent and a potential incentive fee of 
8 percent has been established. In their December 2005 report on award 
and incentive fees, GAO found that the goal of performance incentive 
fees, to motivate contractors to deliver exceptional outcomes, is 
negated by the manner in which the Department awards these fees. 
Contractors are evaluated on criteria not related directly to outcomes 
(such as responsiveness to requests for information), are rewarded for 
all levels of performance--from acceptable to excellent, and are given 
several chances to obtain fees, regardless of actual results. In 
general, what are the criteria for which the LSI will earn incentive 
fees?
    Mr. Bolton. The definitized FAR-based contract has a 7.5-percent 
fixed fee portion and an additional 7.5-percent incentive fee 
arrangement. The fee structure has concrete and measurable performance 
targets oriented at critical program performance, cost, and schedule 
activities. There are nine incentive fee events for the SDD contract. 
The events are designed to incentivize the contractor to prove out 
technologies and systems integration, and to move the program forward 
into readiness for initial production at an affordable cost, and on 
schedule. The LSI will earn the incentive fee by successfully 
completing specific sub-events that contain objectively measurable and 
weighted performance, schedule, life-cycle cost containment plan cost, 
and average unit procurement cost criteria related to each incentive 
fee event.
    Dr. Graham. IDA's review of FCS concluded that the fee structure 
needed to be altered to provide the contractor stronger incentives to 
report on substantive progress.
    By setting firm goalposts for design reviews and other incentive 
award schedule events, the Army could accomplish two critical 
objectives. First, it would set expectations within the Army on the 
need to converge on important FCS design decisions. Second, it would 
provide needed checks on the feasibility of the FCS management concept; 
of program assumptions regarding technologies, costs, and schedules; 
and of the quality of the supporting data and analysis available to 
support major program design decisions.
    We are aware of reports that in restructuring the FCS contract, the 
Army has modified the incentive fees to strengthen reporting 
requirements. Such an action would be an improvement: Linking the 
goalposts for reviews to the program's incentive fee structure will 
allow the Army to clarify expectations regarding needed management data 
and set the standards for the quality of the information and 
assessments supporting each major milestone review.
    Mr. Francis. There are 10 program events outlined in the incentive 
plan in the new contract (one of which was already held under the OTA). 
At each of these events, the contractor will be evaluated on three main 
evaluation areas: performance, cost, and schedule. There will be 
specific dollars associated with each of these areas, so it appears the 
contractor is evaluated on each area independently. In other words, 
even if the contract is over cost and behind schedule at an incentive 
event, the contractor could still earn the fee associated with the 
performance area. Specific performance criteria will be defined in the 
program's integrated master plan and detailed criteria will be 
incorporated into the contract one incentive event prior to each 
scheduled event date. These detailed criteria will be mutually agreed 
upon by the Government and contractor and subject to the disputes 
clause.
    The criteria outlined for the cost and schedule evaluation areas 
are not entirely different from an award fee contract. Specifically, at 
least half of it is subjective and could reward the contractor for 
program inputs, not outcomes. In the cost area for incentive events 2-
8, there are two main criteria used for evaluation: (1) Management of 
life cycle cost, which involves activities, such as the development and 
delivery of quarterly life cycle cost reports, among others; and (2) 
whether or not the current approved LSI-generated acquisition unit 
program cost estimate is at or below the established glide path. The 
contract does not state how each of these criteria are weighted. For 
events 9 and 10, the acquisition unit program cost glide path is not 
evaluated. Similarly, the two criteria for the schedule area are split 
between inputs and outcomes. On the input side, Boeing will be 
evaluated on its ability to update the integrated master plan and 
integrated master schedule in a timely manner. On the outcomes side, 
Boeing must also successfully meet the completion criteria for the 
event within the threshold listed in the acquisition program baseline, 
or if not listed, within 90 calendar days of the scheduled date in the 
integrated master schedule. Finally, the contract allows rollover of 
the incentive fee. The program manager may decide to rollover any 
unearned incentive fee to subsequent events, or to apply the fee to 
specific program risks or objectives.

    50. Senator McCain. Mr. Francis, in your estimation, does the 
proposed incentive fee structure for the new FCS contract increase 
contractor risk while adequately protecting the financial interest of 
the Government?
    Mr. Francis. At the outset, it should be recognized that, 
regardless of the fee structure, the bulk of the financial risk for the 
FCS contract remains with the Government. The new contract is still a 
``cost-reimbursement'' contract, which means the Government reimburses 
the contractor for all allowable incurred costs, to the extent 
prescribed in the contract. As we have reported, the risk in the 
program will be governed mainly by technology development, design 
integration, and testing.\1\
---------------------------------------------------------------------------
    \1\ GAO, Defense Acquisitions: Improved Business Case Needed for 
FCS's Successful Outcome, GAO-06-367 (Washington, DC: March 14, 2006.)
---------------------------------------------------------------------------
    In terms of the balance between risks for the Government and 
rewards for the contractor, the new contract is a slight improvement 
over the original OTA. Under the new contract, more of the contractor's 
fee is tied to performance. The OTA included a 10-percent fixed fee and 
a 5-percent incentive fee; the new contract includes a 7-percent fixed 
fee and an 8-percent incentive fee. However, there are still multiple 
areas of concern. While some of the criteria related to this incentive 
fee appear to be related to interim program events and milestones, half 
of the cost and schedule criteria are still focused on management areas 
or program inputs that are not directly related to the desired 
acquisition outcomes. In addition, because each evaluation area is 
assessed separately for each incentive event, the contractor could 
receive a portion of the available fee if it is performing well 
technically, even if the program is overrunning cost and not meeting 
schedule. The inclusion of a rollover provision could reduce the 
Government's leverage in holding the contractor accountable for its 
performance.

    51. Senator McCain. Secretary Bolton, I understand the FCS contract 
conversion will be completed by the end of March. Will the contract be 
updated for any regulatory changes that occur during the undefinitized 
timeframe before definitization?
    Mr. Bolton. The FAR-based contract was definitized on March 28, 
2006. The contract has been updated due to numerous changes or 
negotiated agreements over the past 6 months. AFAR ``sweep'' was 
conducted 2 weeks prior to definitization to ensure that the latest 
versions of all FAR clauses were reflected in the contract. Future 
regulatory changes will be included routinely as they apply to the FCS 
contract.

    52. Senator McCain. Secretary Bolton, how will the FCS contract 
strengthen oversight and keep costs down?
    Mr. Bolton. The FCS contract will incorporate all of the 
appropriate FAR and Defense Federal Acquisition Regulations Supplement 
(DFARS) clauses and provisions. These include the requirement for truth 
in negotiations, submission of cost and pricing data, procurement 
integrity, and recurring reporting of cost and schedule data. 
Additional contract language provides for Government participation in 
source selection, make/buy decisions and a voice on internal LSI 
decisionmaking bodies. The FAR contract strengthens the FCS integrated 
program management approach; it bolsters the approach of providing a 
focal point to enable the overarching responsibilities of the 
Government PM, Army acquisition leadership, and DOD oversight.

    53. Senator McCain. Mr. Francis and Dr. Graham, will the converted 
FCS strengthen oversight and keep costs down?
    Mr. Francis. The Army's new contract was finalized in March 2006 
and is based on the FAR, which governs acquisition in the Federal 
Government. The new contract incorporates standard FAR clauses 
including those that protect the Government's interests, such as the 
provisions relating to procurement integrity, truth in negotiations, 
and cost accounting standards. Some provisions of the new contract 
represent improvements for the Government, such as the organizational 
conflicts of interest clause, which states that the LSI shall not 
compete for any subcontracts at any tier of the program. This clause 
will be included in subcontracts and flowed down to all tiers. However, 
the revised contract retains a similar oversight structure and should 
have little impact on the likelihood of controlling FCS costs. Cost 
control will be determined by how the Army manages FCS technology, 
design integration, and testing.
    The conversion to a FAR-based contract was appropriate for the FCS 
program and should help to safeguard the Government's interests. In the 
coming months, we will be examining the new contract and its 
implementation to determine if the Government's interests are better 
protected.
    Dr. Graham. The IDA review concluded that there are major 
challenges in executing the FCS program associated with the scope of 
the program, the technical challenges, and the strategic risks cited in 
our report. IDA made 18 recommendations to the Army on the steps to 
address such challenges. We reviewed the then existing contract, and 
concluded that the Army had included adequate contractual provisions. 
Our review concluded that the form of the contract was not a major 
contributor to the program challenges, and we do not believe that the 
change in the form of the contract will, in itself, substantially alter 
the fundamental challenges facing the program.

    54. Senator McCain. Secretary Bolton, does the LSI charge fee on 
fee from its subcontractors, and if so, why?
    Mr. Bolton. The LSI's fixed fee was developed against its costs 
line. Subcontractor fee is treated as costs to the LSI. This practice 
is in accordance with industry-wide accounting practices and Boeing's 
approved disclosure statement. As is customary, and in line with 
industry standard, all prime/LSI contractors charge and receive fee for 
any agreed-to fee from immediate subcontractors. Therefore, ``one 
team'' partner price, which includes the ``one team'' partner fee, 
would be treated as a cost to the program, and therefore part of the 
base for the LSI's fee.

    55. Senator McCain. Mr. Francis, in the GAO report and your 
statement, it is mentioned that award-fee evaluations are generally 
time-based rather than event-based. Please explain what is meant by 
this and why this may not be an effective practice.
    Mr. Francis. On award-fee contracts, DOD personnel (usually members 
of an award-fee evaluation board) conduct periodic evaluations of the 
contractor's performance and recommend the amount of fee to be paid for 
that period. The frequency of evaluation periods can be based on 
specific dates or milestones. For most DOD award-fee contracts in our 
study population, evaluation periods were time- or calendar-based, and 
held generally about every 6 months. Only about 10 percent of DOD 
award-fee contracts in our study population used event-based 
evaluations conducted after the completion of program milestones or 
scheduled for the anticipated completion date for program milestones.
    Time-based award-fee evaluations of contractor performance on 
weapon system development programs that can last a decade or more may 
not generate meaningful information about progress. Adopting event-
based award-fee evaluations would be a logical extension of DOD's new 
award-fee policy. In its March 2006 policy memo on award fees, DOD 
recognized the benefits of moving toward more outcomes-based award fee 
criteria. To do so, the memo stated that it is imperative that award 
fees be tied to identifiable interim outcomes, discrete events, or 
milestones, as much as possible, and offered as examples milestones 
such as timely completion of preliminary design review, critical design 
review, and successful system demonstration.

    56. Senator McCain. Secretary Bolton, the GAO report found that 
neither award nor incentive fees were effective in helping the 
Department achieve the outcomes it wanted. Isn't this indicative of 
larger problems in the defense acquisition system? What actions are you 
taking, in terms of the QDR or DAPA project, to address those problems?
    Mr. Bolton. Yes, there are issues in the defense acquisition system 
as described in the GAO report that can affect the effectiveness of 
using award or incentive fees. However, proper use of award or 
incentive fee arrangements can be useful in achieving performance 
objectives. The DAPA report recommends creating acquisition strategies 
for each program prior to Milestone A to streamline procurement, reduce 
time-to-market, require formal subcontractor level competition, and tie 
award fees to contractor performance using contractor performance 
assessment reporting system ratings. These recommendations are under 
consideration.

    57. Senator McCain. Mr. Francis, I'm trying to understand the way 
these award fees have been used is helping the Department to get the 
outcomes it wants. First, we sign a cost-plus contract that puts most 
of the risk for these major development programs on the Government. 
Next, we offer the contractor the chance to earn an award fee on top of 
having their costs reimbursed. Then, when a program experiences 
problems and I think it is fair to say they almost always do, the 
contractor can still earn millions of dollars in award fees for helping 
to correct the issues which they are partially responsible for 
creating. Please explain to me how anyone can consider this to be an 
effective way of doing business.
    Mr. Francis. DOD's current award-fee practices are not an effective 
way of doing business. In December 2005, we reported that DOD programs 
have engaged in practices that undermine efforts to motivate contractor 
performance and that do not hold contractors accountable for achieving 
desired acquisition outcomes, such as meeting cost and schedule goals 
and delivering desired capabilities.\2\ These programs frequently paid 
most of the available award fee for what they describe as improved 
contractor performance, regardless of whether acquisition outcomes fell 
far short of DOD's expectations, were satisfactory, or exceeded 
expectations.
---------------------------------------------------------------------------
    \2\ GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, DC: December 19, 2005).
---------------------------------------------------------------------------
    In the case of FCS, we have found that the program is well behind 
where it should be, in that they will be working on pre-development 
activities 5 years after the program was approved for system 
development and demonstration. Yet the LSI has received all of the 
available incentive and award fees that were available thus far. 
Further, the Army has adjusted the program schedule, such as for the 
recently completed System of Systems Functional Review, which was a fee 
event in the FCS contract.
    To address this issue, DOD must structure award and incentive fees 
to ensure that the Government is only paying contractors for meeting or 
exceeding cost, schedule, and performance goals. In March 2006, DOD 
issued a new award fee policy that recognized the benefit of moving 
toward more outcomes-based award fee criteria. To do so, the memo 
stated that it is imperative that award fees be tied to identifiable 
interim outcomes, discrete events, or milestones, as much as possible, 
and offered as examples milestones such as timely completion of 
preliminary design review, critical design review, and successful 
system demonstration. As always, the key will be how DOD implements 
this new policy and ensures that it translates into practice.

    58. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham, 
fixed-price contracts shift the risk to the contractor and incentivize 
the contractor to increase the reliability of the system components. 
What do you think DOD can do to return to more common use of fixed-
price contracts?
    Mr. Bolton. In accordance with the FAR and current policy, the 
selection of contract type, whether fixed-priced or cost reimbursement, 
involves considering factors such as the type and complexity of the 
requirement, whether adequate price competition is a reasonable 
expectation, and other economic factors such as our ability to analyze 
price and/or cost, the history of the acquisition, and the period of 
performance or length of the production run. These factors along with 
several others contribute to our ability to utilize a fixed-price 
contract for a given requirement and thus shift the risk to the 
contractor. Obviously, there are cost/risk tradeoffs that envelope this 
process which must be considered when deciding upon the best 
acquisition strategy or contract type.
    Mr. Francis. According to the FAR, fixed-price contracts are 
generally the preferred contracting method. However, this preference 
applies in research and development contracting only to the extent that 
``goals, objectives, specifications, and cost estimates are sufficient 
to permit such a preference.'' The FAR further explains, ``Because the 
absence of precise specifications and difficulties in estimating costs 
with accuracy normally precludes using fixed-price contracting for 
research and development, the use of cost-reimbursement contracts is 
usually appropriate.'' FAR 35.006(e) states that, ``Projects having 
production requirements as a follow-on to research and development 
efforts normally should progress from cost-reimbursement contracts to 
fixed-price contracts as designs become more firmly established, risks 
are reduced, and production tooling, equipment, and processes are 
developed and proven.''
    In general, to attract cooperation from the contractor base to 
compete on fixed-price contracts, DOD would need to ensure that the 
project is well-defined, has a predictable schedule and scope, and has 
low technical risk. As the level of uncertainty in a project increases, 
contractors will be less likely to participate on a fixed price basis.
    Dr. Graham. The fundamental variables in any program are cost, 
schedule, and performance. A good contract is one that brings these 
three variables into alignment to provide a feasible and predictable 
transaction for both the buyer and the seller. Often, the high degree 
of uncertainty in weapon programs makes it impossible to set fixed 
cost, schedule, and performance with enough confidence to define an 
executable transaction. Historically, DOD's attempts to set fixed 
prices in the face of great uncertainty, such as in the development 
phase of major weapon programs, have not contributed to successful 
program outcomes.
    This suggests that the best way for the Government to gain the 
considerable benefits of sound and fair fixed price development 
contracts would be to significantly reduce the uncertainty in the 
likely cost. This could be done in principle by specifying new 
equipment that requires much less ambitious technical advances than has 
recently been the case. On the other hand, if the United State were to 
slow the rate at which it fields new military technology primarily in 
order to reap the financial predictability benefits of lower technical 
risk, there is no assurance that our future adversaries will follow 
suit and slow their advances.

    59. Senator McCain. Secretary Bolton, what are you doing to ensure 
fee determining officers use their training to follow regulation and 
published acquisition guidance when determining award fees?
    Mr. Bolton. The Department of the Army has implemented specific 
regulatory requirements with respect to the role of the fee 
determination official and the necessary training for personnel 
participating in an award fee evaluation board (AFEB). The Army Federal 
Acquisition Regulation Supplement (AFARS) Subpart 5116.4, Incentive 
Contracts, requires that any award fee determining official (AFDO) 
appointed by the principal assistant responsible for contracting or 
authorized contracting officer, be made in writing. The AFARS further 
requires that the AFDO appoint in writing the AFEB and its chairman and 
that the appointment letters clearly outline the responsibilities and 
limitations of the AFEB and its chairman. The AFARS also requires that 
the AFEB consist of contracting and acquisition personnel most 
knowledgeable of the requirements and contractor performance and that 
the AFEB chairman ensure that all AFEB evaluators are sufficiently 
trained in their responsibilities. Finally, the AFARS requires that the 
rationale for the recommended award fee be documented in sufficient 
detail in order to ensure that the integrity of the award fee process 
is preserved.

    60. Senator McCain. Mr. Francis, the GAO report briefly described 
the personnel who generally make up the award-fee boards. I understand 
that program office personnel may be in the best position to offer 
input on the contractor's performance, but since they may have a vested 
interest in presenting the program in its best light, are they the most 
appropriate officials to be recommending how much fee the contractor 
should earn?
    Mr. Francis. Independence is a key factor for ensuring the 
integrity of the award-fee process. Award-fee boards on major weapons 
programs are generally made up of personnel from the program office, 
which, as you point out, may be in the best position to offer input on 
contractor performance. However, our past work \3\ has shown that 
programs are incentivized to suppress bad news--largely due to 
continual funding competition. Moving towards more outcomes-based award 
fee criteria helps to address this issue. Using outcomes-based award-
fee criteria that reflect cost, schedule, and performance goals would 
provide a more objective and transparent basis for award-fee decisions.
---------------------------------------------------------------------------
    \3\ GAO, DOD Acquisition Outcomes: A Case for Change, GAO-06-257T 
(Washington, DC: November 15, 2005).

               future combat systems contract conversion
    61. Senator McCain. Secretary Bolton, what is the status of the 
conversion of the FCS contract to a FAR part 15 contract?
    Mr. Bolton. A FAR-based letter contract was awarded on September 
23, 2005. This letter contract was definitized by modification PZ0020 
issued on March 28, 2006.

    62. Senator McCain. Secretary Bolton, in the 2006 Defense 
Authorization Law, Congress instructed the Pentagon to report on every 
program that costs at least 50 percent more than initial projections. 
The provision was designed to tie programs to their original cost 
estimates, rather than updated cost and schedule baselines. The 
Pentagon has been allowed to change its baseline without invoking the 
penalty. For example, the FCS program hasn't triggered an official 
breach despite a $161 billion cost estimate that is more than double 
its original baseline estimate. What plans do you have in place to 
ensure your acquisition programs are held to their original baseline 
figures instead of allowing the current practice of rebaselining?
    Mr. Bolton. While the Army's implementation plans for this new 
amendment depend partly on the guidance from the Office of the 
Secretary of Defense, the Army intent is full, timely compliance with 
the law. Oversight of the program baselines will continue through 
milestone decision reviews and program executive officer updates to the 
Army acquisition executive. Deviation reports using the new criteria 
outlined in the amendment will be reported using current processes and 
procedures.
    While this amendment does not prohibit the rebaselining of 
programs, it does hold program managers accountable to the original 
baseline estimate. By keeping the original estimate as a data point in 
selected acquisition reports (SARs), the entire DOD acquisition chain 
is sensitive to the cost growth of the entire program. This is an 
improvement of the current practice of rebaselining which does not 
retain the original baseline estimate in official reports.
    With respect to the FCS program, the $161 billion figure cited in 
the question represents the total acquisition cost in then-year 
dollars, and was reported in the November 2005 SAR. The comparable 
original baseline figure is $92.2 billion, a 75-percent increase. When 
calculated using base-year dollars so that the rate of inflation (which 
is beyond a program manager's control) does not influence the result, 
the overall increase is 54 percent (From November 2005 SAR: SAR 
Development Baseline of $77.8 billion; acquisition program baseline 
objective of $120.15 billion).

    63. Senator McCain. Secretary Bolton, how do you plan to implement 
this new amendment to Nunn-McCurdy specifically as it applies to the 
FCS program?
    Mr. Bolton. In compliance with the new amendment, each SAR must 
reflect the originally established baseline estimate along with the 
estimate deemed to be the original under this amendment. Under this 
amendment, the FCS current baseline would be deemed the original 
baseline estimate. The current FCS acquisition program baseline was 
signed by the Defense Acquisition Executive on November 2, 2005, and 
reported in the November 2005 SAR.
    Oversight of the program baselines will continue through milestone 
decision reviews and program manager updates to the Army Acquisition 
Executive. The Army will not lose sight of the baseline estimate that 
was originally established for the program in 2003.

    64. Senator McCain. Secretary Bolton, the FCS program has been 
rebaselined at least twice in the past 3 years; what does this say 
about the soundness of the business cases that the Army is using to 
justify this system?
    Mr. Bolton. The FCS program has only two baselines (initial and 
current). The reason the baseline changed is that the Army decided to 
accelerate fielding FCS capability to the current force. Based on this 
change in Army's strategy, the FCS funding profile was adjusted and 
deferred systems were added back into the program creating a new 
baseline.
                                 ______
                                 
           Questions Submitted by Senator Joseph I. Lieberman
                      impact of brigade reduction
    65. Senator Lieberman. General Cody, the decision to restructure 
the National Guard by reducing the number of brigade combat teams 
(BCTs) apparently also included the elimination of an aviation brigade. 
Does that mean that the Army is reducing from 19 to 18 aviation 
brigades in its force structure?
    General Cody. ARNG restructuring is not reducing the number of 
brigades but converting six BCTs and one CAB-E, to sustainment and 
engineer brigades. Yes, if this decision is implemented the Army will 
reduce from 19 to 18 CABs. However, it will also ensure the seven 
remaining ARNG CABs are fully resourced with personnel and aircraft 
vice eight partially resourced CABs.

    66. Senator Lieberman. General Cody, does that mean that the 
National Guard will lose helicopters as a result of this restructuring?
    General Cody. The number of assigned aircraft will remain the same 
or increase. The ARNG may lose the authorization for some helicopters 
depending on how the decision is implemented; however, the total number 
of aircraft will remain the same or increase.

                               modularity
    67. Senator Lieberman. Secretary Bolton and General Cody, the 
fiscal year 2007 budget request represents the first year that the Army 
has included modularity in its base budget request. Will the Army 
continue to fund its modularity initiative in the base budget requests?
    Mr. Bolton and General Cody. Yes. The Army will continue to include 
modularity in its base budget requests.

    68. Senator Lieberman. Secretary Bolton and General Cody, 2 years 
ago at this time, the Army estimated modularity costs at $28 billion. 
Last year, the estimate was raised to $48 billion. Do you have a 
revised estimate for modularity costs for fiscal year 2007?
    Mr. Bolton and General Cody. The revised estimate for modularity is 
$52.5 billion. The fiscal year 2007 budget request for modularity is 
$6.6 billion. This amount includes $5.9 billion for equipment 
procurement and $504 million for construction and $196 million for 
operations and maintenance. For fiscal year 2005, the cost was $5.0 
billion, for current year fiscal year 2006, the cost is $6.5 billion. 
The remaining years are estimated at: fiscal year 2008, $7.6 billion; 
fiscal year 2009, $9.1 billion; fiscal year 2010, $9.2 billion; and 
fiscal year 2011, $8.5 billion.

    69. Senator Lieberman. Secretary Bolton and General Cody, the Army 
has estimated that the cost of modularity is $48 billion. Does this 
include Reserve component equipment? If not, how does the Army intend 
to fund these Guard requirements?
    Mr. Bolton and General Cody. Yes, the $48 billion includes Army 
Reserve and ARNG equipment.

    70. Senator Lieberman. Secretary Bolton and General Cody, given the 
high operational tempo for OIF and OEF, has the Army been able to 
adequately man and equip the new modular brigades, including the 
additional nine brigade-size units, by 2007 as originally intended?
    Mr. Bolton and General Cody. The units that the Army sends into 
harm's way are fully manned and equipped to accomplish the range of 
missions assigned to them. The rebalancing the Army is undertaking is 
aimed at reducing stress on the Active and Reserve components, improve 
the responsiveness of the overall force to achieve National Security 
Strategy goals, and improve the readiness and deployability of units. 
These efforts will ultimately ensure predictable deployment cycles for 
Army forces of one rotation every 3 years for the Active component and 
one rotation every 6 years for the Reserve component. The Army will use 
this cyclical force readiness model to generate forces that are fully 
manned and equipped.

                         future combat systems
    71. Senator Lieberman. Secretary Bolton and General Cody, there 
have been many criticisms about the FCS. I believe at least some of the 
criticisms derive from two factors: The Army has had some difficulty 
describing concretely what the FCS is expected to be and how the Army 
intends to fight an FCS-equipped force differently than a force 
equipped with modifications to current systems, and that the program 
rests on very high risk technologies.
    GAO has found that the program does not yet have firm requirements. 
I understand the Army has completed an operational requirement document 
(ORD) that outlines 522 requirements. The GAO has found that the Army 
has a good understanding of what FCS BCTs should be capable of, but not 
enough knowledge of what is needed for each of the 18 individual 
systems. It found that the Army and the LSI will later translate system 
of system requirements into more specific requirements for individual 
systems within FCS. This step is rather late in the usual acquisition 
process. When do you expect to have mature and stable requirements for 
the system of systems and for the individual systems?
    Mr. Bolton and General Cody. The fundamental requirements set forth 
in the FCS ORD have remained relatively unchanged since the first JROC-
approved ORD in April 2003. Change 2 of the ORD was approved by the 
Army Requirements Oversight Council (AROC) on December 16, 2005, and is 
scheduled for JROC approval on April 27, 2006. This change encompasses 
previously coordinated materiel developer and user agreed-to 
requirements clarifications, addition of the Spin Out Capabilities 
Description Document Annex, mandated change to key performance 
parameter (KPP) 7 incorporating language for force protection and a 
change to KPP 5 to update previously agreed-to maintenance ratios for 
the class IV unmanned aerial vehicle (UAV). The actual number of ORD 
requirements has been reduced from 555 to 544 as a result of this 
maturation activity.
    These ORD requirements were translated into performance 
requirements by the materiel developer. These FCS SoS requirements were 
established and baselined at the SoS functional review (FR) in August 
2005. At SoSFR, this functional baseline, which includes the SoS 
specification, architecture, and a design concept baseline, was placed 
under formal configuration management and control. This signaled the 
formal flow-down of requirements to the system level. Beginning in 
November 2005, a series of system functional reviews (for each of the 
integrated platforms and the network) have been held to establish and 
baseline the system-level requirements. These system level baselines 
were placed under formal configuration management and control. 
Preliminary interface requirements have been established and documented 
in interface requirements documents for complementary programs, 
interface control documents for hardware items and interface 
requirements specifications for software items. These reviews will 
culminate in a SoS-level validation of the requirements baseline at the 
August 2006 In-process Preliminary Design Review. This review signals 
the stability of the requirements baseline to begin the series of 
system-level preliminary design activities and reviews leading up to 
the SoS Preliminary Design Review in fiscal year 2008.
    The requirements maturity and stability will vary given the point 
in time of the development lifecycle for a program. According to 
systems engineering fundamentals, at a systems functional review, the 
technical description (functional baseline) must be approved as the 
governing technical requirements. Further, the functional baseline must 
reflect the requirements that will meet user expectations found in the 
ORD. Draft subsystem specifications should be available. The FCS PM 
confirmed these tenets were met at the SoSFR for the SoS and at the 
system level SFRs for the integrated platforms. The SoS specification, 
prime item development specifications and draft configuration item 
specifications exist and are baselined.
    Requirements maturity and stability will continue to evolve as we 
move forward in the systems engineering (SE) process towards SoS 
preliminary design review (PDR) (fiscal year 2008) and SoS critical 
design review (CDR) (fiscal year 2010)--resulting in an increasing 
level of maturity and stability at each of these milestones in 
accordance with best business practices.

    72. Senator Lieberman. Secretary Bolton and General Cody, what 
process are you using to determine the final requirements for the 
operational doctrine and tactical procedures for the system?
    Mr. Bolton and General Cody. The Army has developed detailed and 
iterative processes to accurately develop requirements, operational 
doctrine, and tactical procedures for the FCS family of systems. 
Focused on the pursuit of full spectrum operational concepts, 
requirements definition is enabled through an iterative evaluation 
process which includes experimentation, testing, analysis, documenting 
the operational doctrine and tactical procedures, retesting, and 
validating. This process develops, evaluates, and refines doctrine, 
organization, training, materiel, and leader development capabilities 
from the future BCT from individual platforms and soldier level through 
each collective echelon level to brigade. The FCS BCT maneuver battle 
lab employs live-virtual-constructive simulations employing a soldier-
in-the-loop, collaborative, simulated environment, replete with mock-
ups of the FCS platforms, staff work stations, and surrogates for the 
command and control systems in determining operational doctrine and 
tactical procedures. This rigorous disciplined methodology enables the 
achievement of credible fidelity in complex environments, for the 
operational doctrine and tactical procedures for the FCS BCT at the 
unit, leader, staff, and soldier levels. This top-to-bottom evaluation 
process is enabled by a dedicated evaluation BCT (EBCT) in conjunction 
with the U.S. Army Training and Doctrine Command (TRADOC) Analysis 
Center, the TRADOC proponents, U.S. Air Force, U.S. Marine Corps, and 
allied observers. The EBCT is a consistent, trained group of veteran 
warfighters and sustainers that fight the FCS in various defense 
planning guidance approved scenarios to develop tactics, techniques, 
and procedures, refine platform (system) requirements and doctrine for 
the future force. The source data for the development process comes 
from Army Materiel Systems Analysis Agency, independent threat sources, 
Center for Army Lessons Learned, and current operational environment 
sources to ensure the evaluation process includes both traditional and 
irregular challenges in complex environments. Additionally, Unit of 
Action Maneuver Battle Lab (UAMBL) performs the same mission for spin-
out technologies for the current force. The UAMBL develops the 
operational concepts for evaluation, provides the soldier-in-the-loop 
to conduct the evaluation; then adjusts the concept, repeats the 
evaluation, develops and refines the tracking and impact prediction 
(TIP) for doctrinal development. Doctrine is being developed to support 
the timely evaluation, experimentation, and training related to 
fielding and sustaining the FCS BCT in support of the future force. To 
date, UAMBL has maintained the development schedule. Additionally, 
UAMBL has produced a manual, which describes implications for TIP of 
the four spin-out 1 systems to support ongoing test and evaluation 
planning. This is the process currently underway to determine the final 
requirements for the operational doctrine and tactical procedures for 
the FCS BCT.

    73. Senator Lieberman. Secretary Bolton and General Cody, a key 
part of the Army plan is to use FCS technologies to modernize the 
current force so that there is not a significant technology gap between 
the FCS-equipped force and the current force. Yet we hear that the 
technologies are untested and high risk. What technologies have you 
selected and does your budget request prioritize those technologies for 
earlier development?
    Mr. Bolton and General Cody. Spiraling of FCS capabilities is 
accomplished through spin-outs. Each spin-out is structured to 
facilitate the insertion of promising and sufficiently mature 
technologies/capabilities to the current force, while allowing the base 
FCS program to focus on meeting threshold capabilities as described in 
the ORD. Knowledge gained through the experimentation, testing, and 
fielding of spin-outs benefits the main FCS program by providing early 
assessments and feedback which inform the continued development of FCS 
threshold capabilities. This approach will also allow the Army to field 
FCS network elements and some individual FCS systems over time, thus 
reducing the risk to the FCS program while simultaneously adding 
capability to the current force. This will culminate in the fielding of 
the FCS Battle Command Network to the current force in the same 
timeframe as the FCS BCT fielding.
    The Army has prioritized, in its Acquisition Strategy Report, and 
has budgeted for spin-out 1. This spin-out will provide enhanced 
warfighter capabilities to the current force in three primary areas. It 
provides enhanced situation awareness, enhanced force protection, and 
enhanced lethality through the use of unattended sensors and munitions 
and an initial FCS communications network backbone for FCS BCT and 
battalion command nets. The lethality and sensor products are Non Line 
of Sight Launch System, Unattended Ground Sensor, and the Intelligent 
Munition System which will satisfy the National Land Mine Policy 
Objectives. The FCS spin-out systems are designed to interface with the 
Army Battle Command System and current force communications networks 
and platforms.
                                 ______
                                 
             Questions Submitted by Senator Daniel K. Akaka
                           schedule slippage
    74. Senator Akaka. Secretary Bolton, in your testimony, you 
asserted that in terms of critical technologies, you have more than 23 
technologies with a technical readiness level (TRL) of 6 and that the 
program is on schedule to mature the rest by the preliminary design 
review in August 2008. While I am glad to hear of your progress, this 
schedule still represents a significant slip in schedule from that 
proposed at the start of the program. What have you done to identify 
the causes for such significant delays in technology maturation and 
what measures have been, or will be, put in place to prevent further 
schedule push backs?
    Mr. Bolton. The FCS program has a structured, time-phased approach 
to technology maturation for critical technologies (CT). The FCS 
program also planned for the integration of these technologies during 
the SDD process specifically for the purpose of properly and 
successfully fielding a revolutionary networked SoS. As part of the 
restructure in 2004, the program was realigned to create integration 
phases wherein segments of FCS capability would be designed, built, and 
evaluated providing risk reduction and knowledge to feed subsequent 
integration phases. The maturation of critical technologies is aligned 
with this time-phased and deliberate approach. To date, this has proven 
an informed and methodical approach to the management and mitigation of 
technical risk while enabling incorporation of rapidly evolving 
technology. FCS CTs were aligned to this phased approach with plans to 
have each demonstrated to a TRL 6 prior to its entry into an 
integration phase. This process is similar to approaches used in the 
commercial sector for software intensive, complex systems.
    Significant changes were made to manage risks associated with 
technology maturation and additional experiments were added to mitigate 
technical risk; the revised FCS program schedule reduces technical 
risk; component maturation projects were added to reduce technical 
risk. The program continues to mature its critical technologies in an 
evolutionary and deliberate approach consistent with DOD acquisition 
policy. The FCS program is appropriately managing risks associated with 
the CTs in order to meet the overall program objectives. The plans for 
maturation of CTs assessed at less than TRL 6 are incorporated in the 
risk management plan (RMP) for each particular CT. These RMPs are 
actively managed and receive senior level review at the PM's risk 
review board, with quarterly events to track the technology maturation.

                             fee structure
    75. Senator Akaka. Secretary Bolton, in the OTA between the Army 
and LSI finalized in March 2005, the annual fixed fees for contractors 
were set at 10 percent of estimated cost and the incentive fee 
available was 5 percent. The Army intends to change the fee structure 
for the FCS program in the new contract to a proposed 7-percent fixed 
fee and an 8-percent incentive fee. In your testimony you noted that 
the DOD is attempting to address the concerns raised by a recent GAO 
report that found there was little evidence that contractor award fees 
improve performance and outcome. You also stated that, from your 
perspective, the proposed fee structure for the new FCS program 
contract strikes the right balance between contract risks and 
motivation of contractor performance. Can you explain to me how this 
proposed change in fee structure which raised the ceiling on the 
available incentive fee percentage addresses the issues raised by the 
GAO report?
    Mr. Bolton. The change to the FCS incentive fee structure to 
increase the percentage that is allocated to incentive fees is designed 
to increase the LSI's motivation to excel in accomplishing program 
goals. As suggested by the GAO report, the incentive fee arrangement 
has objectively measured critical path performance criteria (major 
program events and activities). This difference eliminates most of the 
subjectivity pitfalls with typical evaluation schemes. The final 
balance struck between the base fee and incentive fee is 7.5 percent 
for each, for a total of 15 percent. The fee criteria are clearly 
described in the fee provision of the contract.

                           boeing restructure
    76. Senator Akaka. Secretary Bolton and General Cody, Mr. Graham 
from IDA has testified before this subcommittee that in response to 
IDA's 2004 review of FCS program management, Boeing has realigned its 
corporate structure to increase the independence of corporate 
governance functions. However, Mr. Graham also noted that IDA did not 
audit the execution of these realignments at Boeing. What, if any, 
controls have been put in place by the Army to ensure that Boeing 
successfully implements the changes to its corporate structure?
    Mr. Bolton and General Cody. The Army relies on two DOD agencies, 
the Defense Contract Audit Agency and Defense Contract Management 
Agency, to provide insight into Boeing's corporate structure, business 
practices, and systems. This oversight ensures that any restructure 
does not violate statutory requirements.

                          realistic estimates
    77. Senator Akaka. Secretary Bolton and General Cody, the Army 
currently estimates that the total expected cost for the FCS program is 
$160.7 billion which represents a 76-percent increase over the original 
estimate of $91.4 billion. According to the Army, this is a more 
realistic cost estimate reflecting the progress made in defining 
systems requirements. How stable is this revised estimate given that, 
although progress has been made, the Army and its contractors are still 
working to complete the definitions of system level requirements?
    Mr. Bolton and General Cody. The fundamental requirements set forth 
in the FCS ORD have remained relatively unchanged since the first JROC 
approved ORD in April 2003. The FCS program is a complex SoS 
developmental effort involving 18 integrated platforms and a common 
network. System or platform level requirements will stabilize prior to 
entering the program's initial preliminary design review at the SoS 
level.
                                 ______
                                 
               Questions Submitted by Senator Bill Nelson
                            fair competition
    78. Senator Bill Nelson. Secretary Bolton, from time to time my 
office will receive complaints or allegations that the FCS program and 
LSI are not small business ``friendly'' or that development and 
selection of subsystem technologies are structured in a way that may, 
in effect, unfairly advantage one company over all others. What 
oversight systems does the Army have in place to ensure that the 
program is meeting requirements in law and regulation regarding 
opportunities for small businesses and promotion of free, fair, and 
open competition?
    Mr. Bolton. From a program oversight perspective, a centralized 
database has been developed and all FCS contractors and suppliers must 
submit their small business performance data semiannually. This 
database allows the Government to track and assess performance data, 
historical data, and supplier profile information in order to ensure 
fair and open competition as well as to ensure maximum small business 
participation is achieved.
    The LSI has established a collaborative and dedicated team, the 
Diversity Advocacy Round Table, to ensure an integrated approach is 
executed among the LSI and large business industrial partners to 
achieve the FCS program small business goals. Their outreach efforts 
include participating in a variety of forums such as: disadvantaged 
business conferences and trade fairs, the National Veterans Small 
Business Conference, National HUB Zone Small Business Conference, and 
the Minority Enterprise Development Week to name a few.
    In addition, the LSI has formed the One Team Council with its first 
tier subcontractors to ensure maximum small business participation is 
achieved. The One Team Council is composed of top Army officials, LSI 
executives, program office personnel, functional proponents, and other 
key personnel. An FCS Web site has also been created. This Web site is 
used by LSI and its partners to post business opportunities, identify 
subcontracting opportunities, as well as promote transparency in the 
process.

    79. Senator Bill Nelson. Mr. Francis, what is the GAO's assessment 
of the FCS program's compliance with law and regulation regarding 
access and opportunities for small businesses?
    Mr. Francis. The contract sets forth the Army's goals for 
subcontracting to small businesses. The Army hopes to award 25.5 
percent of subcontracted dollars to small businesses and states that 
Boeing should endeavor to reach this goal. The contract also allows 
small business subcontractors to request payments more often than the 
standard of every 2 weeks. It also asks that the LSI report 
periodically on its efforts to include small businesses in subcontract 
awards. We have not yet fully analyzed the new FCS contract and its 
execution of these clauses.

    80. Senator Bill Nelson. Mr. Francis, what is the GAO's assessment 
of the FCS program's promotion and execution of free, fair, and open 
competition across objective technologies and subsystems?
    Mr. Francis. The Army's acquisition strategy for the FCS program 
calls for a significant amount of competition at the level of 
individual systems and technologies within the overall system of 
systems. We have yet to further evaluate the program's execution of 
this issue.
                                 ______
                                 
  Questions Submitted by Senators John McCain and Joseph I. Lieberman
                      uh-60m black hawk helicopter
    81. Senator McCain and Senator Lieberman. Secretary Bolton, last 
year Congress authorized multiyear procurement authority for the 
acquisition of Black Hawk helicopters. We note that fiscal year 2006 
budget justification documentation indicated that the Army would 
acquire 351 Black Hawks over the fiscal years 2007-2011 time frame. 
Fiscal year 2007 budget justification documentation indicates that the 
Army intends to acquire only 273 Black Hawks over the fiscal years 
2007-2011 time frame. This concerns us. What is the impact of the 
fiscal year 2007 budget request for Black Hawk helicopters on the 
multiyear contract and unit cost of the Black Hawk helicopter?
    Mr. Bolton. The Army will continue to leverage the multiyear 
procurement authority authorized in the fiscal year 2006 budget. A 
joint multiyear multiservice contract has been approved for the 
procurement of UH-60M, MH-60S, and MH-60R aircraft. The annual 
quantities to be procured under this multiyear contract will result in 
the cost avoidance associated with the multiyear buy since the joint 
program maintains a steady business base for Sikorsky Aircraft Company 
during the fiscal years 2007-2011 time frame. While the quantities for 
UH-60M have been reduced as a result of the addition of the upgrade 
program and Army budget cuts, the multiyear contract and the associated 
cost avoidance are still realized with the reduced UH-60M quantities.

    82. Senator McCain and Senator Lieberman. Secretary Bolton, does 
the Army expect to receive additional Black Hawk helicopters as an 
earmark?
    Mr. Bolton. Congress has consistently provided supplemental funding 
for the procurement of Black Hawk aircraft. The Army does not expect to 
receive additional Black Hawk helicopters as an earmark; but the 
aircraft losses due to the warfight could result in future supplemental 
requests for Black Hawk aircraft.

    83. Senator McCain and Senator Lieberman. General Cody, are Black 
Hawk helicopters on the fiscal year 2007 Chief of Staff of the Army's 
unfunded requirements list? If not, why not?
    General Cody. No. The Army is on track to fill its UH-60 shortages 
by fiscal year 2009.

    84. Senator McCain and Senator Lieberman. Secretary Bolton, how 
many Black Hawk helicopters have been lost in OIF and OEF and has the 
Army funded or requested funding for these battle losses?
    Mr. Bolton. There have been a total of 28 battle-related losses. Of 
these 28 aircraft, 27 aircraft have been replaced through congressional 
marks and fiscal years 2004-2006 supplemental funding.

    85. Senator McCain and Senator Lieberman. Secretary Bolton, the 
Director, Operational Test and Evaluation Fiscal Year 2005 Annual 
Report notes that the UH-60 Black Hawk program has technical risks 
include digital interoperability and reliability. Has the Army 
requested funding in the fiscal year 2007 budget request to address 
these technical risks?
    Mr. Bolton. The Army Aviation digital interoperability requirements 
solidified during 2005 and the UH-60M program is funded to address all 
of these requirements to include Blue Force Tracker and The Army 
Tactical Communications System (ATCS). No additional funding is 
requested. The Blue Force Tracker system is in the low rate initial 
production configuration and will be exercised at the initial 
operational test (IOT) which is scheduled for October 2006. The ATCS, 
which consists of two SINCGARS (ARC-201D) radios and two Multi-Mode 
Multi-Band radios (ARC-23I) will be integrated on all full rate 
production aircraft which will be procured in fiscal year 2007 and 
support the fiscal year 2008 first unit equipped. Both configurations 
will comply with interoperability requirements in the JCIDS approved 
ORD. The Black Hawk is following the same interoperability migration 
plan as other Army aviation platforms and will continue to track to 
emerging requirements.
    With respect to reliability, the data from the most recent scoring 
conference indicates that the UH-60M aircraft is well-established on 
the reliability growth curve and will demonstrate compliance with 
requirements during IOT. No additional funding is requested, the 
program is adequately funded to track and also improve reliability 
further. The component data is continuously evaluated to identify high 
priority cost and maintenance issues. Future reliability improvements 
will be included in production as they are identified and qualified. In 
2005, the Defense Acquisition Executive authorized the Army to build 
all new UH-60M vice remanufacturing older UH-60As which will result in 
even further improvements to system reliability metrics.

    86. Senator McCain and Senator Lieberman. Secretary Bolton, the 
committee understands that the Army is procuring ATCS to provide 
alternative communications because of the delay in the Joint Tactical 
Radio System (JTRS) program. We understand that these radios are analog 
and will not be interoperable with ground forces. Will the radios 
procured under this program be interoperable with the current Army 
digital architecture? If not, what is your plan to make ground and 
aviation assets interoperable?
    Mr. Bolton. In response to the JTRS program delay, the Commanding 
General (BG Sinclair), United States Army Aviation Warfighting Center, 
issued a memorandum subject ``Joint Tactical Radio System Interim 
Radios,'' dated 16 May 2005 which defined the aviation requirements 
until JTRS becomes available. The PEO Aviation implementation of the 
requirement was defined in a 1 December 2005 memorandum, subject: 
``Alternative Communications (Alt Comms) radios to Meet Waveform 
Requirements.'' The ATCS or Alt Comms program was established to meet 
the interim communication requirements due to the delays of the JTRS 
program. ATCS consists of two SINCGARS (ARC-201D) radios and two Multi-
Mode Multi-Band radios (ARC-231) with digital capability. The Improved 
Data Modem (IDM) currently installed on Army aviation helicopters 
provides interfaces that ensure analog to digital interoperability with 
Army ground forces. The ARC-201D is fully interoperable with the Ground 
SINCGARS. The ARC-231 is fully interoperable with the legacy air 
traffic control system, Havequick (ARC-164), and ground satellite 
communications (SATCOM) terminals (LST-5, PST 5C/D, PRC-148, and PRC-
117F). In addition, the ARC-231 meets future air traffic control 
requirements (8.33 KHz channel spacing) and provides land mobile radio 
communications allowing interoperability with the police/fire/rescue 
and homeland security communities.
    Army aviation is interoperable with the current Army digital 
architecture and will maintain future interoperability within the DOD 
by adding JTRS and future digital waveforms as they become available. 
Army aviation is committed to ensuring that interoperability is 
maintained with the current and future force.

    [Whereupon, at 4:27 p.m., the subcommittee adjourned.]


DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR 
                                  2007

                              ----------                              


                        TUESDAY, MARCH 28, 2006

                               U.S. Senate,
                           Subcommittee on Airland,
                                Committee on Armed Services
                                                    Washington, DC.

             AIR FORCE AND NAVY TACTICAL AVIATION PROGRAMS

    The subcommittee met, pursuant to notice, at 2:40 p.m. in 
room SR-232A, Russell Senate Office Building, Senator John 
McCain (chairman of the subcommittee) presiding.
    Committee members present: Senators McCain, Inhofe, and 
Chambliss.
    Majority staff members present: Ambrose R. Hock, 
professional staff member; Gregory T. Kiley, professional staff 
member; and Stanley R. O'Connor, Jr., professional staff 
member.
    Minority staff members present: Richard D. DeBobes, 
Democratic staff director; and Creighton Greene, professional 
staff member.
    Staff assistants present: Micah H. Harris and Jessica L. 
Kingston.
    Committee members' assistants present: Christopher J. Paul, 
assistant to Senator McCain; John A. Bonsell, assistant to 
Senator Inhofe; Clyde A. Taylor IV, assistant to Senator 
Chambliss; Frederick M. Downey, assistant to Senator Lieberman; 
and William K. Sutey, assistant to Senator Bill Nelson.

       OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

    Senator McCain. The Airland Subcommittee meets today. I 
want to apologize to the witnesses for being late. There are a 
lot of things that are going on in the Senate these days.
    The subcommittee meets today to receive testimony on Air 
Force and Navy tactical aviation programs. The hearing will be 
conducted in two panels. The first will testify on the Air 
Force proposal to incrementally fund the multiyear procurement 
of the F-22 and enter into a multiyear procurement contract for 
60 aircraft beginning in fiscal year 2007. The second panel 
will testify on the Joint Strike Fighter's (JSF) progress 
through the systems development and demonstration phase of the 
program with regard to cost, schedule, and performance.
    The subcommittee is also interested in hearing testimony on 
the proposed termination of the F136 alternate engine program. 
Most of our witnesses will describe how, historically, 
competition results in lower acquisition costs for engines, 
better responsiveness from the contractors, and also better 
readiness for the warfighter. The subcommittee is interested in 
hearing about that issue today.
    I will make the remainder of my statement part of the 
record.
    [The prepared statement of Senator McCain follows:]
               Prepared Statement by Senator John McCain
    The Airland Subcommittee meets today to receive testimony on Air 
Force and Navy tactical aviation programs. The hearing will be 
conducted in two panels. The first panel will testify on the Air Force 
proposal to incrementally fund the multiyear procurement of the F-22 
and enter into a multiyear procurement contract for 60 aircraft 
beginning in fiscal year 2007.
    The second panel will testify on the Joint Strike Fighter's (JSF) 
progress through the systems development and demonstration phase of the 
program with regard to cost, schedule, and performance. The 
subcommittee is also interested in hearing testimony on the proposed 
termination of the F136 Alternate Engine Program. Most of our witnesses 
will describe how historically competition resulted in lower 
acquisition costs for engines, and better responsiveness from the 
contractors, but most importantly, better readiness for the warfighter. 
The subcommittee is interested in hearing why such benefits are not 
achievable today for the JSF competitive engine environment.
    The F-22 represents the Air Force's top priority for providing the 
military with air dominance and cruise missile defense for the next 20-
plus years. However, all of this capability comes with a cost, and the 
F-22 must compete with other weapons systems within the defense budget. 
Looking at the Air Force's desire to procure F-22s, JSFs, C-130Js, 
Joint Cargo Aircraft, a replacement tanker for the KC-135, just to name 
a few of the major Air Force procurement programs, one begins to wonder 
how we're going to pay for it all. Now, it appears, the Department has 
come to the same realization by proposing an incremental funding scheme 
for its proposed multiyear procurement of the F-22. With that proposal, 
the Air Force seeks to restructure the procurement profile to 20 
aircraft per year for a 3-year multiyear procurement of 60 aircraft.
    Under current law, the Air Force can't incrementally fund a 
multiyear procurement contract. So, in order for the Air Force to do so 
here, the Air Force needs legislative relief. But, the last time the 
Air Force came to Congress with a proposal to incrementally fund the 
multiyear procurement of aircraft (regarding the C-17 cargo aircraft), 
that proposal was rejected. It is not clear to me why the same result 
should not be obtained here. In this case, the Air Force is initially 
requesting incremental funding to pay for only components of the 
aircraft and, at the same time, excludes funding for cancellation 
liability. Why would Congress agree to this? Under this approach, 
Congress would have to authorize and appropriate more money--more money 
than it originally authorized--to either get completed, fully 
functional aircraft or cancel them. In my mind, the Air Force needs to 
state a case that justifies why Congress would want to hamstring itself 
on the F-22 program in that way. In my view, where the current 
acquisition environment counsels visibility, transparency, and 
simplicity, that justification should be just about overwhelming.
    Although I appreciate that Congress has approved incremental 
funding for other defense programs, such as certain Navy ships, we have 
never authorized incremental funding for aircraft. For instance, 
Congress authorized incremental funding for the LHD-8 amphibious ship 
and CVN-78 nuclear power aircraft carrier because it takes 7 and 9 
years respectively to build these multibillion ships. Aircraft, on the 
other hand--even ones as costly as the F-22--are less expensive than 
Navy ships and they are easier to budget for in full. Budgetary 
constraints can be accommodated by purchasing fewer aircraft in a given 
year rather than by funding only a part of the cost of the aircraft.
    I am also concerned about whether the Air Force's proposal to 
acquire F-22s under a multiyear procurement contract complies with the 
requirements of the Federal multiyear procurement statute: Title 10 
United States Code section 2306b. Among other things, this statute 
provides that: ``The Secretary of Defense may obligate funds for 
procurement of an end item under a multiyear contract for the purchase 
of property only for procurement of a complete and usable end item.''
    I believe the intent of Congress is very clear on this subject: 
full funding within each fiscal year of the multiyear contract.
    Setting the incremental funding scheme aside, the statute also 
requires the Air Force to provide Congress with a Business Case 
Analysis that shows that entering into a multiyear procurement contract 
results in ``substantial savings'' as compared to procurement through a 
series of annual contracts. In this case, the Business Case Analysis 
has not yet been completed. Accordingly, it is premature for Congress 
to consider this proposal until that requirement has been completed and 
fully ventilated in the authorizing committees.
    Among the concerns that will be conveyed today is the fact that the 
Air Force F-22 funding plan does not request appropriations sufficient 
to cover the potential cancellation liability--thus not offering 
sufficient protections for the taxpayer. This sounds all too familiar, 
and there is a record of this similar funding scheme that was proposed 
in the Boeing 767 tanker scandal.
    In his written testimony, Air Force General Hoffman advocates a 
``back to basics approach in how we do acquisitions.'' While I 
appreciate the sentiment, in my view, I see nothing ``basic'' in the 
Air Force's proposal to acquire F-22 aircraft under a multiyear 
procurement contract. Like other acquisition methodologies that have 
proved so problematic in the past, the Air Force's proposal is opaque 
and Byzantine. To date, the case as to why we should revert to an 
acquisition methodology that actually limits visibility and 
accountability has not been persuasive.
    I expect that some of today's witnesses will convey concern that 
incrementally funding a multiyear procurement contract and underfunding 
cancellation liability on a multibillion dollar procurement program are 
moves in the wrong direction. I look forward to hearing the Air Force's 
response to those concerns today.
    Deferring recognition of the full cost of the F-22 would understate 
the nature of the government's obligations; potentially distorting 
budgetary choices by making the program appear less expensive than it 
is--and certainlly is not a return to the back to basics approach which 
the taxpayer should be guarenteed.
    I want to welcome our witnesses in the first panel . . . Lieutenant 
General Hoffman, Military Deputy, Office of the Assistant Secretary of 
the Air Force for Acquisition; Michael Sullivan, Director, Acquisition 
and Sourcing Management at the Government Accountability Office; Donald 
Marron, Acting Director at the Congressional Budget Office; and 
Christopher Bolkcom, Senior Specialist in National Defense at the 
Congressional Research Service. We greatly appreciate all you giving us 
your time for this very important hearing.
    I want to welcome our witnesses in the second panel . . . Rear 
Admiral Kilcline, Navy Director, Air Warfare; Rear Admiral Enewold, 
Program Executive Officer, Joint Strike Fighter Program; Michael 
Sullivan, Director, Acquisition and Sourcing Management at the 
Government Accountability Office; and Christopher Bolkcom, Senior 
Specialist in National Defense at the Congressional Research Service. 
Again, we greatly appreciate all you giving us your time for this 
hearing.

    Senator Chambliss. Mr. Chairman, I have no opening 
statement. I look forward to hearing our witnesses.
    Senator McCain. Good.
    Our witnesses today, our first panel, are Michael Sullivan, 
who is the Director of the Acquisitions and Sourcing Management 
Team at the United States Government Accountability Office 
(GAO); Donald Marron, who's the acting Director of the 
Congressional Budget Office (CBO), Christopher Bolkcom, who is 
a Senior Specialist in National Defense in the Congressional 
Research Service (CRS); and Lieutenant General Donald Hoffman, 
U.S. Air Force, who is the Military Deputy of the Office of the 
Assistant Secretary of the Air Force for Acquisition.
    Welcome. We'll begin with you, Mr. Sullivan.

  STATEMENT OF MICHAEL J. SULLIVAN, DIRECTOR, ACQUISITION AND 
      SOURCING MANAGEMENT TEAM, UNITED STATES GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. Sullivan. Thank you, Mr. Chairman, and members of the 
subcommittee.
    I'm privileged to be here today to discuss the status of 
two of the Department's major tactical aircraft programs, the 
F-22A and the JSF.
    Senator McCain. If you could bring that microphone a little 
closer, so that we can hear you.
    Mr. Sullivan. Okay?
    Senator McCain. I think so. Lift it up. Lift it up just a 
little bit. There you go.
    Mr. Sullivan. Okay.
    Senator McCain. Thank you.
    Mr. Sullivan. Mr. Chairman, these programs represent an 
investment estimated at about $320 billion today; and, in 
fiscal year 2007 alone, the budget request for both will be 
about $8 billion.
    I'll summarize my remarks here and ask that the full 
statement be submitted for the record.
    Any discussion of the significance of the Department's 
investment in these two weapons systems demands that it be 
placed in the larger national context. Current fiscal 
imbalances and competing national needs will continue to 
constrain discretionary spending for years to come, and the 
Department will not be immune to those constraints.
    That said, over the past 5 years the Department of Defense 
(DOD) has doubled planned investments in new weapons systems 
from about $700 billion in 2001 to nearly $1.4 trillion in 
2006. At the same time, development cost on a typical major 
weapons system development continues to be about 30 to 40 
percent. Given the larger context that I describe, this cannot 
continue.
    My testimony today focuses on the current tactical aircraft 
capitalization efforts, the current status of these two 
programs' business cases, and potential options for 
recapitalizing the force moving forward.
    There are still many unanswered questions about whether the 
Department can achieve its goals for modernizing its aging 
tactical air forces. In recent testimony, the Secretary of 
Defense stated that continued U.S. air dominance and 
flexibility depends on a recapitalized force. However, the 2006 
Quadrennial Defense Review (QDR) report did not present a 
detailed investment strategy that measures needs, gaps, and 
affordability for that force.
    Right now, the Department plans to replace legacy aircraft, 
that are in the field today, with about 1,300 fewer new 
aircraft, later than it had originally planned, resulting in 
increasing maintenance costs for those legacy aircraft.
    Regarding the F-22A, the program does not currently have 
what we would call an executable business case, which we define 
as firm requirements, sufficient quantities, mature 
technologies, realistic estimates, and sufficient funding.
    Since development began, in 1986, requirements have been 
added, cost has increased, and quantities have been reduced. 
The current stated need by the Air Force is for 381 aircraft to 
satisfy air-to-air missions, and recently added air-to-ground 
attack and intelligence capabilities. However, due to past cost 
overruns and current budget constraints, the Department can now 
only afford 183 F-22As. This leaves a 198-aircraft gap.
    In addition, the Department's latest proposal for multiyear 
procurement of 60 aircraft over 3 years, beginning in 2008, 
requires almost $2.5 billion in fiscal years 2006 and 2007 to 
frontload that procurement.
    Regarding the JSF, the program's business case still 
includes significant cost and schedule risk that continues to 
jeopardize timely recapitalization efforts. The program plans 
to begin procuring aircraft in 2007, with less than 1 percent 
of the flight test program completed. By the time the fully 
integrated aircraft flies for the very first time, in 2011, the 
program will already have procured 190 aircraft for about $26 
billion. By the time flight test is complete, the program will 
have procured over 420 aircraft for almost $50 billion. Because 
of the risk associated with this strategy, the program plans to 
procure those aircraft using a cost-type contracting 
arrangement.
    Also, because of affordability concerns overall in the 
Department, the Department is proposing termination of a 
competitive engine development program, to save about $1.8 
billion over the next several years.
    Despite these substantial setbacks, we believe the 
Department can reduce risk in its current acquisitions and 
recapitalize the aging force sooner if it changes the way it 
executes its business cases. Before procuring more F-22A 
aircraft, the Air Force and the Secretary of Defense must agree 
on a business case for an appropriate quantity of F-22As that 
both satisfies current needs and is affordable, given today's 
budget realities.
    The JSF program should consider adjusting its business case 
to reduce risk by allowing more time for flight testing prior 
to starting procurement. More testing prior to buying aircraft 
may ultimately allow sooner delivery of greater quantities to 
replace aging aircraft. Requirements for undemonstrated 
technology should be deferred and managed separately.
    Finally, at a broader level, the Department needs more 
discipline and controls in its acquisition process to ensure 
realistic business cases that can be executed more efficiently. 
This may require a new look at policy, and perhaps statute.
    In conclusion, despite the Department's repeated 
declaration that recapitalizing the aging tactical air forces 
is a top priority, it continues to follow an acquisition 
strategy that results in higher costs, lower quantities, and 
late deliveries. This strategy must change, particularly given 
today's fiscal and national security realities.
    Mr. Chairman, that concludes my remarks. I'll be happy to 
try to answer any questions you or the other members may have.
    [The prepared statement of Mr. Sullivan follows:]
               Prepared Statement by Michael J. Sullivan
    Mr. Chairman and members of the subcommittee: I am pleased to be 
here today to participate in the subcommittee's hearing on the 
Department of Defense's (DOD) tactical air forces, including two of its 
major tactical aircraft fighter programs--the F-22A and the F-35, also 
known as the Joint Strike Fighter (JSF).\1\ Both programs are intended 
to replace aging tactical fighter aircraft with highly advanced, 
stealthy aircraft. These two programs together represent a significant 
investment--currently estimated at almost $320 billion--for DOD. To 
date nearly $75 billion has been appropriated for these programs, and 
based on current plans, they represent a potential future investment of 
about $245 billion over the next 20 years. In fiscal year 2007 alone, 
the budget request under consideration for these programs represents 
over $8 billion. Given the large potential investment that the F-22A 
and JSF programs represent, decisions based on fact and knowledge about 
needs and resources are key to ensure that sound program investments 
are made.
---------------------------------------------------------------------------
    \1\ The third major program, the F/A-18E/F, currently in 
production, is not a subject of this testimony.
---------------------------------------------------------------------------
    Any discussion of the significance of DOD's investment in these two 
weapon systems demands that they be placed in the larger context. 
Fiscal imbalances and competing national needs will continue to 
constrain discretionary spending for years to come. Over the past 5 
years, the department has doubled its planned investments in new weapon 
systems from about $700 billion in 2001 to nearly $1.4 trillion in 
2006. At the same time, research and development cost growth on new 
weapons continues to be about 30 to 40 percent. This is how one must 
view major new investments, such as the F-22A and JSF, because more 
money may not be an option for the future. Rather, the key to getting 
better outcomes is to make individual programs more executable.
    We have reported and testified in the past on the disappointing 
outcomes of DOD's acquisitions of tactical aircraft and other major 
weapon systems (see GAO Related Products). DOD's budgeting plans and 
the reality of the costs of its systems have been vastly different. 
Performance--if defined as the capability that actually reaches the 
warfighter--tends to fall short of expectations, as cost increases 
often result in late deliveries of smaller quantities of weapon 
systems. DOD has lost opportunities and buying power in the process. 
Last year, we testified that weaknesses in the F-22A and JSF programs 
raised questions as to whether DOD's overarching tactical aircraft 
recapitalization goals were achievable.\2\
---------------------------------------------------------------------------
    \2\ GAO, Tactical Aircraft: F/A-22 and JSF Acquisition Plans and 
Implications for Tactical Aircraft Modernization, GAO-05-519T 
(Washington, DC: Apr. 6, 2005).
---------------------------------------------------------------------------
    My testimony today focuses on: (1) the extent to which the current 
F-22A and JSF business cases are executable, (2) the current status of 
DOD's tactical aircraft recapitalization efforts, and (3) potential 
options for recapitalizing the air forces as DOD moves forward with its 
tactical aircraft recapitalization efforts. We performed our work in 
accordance with generally accepted government auditing standards.
                                summary
    DOD currently does not have an executable business case for buying 
the F-22A. Over the 19 years that the aircraft has been in development, 
the world has changed and the capabilities the Air Force once needed 
and planned for the F-22A no longer satisfy today's needs. The Air 
Force's current stated need is for 381 F-22As to satisfy original air-
to-air missions and recently added requirements for more robust air-to-
ground attack and intelligence-gathering capabilities. However, because 
of past cost overruns and current budget constraints, DOD can now 
afford only 183 F-22As. This leaves a 198-aircraft gap between the Air 
Force's stated need and what the acquisition process is able to 
deliver. DOD's business case for the JSF program still includes 
significant cost and schedule risk that continues to jeopardize timely 
recapitalization of the tactical force. We recently reported that DOD 
plans to begin procuring large quantities of aircraft in 2007 with less 
than 1 percent of the flight test program completed.\3\ By 2010, it 
expects to have procured 126 aircraft with only 35 percent of the 
flight test program completed. Concurrently testing and procuring the 
aircraft adds to the program's cost and schedule risks, further 
weakening DOD's buying power and jeopardizing its ability to 
recapitalize its aging tactical air force in a timely and efficient 
manner.
---------------------------------------------------------------------------
    \3\ GAO, Joint Strike Fighter: DOD Plans to Enter Production before 
Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington DC: 
March 15, 2006).
---------------------------------------------------------------------------
    As there were last year at this time, there are many unanswered 
questions about whether DOD can achieve its overarching goals for 
modernizing its aging tactical air forces. In recent testimony on the 
results of the department's 2006 Quadrennial Defense Review (QDR), the 
Secretary of Defense stated that continued U.S. air dominance depends 
on a recapitalized fleet. However, DOD's 2006 QDR report, issued last 
month, did not present a detailed investment strategy for tactical 
aircraft systems that addressed needs, capability gaps, alternatives, 
and affordability. Lacking a strategy that identifies capability gaps 
and affordable alternatives, DOD cannot reasonably ensure that new 
tactical air capabilities will be delivered to the warfighter within 
cost and schedule targets. Right now, DOD plans to replace legacy 
aircraft with about 1,400 fewer new major tactical systems than it had 
originally planned--almost a one-third reduction in quantities. 
Additionally, delivery of these new systems has lagged far behind 
original plans, increasing operating costs to keep legacy aircraft 
relevant and in the inventory longer than expected and delaying 
delivery of needed capabilities to the warfighter.
    Despite these substantial setbacks, we believe DOD can reduce cost 
risk on its current acquisitions and deliver needed capabilities more 
quickly. This could allow it to recapitalize the aging tactical air 
force sooner and reduce costs to maintain the current inventory. To do 
so, however, DOD must rethink the business cases for the F-22A and JSF 
programs. Before procuring more F-22A aircraft, the Air Force and the 
Office of the Secretary of Defense should agree on a business case for 
the appropriate quantity of F-22A aircraft that: (1) satisfies current 
Air Force needs and (2) is affordable given today's budget realities. 
The JSF acquisition program can reduce cost and schedule risks by 
adopting a new knowledge-based business case. The JSF program should 
delay production and investments in production capability until the 
aircraft design qualities and integrated mission capabilities of the 
fully configured and integrated JSF aircraft variants have been proven 
to work in flight testing. DOD should also develop a knowledge-based 
business case that matches requirements with proven technologies, 
design knowledge, and available funding. Capabilities that demand 
technological advances which are not yet demonstrated should be part of 
future increments that are funded and managed separately once 
demonstrated. With such an approach DOD could enter low-rate production 
sooner and deliver a useful product in sufficient quantities to start 
replacing DOD's aging tactical aircraft force. The F-16 acquisition 
program provides strong precedent for this type of acquisition 
strategy. It began delivering aircraft in 4 years and within predicted 
costs. GAO recommended these actions in a recent JSF report and DOD 
agreed that these were appropriate things to do but it believed its 
current acquisition strategy will allow it to achieve the JSF program 
objectives.
    Finally, at a broader level, DOD needs to apply more discipline and 
controls to establish realistic business cases for acquisition programs 
and then execute them more efficiently. This may require a new look at 
policies and perhaps statute.
                               background
    Over the past 20 years, DOD has been engaged in an effort to 
modernize its aging tactical aircraft force. The F-22A and JSF, along 
with the F/A-18E/F,\4\ are the central elements of DOD's overall 
recapitalization strategy for its tactical air forces. The F-22A was 
developed to replace the F-15 air superiority aircraft. The continued 
need for the F-22A, the quantities required, and modification costs to 
perform its mission have been the subject of a continuing debate within 
DOD and Congress. Supporters cite its advanced features--stealth, 
supercruise speed, maneuverability, and integrated avionics--as 
integral to the Air Force's Global Strike initiative and for 
maintaining air superiority over potential future adversaries.\5\ 
Critics argue that the Soviet threat it was originally designed to 
counter no longer exists and that its remaining budget dollars could be 
better invested in enhancing current air assets and acquiring new and 
more transformational capabilities that will allow DOD to meet evolving 
threats. Its fiscal year 2007 request includes $800 million for 
continuing development and modifications for aircraft enhancements such 
as equipping the F-22A with an improved ground attack capability and 
improving aircraft reliability. The request also includes about $2.0 
billion for advance procurement of parts and funding of subassembly 
activities for the initial 20 aircraft of a 60-aircraft multiyear 
procurement.
---------------------------------------------------------------------------
    \4\ The F/A-18E/F, which began development in 1992, evolved from 
the F/A-18 aircraft program and has been in production since 1997. 
Currently, the program is producing aircraft under its second multiyear 
contract. Because of the maturity of the F/A-18E/F program, we did not 
review it for this engagement.
    \5\ Global Strike is one of six complementary concepts of 
operations laying out the Air Force's ability to rapidly plan and 
deliver limited-duration and extended attacks against targets.
---------------------------------------------------------------------------
    JSF is a replacement for a substantial number of aging fighter and 
attack aircraft currently in the DOD inventory. For the Air Force, it 
is intended to replace the F-16 and A-10 while complementing the F-22A. 
For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-
18A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F. 
DOD estimates that as currently planned, it will cost $257 billion to 
develop and procure about 2,443 aircraft and related support equipment, 
with total costs to maintain and operate JSF aircraft adding $347 
billion over the program's life cycle. After 9 years in development, 
the program plans to deliver its first flight test aircraft later this 
year. The fiscal year 2007 budget request includes $4 billion for 
continuing development and $1.4 billion for the purchase of the first 5 
procurement aircraft, initial spares, and advance procurement for 16 
more aircraft to be purchased in 2008.
    We have frequently reported on the importance of using a sound, 
executable business case before committing resources to a new product 
development. In its simplest form, such a business case is evidence 
that (1) the warfighter's needs are valid and can best be met with the 
chosen concept and quantities, and (2) the chosen concept can be 
developed and produced within existing resources--that is, proven 
technologies, design knowledge, adequate funding, and adequate time to 
deliver the needed product. At the heart of a good business case is a 
knowledge-based strategy to product development that demonstrates high 
levels of knowledge before significant commitments of time and money 
are made.
  f-22a and jsf acquisition business cases still include considerable 
                                 risks
    The future of DOD's tactical aircraft recapitalization depends 
largely on the outcomes of the F-22A and JSF programs--which represent 
about $245 billion in investments to be made in the future. Yet 
achieving expected outcomes for both these programs continues to be 
fraught with risk. We have reported that the F-22A's original business 
case is unexecutable and does not reflect changing conditions over 
time. Currently, there is a significant mismatch between the Air 
Force's stated need for F-22A aircraft and the resources the Office of 
the Secretary of Defense (OSD) is willing to commit. The business case 
for the JSF program, which has 90 percent of its investments still in 
the future, significantly overlaps production with development and 
system testing--a strategy that often results in cost and schedule 
increases. Both programs are at critical junctures that require DOD to 
make important business decisions.
Matching F-22A Requirements and Resources Is Crucial to Future 
        Recapitalization Investment Decisions
    According to the Air Force, a minimum of 381 modernized F-22A 
aircraft are needed to satisfy today's national strategic requirements 
\6\--a buy that is roughly half the 750 aircraft originally planned, 
but more than double the 183 aircraft OSD states available funding can 
support. Since the Air Force began developing the F-22A in 1986, the 
business case for the program has changed radically--threats have 
changed, requirements have been added, costs have increased, funds have 
been added, planned quantities have been reduced, and deliveries of the 
aircraft to the warfighter have been delayed. There is a 198-aircraft 
capability gap today. Decisions in the last 2 years have worsened the 
mismatch between Air Force requirements and available resources, 
further weakening the F-22A program's business case. Without a new 
business case, an agreement on an appropriate number of F-22As for our 
national defense, it is uncertain as to whether additional investments 
in the program are advisable.
---------------------------------------------------------------------------
    \6\ The Air Force states a need for one squadron of 24 F-22A 
aircraft for each of the 10 Air Expeditionary Forces, the planned 
organization of the Air Force aircraft and personnel for operations and 
deployments. This equates to 240 aircraft. The remaining 141 aircraft 
are needed for training, and attrition, and to allow for periodic depot 
maintenance required for each aircraft. The Air Force states that if 
all 381 aircraft are acquired, the Air Force could retire about 566 
legacy aircraft; if not, several billions of modification dollars will 
be required to extend their structural life to keep them operational.
---------------------------------------------------------------------------
    The original business case for the F-22A program was to develop air 
superiority fighters to counter a projected threat of significant 
quantities of advanced Soviet fighters. During the 19-year F-22A 
development program, that threat did not materialize to the degree 
expected. Today, the requirements for the F-22A have evolved to include 
what the Air Force has defined as a more robust ground attack 
capability to destroy expected air defense systems and other ground 
targets and an intelligence-gathering capability. However, the 
currently configured F-22A is not equipped to carry out these roles 
without further investments in its development. The F-22As 
modernization program is currently being planned for three basic 
blocks, or spirals, of increasing capability to be developed and 
delivered over time. Current Air Force estimates of modernization 
costs, from 2007 through 2016, are about $4.3 billion. Additional 
modernization is expected, but the content and costs have not been 
determined or included in the budget.
    OSD has restructured the acquisition program twice in the last 2 
years to free up funds for other priorities. In December 2004, DOD 
reduced the program to 179 F-22As to save about $10.5 billion. This 
decision also terminated procurement in 2008. In December 2005, DOD 
changed the F-22A program again, adding $1 billion to extend production 
for 2 years to ensure a next-generation fighter aircraft production 
line would remain in operation in case JSF experienced delays or 
problems. It also added 4 aircraft for a total planned procurement of 
183 F-22As. As part of the 2005 change, aircraft previously scheduled 
in 2007 will not be fully funded until 2008 or later.
    OSD and the Air Force plan to buy the remaining 60 F-22As in a 
multiyear procurement that would buy 20 aircraft a year for 3 years--
2008 through 2010. The Air Force plans to fund these aircraft in four 
increments--an economic order quantity to buy things cheaper; advanced 
procurement for titanium and other materials and parts to protect the 
schedule; subassembly; and final assembly. The Air Force plans to 
provide Congress a justification for multiyear procurement in May 2006 
and the fiscal year 2007 President's budget includes funds for 
multiyear procurement. The following table shows the Air Force's plan 
for funding the multiyear procurement. Air Force officials have told us 
that an additional $400 million in funds are needed to complete the 
multiyear procurement and that the accelerated schedule to obtain 
approval and start the effort adds risk to the program, creating more 
weaknesses in the current F-22A business case.

                              TABLE 1: F-22A PROPOSED MULTIYEAR PROCUREMENT FUNDING
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  Fiscal Year
                                         ------------------------------------------------------------    Total
                                            2006      2007      2008      2009      2010      2011
----------------------------------------------------------------------------------------------------------------
Lot 7 Buy
  Economic Order Quantity...............  ........     200.0  ........  ........  ........  ........       200.0
  Advance Procurement...................     569.2  ........  ........  ........  ........  ........       569.2
  Subassembly...........................  ........   1,503.9  ........  ........  ........  ........     1,503.9
  Final Assembly........................  ........  ........   1,362.4  ........  ........  ........     1,362.4
  Other Cost............................  ........      68.1  ........  ........  ........  ........        68.1
                                         -----------------------------------------------------------------------
    Subtotal............................    $569.2  $1,772.0  $1,362.4  ........  ........  ........    $3,703.6
----------------------------------------------------------------------------------------------------------------
Lot 8 Buy
  Advance Procurement...................  ........     277.4  ........  ........  ........  ........       277.4
  Subassembly...........................  ........  ........   1,433.3  ........  ........  ........     1,433.3
  Final Assembly........................  ........  ........  ........   1,342.8  ........  ........     1,342.8
  Other Cost............................  ........  ........      47.4  ........  ........  ........        47.4
                                         -----------------------------------------------------------------------
    Subtotal............................  ........    $277.4  $1,480.7  $1,342.8  ........  ........    $3,100.9
----------------------------------------------------------------------------------------------------------------
Lot 9 Buy
  Advance Procurement...................  ........  ........     366.6  ........  ........  ........       366.6
  Subassembly...........................  ........  ........  ........   1,515.7  ........  ........     1,515.7
  Final Assembly........................  ........  ........  ........  ........   1,694.5  ........     1,694.5
  Other Cost............................  ........  ........  ........      48.3      16.2      12.9        77.4
                                         -----------------------------------------------------------------------
    Subtotal............................  ........  ........    $366.6  $1,564.0  $1,710.7     $12.9    $3,654.2
----------------------------------------------------------------------------------------------------------------
      Total.............................    $569.2  $2,049.4  $3,209.7  $2,906.8  $1,710.7     $12.9   $10,458.7
----------------------------------------------------------------------------------------------------------------
Source: DOD data.
Note: Other cost includes funding for modifications and munitions.

    A 198-aircraft gap between what the Air Force needs and what is 
affordable raises questions about what additional capabilities need to 
be included in the F-22A program. In March 2005, we recommended that 
the Air Force develop a new business case that justified additional 
investments in modernizing the aircraft to include greater ground 
attack and intelligence-gathering capabilities before moving forward. 
DOD responded to our report that business case decisions were handled 
annually in the budget decisions and that the QDR would analyze 
requirements for the F-22A and make program decisions. However, it is 
not clear from the QDR report, issued last month, what analyses were 
conducted to determine the gaps in capability, the alternatives 
considered, the quantities needed, or the costs and benefits of the F-
22A program. Therefore, questions about the F-22A program remain:

         What capability gaps exist today and will exist in the 
        future (air superiority, ground attack, electronic attack, 
        intelligence gathering)?
         What alternatives besides the F-22A can meet these 
        needs?
         What are the costs and benefits of each alternative?
         How many F-22As are needed?
         What capabilities should be included?

    Until these questions are answered and differences are reconciled, 
further investments in the program--for either the procurement of new 
aircraft or modernization--cannot be justified.
JSF Business Case Still Contains Cost and Schedule Risks
    The JSF program appears to be on the same path as the F-22A 
program. After being in development for 9 years, the JSF program has 
not produced the first test aircraft, has experienced substantial cost 
growth, has reduced the number of planned aircraft, and has delayed 
delivery of the aircraft to the warfighter. Moreover, the JSF program 
remains committed to a business case that invests heavily in production 
before testing has demonstrated acceptable performance of the aircraft. 
At the same time, the JSF program has contracted to develop and deliver 
the aircraft's full capability in a single-step, 12-year development 
program--a daunting task given the need to incorporate the 
technological advances that, according to DOD, represent a quantum leap 
in capability. The business case is a clear departure from the DOD 
policy preference that calls for adopting an evolutionary approach to 
acquisitions. Furthermore, the length and cost of the remaining 
development are exceedingly difficult to accurately estimate, thereby 
increasing DOD's risks in contracting for production. With this risky 
approach, it is likely that the program will continue to experience 
significant cost and schedule overruns.
    The JSF program expects to begin low-rate initial procurement in 
2007 with less than 1 percent of the flight test program completed and 
no production representative prototypes built for the three JSF 
variants.\7\ Technologies and features critical to JSF's operational 
success, such as a low observable and highly common airframe, advanced 
mission systems, and maintenance prognostics systems, will not have 
been demonstrated in a flight test environment when production begins. 
Other key demonstrations that will have not been either started or only 
in the initial stages before production begins include:
---------------------------------------------------------------------------
    \7\ The JSF aircraft design includes three variants: a conventional 
takeoff and landing variant; an aircraft carrier-suitable variant; and 
a short takeoff and vertical landing.

         testing with a fully integrated aircraft--mission 
        systems and full software,
         structural and fatigue testing of the airframe, and
         shipboard testing of Navy and Marine Corps aircraft.

    When the first fully integrated and capable development JSF is 
expected to fly in 2011, DOD will already have committed to buy 190 
aircraft at an estimated cost of $26 billion. According to JSF program 
plans, DOD's low-rate initial production quantities will increase from 
5 aircraft a year in 2007 to 133 a year in 2013, when development and 
initial operational testing are completed.\8\ By then, DOD will have 
procured more than double that amount--424 aircraft at an estimated 
cost of about $49 billion, and spending for monthly production 
activities is expected to be about $1 billion, an increase from $100 
million a month when production is scheduled to begin in 2007. Figure 1 
shows the significant overlap in development and testing and the major 
investments in production.
---------------------------------------------------------------------------
    \8\ These figures do not include the potential for orders for 
international partners during low-rate initial production. Preliminary 
data indicate that these orders could significantly increase this rate.
---------------------------------------------------------------------------
      
    
    
      
    The overlap in testing and production is the result of a business 
case and acquisition strategy that has proven to be risky in past 
programs like F-22A, Comanche, and B-2A, which far exceeded the cost 
and delivery goals set at the start of their development programs. JSF 
has already increased its cost estimate and delayed deliveries despite 
a lengthy replanning effort that added over $7 billion and 18 months to 
the development program. JSF officials have stated that the 
restructured program has little or no flexibility for future changes or 
unanticipated risks. The program has planned about 8 years to complete 
significant remaining activities of the system development and 
demonstration phase, including:

         fully maturing seven of the eight critical 
        technologies;
         completing the designs and releasing the engineering 
        drawings for all three variants;
         manufacturing and delivering 15 flight test aircraft 
        and 7 ground test articles;
         developing 19 million lines of software code; and
         completing a 7-year, 12,000-hour flight test program.

    The JSF program's latest planned funding profile for development 
and procurement, produced in December 2004 by the JSF program office, 
assumes annual funding rates to hover close to $13 billion between 2012 
and 2022, peaking at $13.8 billion in 2013. If the program fails to 
achieve its current estimated costs, funding challenges could be even 
greater than that. The Office of Secretary of Defense Cost Analysis 
Improvement Group was to update its formal independent cost estimate in 
the spring of 2005. The group now does not expect to formally complete 
its estimate until spring 2006, but its preliminary estimate was 
substantially higher than the program office's. A modest cost increase 
would have dramatic impacts on funding. For example, a 10 percent 
increase in production costs would amount to over $21 billion (see fig. 
2).
      
    
    
      
    DOD has recently made decisions to reduce near-term funding 
requirements that could cause future JSF costs to increase. It had 
begun to invest in the program to develop an alternative engine for the 
aircraft, but now plans to cancel further investments in order to make 
the remaining funds available for other priorities. According to DOD, 
it believes that there is no cost benefit or savings with an engine 
competition for the JSF and there is low operational risk with going 
solely with a single engine supplier. DOD has already invested $1.2 
billion in funding for this development effort through fiscal year 
2006. By canceling the program, it expects to save $1.8 billion through 
fiscal year 2011. Developing alternative engines is a practice that has 
been used in past fighter aircraft development programs like the F-16 
and F-15 programs. An alternative engine program may help maintain the 
industrial base for fighter engine technology, result in price 
competition in the future for engine acquisition and spare parts, 
instill incentives to develop a more reliable engine, and ensure an 
operational alternative should the current engine develop a problem 
that would ground the entire fleet of JSF aircraft. As result, the JSF 
decision should be supported by a sound business case analysis. To 
date, we have not seen such an analysis.
    Finally, the uncertainties inherent in concurrently developing, 
testing, and producing the JSF aircraft prevent the pricing of initial 
production orders on a fixed price basis. Consequently, the program 
office plans to place initial procurement orders on cost reimbursement 
contracts. These contracts will provide for payment of allowable 
incurred costs, to the extent prescribed in the contract. With cost 
reimbursement contracts a greater cost risk is placed on the buyer--in 
this case, DOD. For the JSF, procurement should start when risk is low 
enough to enter into a fixed price agreement with the contractor based 
on demonstrations of the fully configured aircraft and manufacturing 
processes.
    dod's tactical aircraft recapitalization goals are not being met
    DOD has not been able to achieve its recapitalization goals for its 
tactical aircraft forces. Originally, DOD had planned to buy a total of 
4,500 tactical aircraft to replace the aging legacy force. Today, 
because of delays in the acquisition programs, increased development 
and procurement costs, and affordability pressures, it plans to buy 
almost one-third fewer tactical aircraft (see fig. 3). The delivery of 
these new aircraft has also been delayed past original plans. DOD has 
spent nearly $75 billion on the F-22A and JSF programs since they 
began, but this accounts for only 122 new operational aircraft.
      
    
    
      
    Because DOD's recapitalization efforts have not materialized as 
planned, many aircraft acquired in the 1980s will have to remain in the 
inventory longer than originally expected, incurring higher investment 
costs to keep them operational. According to DOD officials, these aging 
aircraft are approaching the end of their service lives and are costly 
to maintain at a high readiness level. While Air Force officials assert 
that aircraft readiness rates are steady, they agree that the costs to 
operate and maintain its aircraft over the last decade have risen 
substantially. Regardless, the military utility of the aging aircraft 
is decreasing.
    The funds used to operate, support, and upgrade the current 
inventory of legacy aircraft represent opportunity costs that could be 
used to develop and buy new aircraft. From fiscal years 2006 to 2011, 
DOD plans to spend about $57 billion \9\ for operations and maintenance 
and military personnel for legacy tactical fighter aircraft. Some of 
these funds could be invested in newer aircraft that would be more 
capable and less costly to operate. For example, the Air Force 
Independent Cost Estimate Summary shows that the F-22A will be less 
expensive to operate than the F-15. The F-22A will require fewer 
maintenance personnel for each squadron, and one squadron of F-22As can 
replace two squadrons of F-15. This saves about 780 maintenance 
personnel as well as about $148 million in annual operating and support 
cost according to the independent cost estimate.
---------------------------------------------------------------------------
    \9\ Figure includes cost data for F/A-18E/F because it could not be 
broken out from the F-18 costs.
---------------------------------------------------------------------------
    Over the same timeframe, DOD also plans to spend an average of $1.5 
billion each year--or $8.8 billion total--to modernize or improve 
legacy tactical fighter aircraft (see fig. 4). Further delays or 
changes in the F-22A or JSF programs could require additional funding 
to keep legacy aircraft in the inventory and relevant to the 
warfighter's needs.
      
    
    
      
    In testimony last year, we suggested that the QDR would provide an 
opportunity for DOD to assess its tactical aircraft recapitalization 
plans and weigh options for accomplishing its specific and overarching 
goals. In February 2006, the Secretary of Defense testified that 
recapitalization of DOD's tactical aircraft is important to maintain 
America's air dominance. Despite this continued declaration about 
recapitalizing tactical aircraft, DOD's 2006 QDR report did not present 
a detailed investment strategy that addressed needs and gaps, 
identified alternatives, and assessed costs and benefits. With limited 
information contained in the QDR report, many questions are still 
unanswered about the future of DOD's tactical aircraft modernization 
efforts.
 dod has an opportunity to set its tactical aircraft recapitalization 
                            efforts on track
    As DOD moves forward with its efforts to recapitalize its tactical 
aircraft force, it has the opportunity to reduce operating costs and 
deliver needed capabilities to the warfighter more quickly. To take 
advantage of this opportunity, however, DOD must fundamentally change 
the way it buys weapon systems. Specifically, the department must 
change how it selects weapon systems to buy, and how it establishes and 
executes the business case. Although the F-22A program has progressed 
further in the acquisition process than the JSF program, both programs 
are at critical decisionmaking junctures, and the time for DOD to 
implement change is now.
    Before additional investments in the F-22A program are made, DOD 
and the Air Force must agree on the aircraft's capabilities and 
quantities and the resources that can be made available to meet these 
requirements. A cost and benefit analysis of F-22A capabilities and 
alternative solutions weighed against current and expected threats is 
needed to determine whether a sound business case for the F-22A is 
possible and whether investing an additional $13.8 billion over the 
next 5 years to procure or modernize these aircraft is justified.
    With more than 90 percent of investment decisions to develop, test, 
and buy JSF aircraft remaining, DOD could implement significant changes 
in its business case before investing further in the JSF program. The 
JSF program should delay production and investments in production 
capability until the aircraft design qualities and integrated mission 
capabilities of the fully configured and integrated JSF aircraft 
variants have been proven to work in flight testing. Also, an 
evolutionary acquisition strategy to limit requirements for the 
aircraft's first increment of capabilities that can be achieved with 
proven technologies and available resources could significantly reduce 
the JSF program's cost and schedule risks. Such a strategy would allow 
the program to begin testing and low-rate production sooner and, 
ultimately, to deliver a useful product in sufficient quantities to the 
warfighter sooner. Once the JSF is delivered, DOD could begin retiring 
its aging and costly tactical aircraft. Capabilities that demand as yet 
undemonstrated technologies would be included as requirements in future 
JSF aircraft increments that would be separately managed. An 
evolutionary, knowledge-based acquisition approach would not only help 
significantly minimize risk and deliver capabilities to the warfighter 
sooner, it would be in line with current DOD policy preferences. \10\
---------------------------------------------------------------------------
    \10\ DOD argues that the JSF program is using an evolutionary 
approach because it is developing capabilities in a series of blocks. 
However, the approach is not truly evolutionary, as DOD does not 
consider each block as a separate program--a critical aspect of an 
evolutionary approach. In addition, DOD currently expects to buy 95 
percent of the JSF aircraft in the final block--which delays providing 
useful capabilities to the warfighter.
---------------------------------------------------------------------------
    DOD's use of an evolutionary, knowledge-based approach is not 
unprecedented. The F-16 program successfully evolved capabilities over 
the span of 30 years, with an initial F-16 capability delivered to the 
warfighter about 4 years after development started. Figure 5 
illustrates the F-16 incremental development approach.
      
    
    
      
    The F-16 program provides a good acquisition model for the JSF 
program. For JSF, an evolutionary approach could entail delivering a 
first increment aircraft with at least as much capability as legacy 
aircraft with sufficient quantities to allow DOD to retire its aging 
tactical aircraft sooner and reduce operating inefficiencies. Limiting 
development to 5-year increments or less, as suggested in DOD's 
acquisition policy, would force smaller, more manageable commitments in 
capabilities and make costs and schedules more predictable. Some of the 
more challenging JSF capabilities, such as advanced mission systems or 
prognostics technologies, would be deferred and added to follow-on 
efforts once they are demonstrated in the technology development 
environment--a more conducive environment to maturing and proving new 
technologies. A shorter system development phase would have other 
important benefits. It would allow DOD to align a program manager's 
tenure to the completion of the phase, which would enable program 
managers to be held accountable for decisions. It also would allow DOD 
to use fixed-price-type contracts for production, and thereby reduce 
the government's cost risk.
    Additionally, DOD should do a more comprehensive business case 
analysis of the costs, benefits, and risks before terminating the 
alternative engine effort. A competitive engine program may: (1) 
incentivize contractors' to minimize life cycle costs; (2) improve 
engine reliability and quality in the future; (3) provide operational 
options; and (4) maintain the industrial base.
    At a broader level, DOD needs to make more substantive changes to 
its requirements, funding, and acquisition processes to improve weapon 
system program outcomes. We have recommended these changes in past 
reports and DOD has agreed with them. The January 2006 Defense 
Acquisition Performance Assessment report, based on a study directed by 
the Deputy Secretary of Defense, made some important observations 
regarding DOD acquisitions. The report concluded that the current 
acquisition process is slow, overly complex, and incompatible with 
meeting the needs of DOD in a diverse marketplace. Notably, the report 
confirmed that a successful acquisition process must be based on 
requirements that are relevant, timely, informed by the combatant 
commanders, and supported by mature technologies and resources 
necessary to realize development. The report also pointed out that 
DOD's acquisition process currently operates under a ``conspiracy of 
hope,'' striving to achieve full capability in a single step and 
consistently underestimating what it would cost to attain this 
capability. The report makes a number of key recommendations for 
changing DOD's acquisition process including the following:

         develop a new requirements process that has greater 
        combatant commander involvement and is time-phased, fiscally 
        informed, and jointly prioritized;
         change the current acquisition policy to ensure a 
        time-constrained development program is strictly followed;
         keep program managers from the start of development 
        through delivery of the ``Beyond Low-Rate Initial Production 
        Report''; and
         move the start of a development program to the point 
        in time that a successful preliminary design review is 
        completed.

    Our work in weapons acquisition and best practices over the past 
several years has drawn similar conclusions. We have made numerous 
recommendations on DOD's acquisition processes and policy--as well as 
recommendations on specific major weapon system programs--to improve 
cost, schedule, and performance outcomes and to increase accountability 
for investment decisions. In 2000, DOD revised its acquisition policy 
to address some of our recommendations. Specifically, DOD has written 
into its policy an approach that emphasizes the importance of knowledge 
at critical junctures before managers agree to invest more money in the 
next phase of weapon system development. Theoretically, a knowledge-
based approach results in evolutionary--that is, incremental, 
manageable, predictable--development and uses controls to help managers 
gauge progress in meeting cost, schedule, and performance goals. 
However, DOD policy lacks the controls needed to ensure effective 
implementation of this approach. Furthermore, decision makers have not 
consistently applied the necessary discipline to implement its 
acquisition policy and assign much-needed accountability for decisions 
and outcomes. Some of key elements of acquisition that we believe DOD 
needs to focus on include the following:

         constraining individual program requirements by 
        working within available resources and by leveraging systems 
        engineering;
         establishing clear business cases for each individual 
        investment;
         enabling science and technology organizations to 
        shoulder the technology burden;
         ensuring that the workforce is capable of managing 
        requirements trades, source selection, and knowledge-based 
        acquisition strategies;
         establishing and enforcing controls to ensure 
        appropriate knowledge is captured and used at critical 
        junctures before moving programs forward and investing more 
        money; and
         aligning tenure for program managers that matches the 
        program's acquisition time to ensure greater accountability for 
        outcomes.

    In conclusion, despite DOD's repeated declaration that 
recapitalizing its aging tactical aircraft fleet is a top priority, the 
department continues to follow an acquisition strategy that 
consistently results in escalating costs that undercut DOD's buying 
power, forces DOD to reduce aircraft purchases, and delays delivering 
needed capabilities to the warfighter. Continuing to follow a strategy 
that results in disappointing outcomes cannot be encouraged--
particularly given our current fiscal and national security realities.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other members of the subcommittee may 
have.
                          gao related products
    Joint Strike Fighter: DOD Plans to Enter Production before Testing 
Demonstrates Acceptable Performance, GAO-06-356 (Washington DC: March 
15, 2006).
    Defense Acquisitions: Business Case and Business Arrangements Key 
for Future Combat System's Success, GAO-06-478T (Washington DC: March 
1, 2006).
    Defense Acquisitions: DOD Management Approach and Processes Not 
Well-Suited to Support Development of Global Information Grid, GAO-06-
211, (Washington DC: January 30, 2006).
    Defense Acquisitions: DOD Has Paid Billions in Award and Incentive 
Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington DC: 
December 19, 2005).
    Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in 
Nunn-McCurdy Report, GAO-06-222R, (Washington DC: December 15, 2005)
    DOD Acquisition Outcomes: A Case for Change, GAO-06-257T, 
(Washington DC: November 15, 2005).
    Defense Acquisitions: Progress and Challenges Facing the DD(X) 
Surface Combatant Program GAO-05-924T. (Washington DC: 07/19/2005).
    Defense Acquisitions: Incentives and Pressures That Drive Problems 
Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington 
DC: 06/23/2005).
    Defense Acquisitions: Resolving Development Risks in the Army's 
Networked Communications Capabilities is Key Fielding Future Force. 
GAO-05-669 (Washington DC: 06/15/2005).
    Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington 
DC: 06/14/2005)
    Tactical Aircraft: F/A-22 and JSF Acquisition Plans and 
Implications for Tactical Aircraft Modernization. GAO-05-519T. 
(Washington DC: 04/06/2005).
    Defense Acquisitions: Assessments of Selected Major Weapon 
Programs. GAO-05-301 (Washington DC: 03/31/2005).
    Defense Acquisitions: Future Combat Systems Challenges and 
Prospects for Success. GAO-05-428T. (Washington DC: 03/16/2005).
    Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed 
Before Development Starts. GAO-05-273 (Washington DC: 03/15/2005).
    Defense Acquisitions: Future Combat Systems Challenges and 
Prospects for Success. GAO-05-442T (Washington DC: 03/15/2005).
    Tactical Aircraft: Air Force Still Needs Business Case to Support 
F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington 
DC: 03/15/2005).
    Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike 
Fighter Program with Different Acquisition Strategy. GAO-05-271. 
(Washington DC: 03/15/2005).
    Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs 
and Implications for Tactical Aircraft Modernization. GAO-05-390T 
(Washington DC: 03/03/2005).
    Defense Acquisitions: Plans Need to Allow Enough Time to 
Demonstrate Capability of First Littoral Combat Ships. GAO-05-255 
(Washington DC: 03/01/2005).
    Defense Acquisitions: Improved Management Practices Could Help 
Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183 
(Washington DC: 02/28/2005).
    Unmanned Aerial Vehicles: Changes in Global Hawk's Acquisition 
Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington DC: 
11/05/2004).
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    Senator McCain. Thank you very much, Mr. Sullivan.
    Mr. Marron.

 STATEMENT OF DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Marron. All right, thank you, Mr. Chairman, and members 
of the subcommittee. It's a pleasure to be here this afternoon 
to discuss the Air Force's proposed procurement approach for 
the F-22 fighter program.
    To briefly summarize my written testimony, from CBO's 
perspective the key issue with the proposed procurement is the 
degree to which it deviates from the usual budget practice of 
full funding. To quote from the Office of Management and 
Budget's (OMB) Circular A-11, which guides administration 
budget requests, ``Good budgeting requires that appropriations 
for the full costs of asset acquisition be enacted in advance 
to help ensure that all costs and benefits are fully taken into 
account at the time decisions are made to provide resources.''
    This policy of full funding strengthens the budget process, 
because it enables Congress to control spending at the time the 
commitments are made, it increases the likelihood that 
complete, usable assets will be delivered without the need for 
additional funds, it promotes transparency and accountability 
in the budget process, and it makes clear the tradeoffs that 
have to be made among competing priorities.
    The Air Force's proposed procurement approach for the F-22 
program deviates from the policy of full funding. There are 
three related concerns:
    First, the Air Force proposed to fund the program on an 
incremental basis, rather than a fully funded basis. For 2007, 
for example, the Air Force is requesting funds only to purchase 
components and subassemblies for 20 fighters, not the full 
fighters themselves. Next year, the Air Force would request 
funds to assemble those components into complete aircraft.
    This approach reduces the apparent cost of the F-22 program 
this year. The budget request is about $2 billion, rather than 
the roughly $3.5 billion that would be necessary for a 
comparable number of complete fighters. In so doing, it pushes 
funding requirements out into future years. In order to procure 
20 complete fighters, Congress would have to provide additional 
appropriations in the future.
    Second, the Air Force is proposing a multiyear procurement, 
but is not funding all the potential costs of that approach. 
Multiyear procurement can provide significant benefits to the 
Air Force, and, thereby, the taxpayer, if it enables the Air 
Force to purchase the fighters at lower cost. Contractors may 
be willing to offer a lower price for the multiyear commitment, 
because it enables them to plan for more efficient production 
and make productivity-enhancing investments. In return for such 
cost-reducing efforts, however, contractors often require some 
commitment that any costs associated with those efforts will be 
paid if the contract turns out to get canceled.
    When the Air Force enters into a multiyear procurement, 
therefore, the full costs of the first year would include not 
just the cost of the aircraft ordered in that year, but also an 
amount to cover any potential cancellation liabilities. If such 
monies are not appropriated, the contract is not fully funded. 
If the program gets canceled, the Air Force would have to seek 
more funds from Congress, reduce planned F-22 purchases, or cut 
into other approved programs.
    The third concern with the Air Force's proposed procurement 
is that, as just described, it attempts to combine incremental 
funding and multiyear procurement. These procurement approaches 
are not a natural fit, because the logic underlying them is 
inconsistent. Incremental funding makes the most sense if you 
do not intend to make a full commitment to the program, while 
multiyear procurement only makes sense if you want to make an 
extended commitment to the program. Perhaps for that reason, 
the use of incremental funding is currently prohibited for 
multiyear procurements. Indeed, Congress explicitly rejected 
this approach for funding another aircraft, the C-17, some 
years ago, saying, ``This financing scheme runs counter to the 
full-funding principles which guide Federal procurement 
practice, and thereby it creates a future liability for the Air 
Force and Congress.''
    To summarize, then, the Air Force's proposal deviates 
significantly from the principle of full funding when acquiring 
new assets. As a result, this proposal would imply that 
additional funding burdens would fall on future Congresses.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of Mr. Marron follows:]
                 Prepared Statement by Donald B. Marron
    Mr. Chairman, Senator Lieberman, and members of the subcommittee, I 
am pleased to appear before you today to discuss the Air Force's 
acquisition strategy for the F-22 fighter program. At your request, the 
Congressional Budget Office (CBO) has examined the proposal for a 
multiyear procurement contract for 60 aircraft and has found the 
following:

         The Air Force proposes to pay for the aircraft through 
        incremental funding. Under that approach, the Air Force would 
        seek appropriations for only part of the cost of each annual 
        production lot in the year it was ordered and would request the 
        remaining amount in the following year. Thus, the funding 
        provided each year would not be sufficient to complete the 
        aircraft ordered that year, and the Air Force would have to 
        seek additional appropriations in the future to obtain 
        functional aircraft.
         The Air Force would commit to the purchase of 20 
        aircraft per year for 3 years, with the right to cancel the 
        remainder of the order at the end of each year. But it is not 
        requesting appropriations sufficient to cover the potential 
        cancellation liability. Under that proposal for multiyear 
        procurement, the Air Force would have to seek additional 
        appropriations in the future even if a decision was made to 
        cancel the contract.
         By initially requesting only incremental funding to 
        pay for components of the aircraft and by excluding funding for 
        the cancellation liability, the Air Force reduces the amount of 
        2007 budget authority needed to initiate its proposed 
        procurement. By the same token, the approach would also 
        increase the amount of future budget authority needed either to 
        complete the purchases or to cancel them.
         Current law prohibits the use of incremental funding 
        in multiyear procurement contracts. The Air Force has requested 
        that legislation exempting the service from that prohibition be 
        included in the National Defense Authorization Act for Fiscal 
        Year 2007.
         Deferring recognition of the full cost of the assets 
        being purchased would understate the nature of the government's 
        obligations, potentially distorting budgetary choices by making 
        the program appear less expensive than it is, and would 
        constrain budgetary flexibility in subsequent years.
                    funding of capital acquisitions
    In general, the Federal budget operates on the principle that 
appropriations for the full costs of acquiring an asset should be 
enacted in advance. In that regard, the Office of Management and 
Budget's Circular A-11, which guides executive branch agencies in the 
preparation of the budget, states:

          Good budgeting requires that appropriations for the full 
        costs of asset acquisition be enacted in advance to help ensure 
        that all costs and benefits are fully taken into account at the 
        time decisions are made to provide resources. Full funding with 
        regular appropriations in the budget year also leads to 
        tradeoffs within the budget year with spending for other 
        capital assets and with spending for purposes other than 
        capital assets. Full funding increases the opportunity to use 
        performance-based fixed price contracts, allows for more 
        efficient work planning and management of the capital project 
        (or investment), and increases the accountability for the 
        achievement of the baseline goals.\1\
---------------------------------------------------------------------------
    \1\ Office of Management and Budget, Preparation and Submission of 
Budget Estimates, Circular A-11 (July 2005), Appendix J, p. 3.

    Upfront funding enables Congress to control spending at the time a 
commitment is made and ensures--or at least increases the likelihood--
that a complete and usable asset will be delivered without the need to 
provide additional appropriations in future years. Very expensive 
items, however, may be difficult for an agency to budget for if it must 
have an appropriation for the full cost in the first year. In some 
instances, the cost of a single item may exceed an agency's annual 
budget for capital acquisitions. If the cost of an asset represents a 
large portion of its budget, an agency may have to forgo most other 
capital acquisitions for that year or otherwise disrupt other ongoing 
acquisition programs. One solution to that problem would be for the 
administration to request an appropriation in excess of the annual 
amount normally provided to an agency for capital acquisitions. But 
large, temporary increases in budget authority are sometimes difficult 
to accommodate in the budget process, at least for nonemergency 
appropriations.
    Budgetary constraints have sometimes led agencies to seek to defer 
recognition of costs until later years--for example, by using 
incremental funding for capital assets. Congress has approved 
incremental funding requests for some ships for the Navy and the Coast 
Guard, water resources projects of the Army Corps of Engineers, 
construction projects of the Department of Defense (DOD), and space 
exploration projects of the National Aeronautics and Space 
Administration (NASA). Agencies argue that through incremental funding 
authority, they have acquired many useful assets that they could not 
have funded upfront.
    Incremental funding, however, can have several deleterious effects. 
It may limit visibility and accountability because it does not display 
the full cost of decisions at the time they are made. In the 
competition for appropriations, it may tilt the playing field in favor 
of expensive programs that benefit from such a funding arrangement; 
programs may be selected on the basis of their apparent economy--in 
their initial stages--relative to other programs that do not have the 
advantage of such a favorable budgetary treatment. Moreover, 
incrementally funded projects may be started without adequate scrutiny 
or a full understanding of the total cost. Incremental funding may even 
provide a particular incentive to underestimate costs at the outset of 
a project because later cost increases would not have to be 
acknowledged as such but could be incorporated in subsequent funding 
increments.
    In cases in which an acknowledgment of the full cost up front could 
render a program too expensive to consider, both agencies and Congress 
may end up accepting those higher costs at a later date if the only 
alternative is to abandon their previous investment in partially 
completed products. Finally, incremental funding may constrain the 
funding available for other programs in future years as programs that 
were partially funded in previous years continue to consume resources.
                the air force's plan for acquiring f-22s
    Through the end of fiscal year 2005, the Air Force had ordered 100 
F-22 aircraft. In its budget request for fiscal year 2006, the service 
proposed purchasing 80 more planes--24 in 2006, 29 in 2007, and 27 in 
2008. Congress appropriated $3.7 billion to procure 24 aircraft in 
fiscal year 2006. To date, funds have been appropriated in advance for 
the full cost of all of the aircraft ordered.
    The fiscal year 2007 budget request seeks authority to buy more 
aircraft in total but at a slower rate than envisioned a year ago. The 
Air Force now seeks authority to purchase 60 aircraft at a rate of 20 
aircraft per year over the 2007-2009 period using a multiyear 
procurement approach aimed at mitigating the increase in costs that 
would otherwise result from the reduction in the production rate. Under 
its proposed approach, the Air Force would commit to purchasing all 60 
aircraft, with the option to cancel the contract at the end of each 
fiscal year if funds were not appropriated to continue the contract. 
According to the Air Force, the 60 airplanes would cost about $10.5 
billion in total.
    The Air Force's proposal differs from the practice of full up-front 
funding in two ways: it seeks incremental funding for acquiring capital 
assets, and it provides for a multiyear procurement without funding for 
possible cancellation costs.
                          incremental funding
    The Air Force has requested the authority to budget and to pay for 
each annual production lot incrementally over a 2-year period rather 
than obtaining appropriations for the full cost of those aircraft in 
the year production begins. The Service's approach would reduce the 
amount of budget authority needed in the first year, although it would 
increase the amount needed in subsequent years. The first year's 
funding would cover the cost of producing certain components of the 
first 20 aircraft; the second year's appropriation would pay for the 
cost of assembling them. Specifically, the Air Force has asked for 
appropriations of about $2 billion in 2007 to pay for part of the cost 
of the aircraft whose production would begin in 2007. Under a multiyear 
contract without incremental funding, the Air Force would initially 
need approximately $4 billion to $5 billion to cover its minimum 
liability.\2\
---------------------------------------------------------------------------
    \2\ The exact amount would depend on the cost of canceling the 
contract after 2007. On the basis of cancellation liabilities for other 
multiyear programs, that amount could be between 5 percent and 15 
percent of contract costs.
---------------------------------------------------------------------------
    In each of the past 4 years, Congress has appropriated around $4 
billion to procure F-22s. A similar appropriation in 2007 would fully 
fund 12 to 20 aircraft under a multiyear contract, depending on the 
amount of the cancellation liability--if such liability was fully 
covered within that amount.
    The Air Force's strategy to incrementally fund production of the F-
22 would have the effect of deferring appropriations for commitments 
already made. At the time it orders the aircraft for each annual 
production lot, the Air Force would have appropriations sufficient to 
pay only for certain components, such as engines, electronic systems, 
and airframe subassemblies. Appropriations for the cost to assemble 
those components into a usable airplane would be requested in the 
following year.
    Such a process would allow the Air Force to order more aircraft in 
the first year within a given amount of funding by understating the 
government's ultimate costs. Therefore, when Congress allocated budget 
authority to programs in the 2007 DOD appropriations act, the F-22 
program would have an advantage over other programs or activities that 
did not receive that form of funding. In subsequent years, Congress 
could be left with little choice but to provide additional 
appropriations to ensure the delivery of fully assembled, functional 
aircraft. Although more aircraft could be ordered in the first year 
under the incremental funding approach, fewer aircraft could be ordered 
in subsequent years within any given amount of appropriations. Even if 
costs increased relative to the Air Force's current estimate, Congress 
might feel compelled to appropriate funds for aircraft that had already 
begun production to avoid wasting the funds already invested in the 
components.
    The incremental funding approach could restrain the pace of 
aircraft production. Because the Air Force would not have sufficient 
appropriations to pay for the full cost of the aircraft in the first 
year, it would have to closely monitor the contractor's work to ensure 
that the pace of production was maintained at a level that would not 
obligate funds that had not yet been appropriated. Otherwise, 
production might have to be slowed or halted in the later months of the 
year.
    Congress has approved incremental funding for other DOD programs, 
such as Navy ships and some military construction projects. For 
instance, Congress authorized the Navy to incrementally fund the CVN-78 
aircraft carrier and the LHD-8 amphibious ship. But incremental funding 
has rarely been used for aircraft procurement programs. Perhaps because 
aircraft--even ones as costly as the F-22--are less expensive than Navy 
ships, dams and levees constructed by the Army Corps of Engineers, and 
NASA's space station, they are easier to budget for in full. 
Consequently, budgetary constraints can be accommodated by purchasing 
fewer aircraft in a given year rather than by funding only a part of 
the cost of a larger production lot.
 the potential benefits of multiyear contracts in reducing acquisition 
                                 costs
    Multiyear procurement is a special contracting method authorized in 
10 U.S.C. 2306b that permits the government to enter into contracts 
covering acquisitions for more than 1 year but not more than 5 years, 
even though the total funds required every year are not appropriated at 
the time the contracts are awarded. As part of such a contract, the 
government commits to purchase all items specified at the time the 
contract is signed, including those to be produced and paid for in 
subsequent years. Before an agency can enter into such a contract, it 
must find that multiyear procurement results in substantial savings in 
comparison with procurement through a series of annual contracts. The 
Air Force has not yet completed its analysis of whether multiyear 
procurement is the most cost-effective strategy for purchasing the F-
22s.
    Because multiyear procurement allows the contractor to plan for 
more efficient production, such a contract can reduce the cost of an 
acquisition compared with the cost of buying the items through a series 
of annual procurement contracts--unless the government decides to 
cancel the contract partway through it. The savings can come from 
several sources, such as investments in equipment and facilities, 
investments in the contractor's workforce, and orders for component 
parts in economically efficient quantities. For example, given the 
commitment of a multiyear procurement contract, the contractor may 
spend time and money on appropriate training or provide financial 
incentives to retain experienced personnel on the job for the duration 
of the contract to improve productivity. The contractor may also 
acquire special tools, manufacturing equipment, or facilities that 
reduce the time, labor, and materials--and thus the cost--to produce 
the items. The savings in recurring costs may not be great enough in a 
single year to recover the cost of the investments, but if production 
quantities are sufficiently large, the investment costs can be spread 
out over several years of production.
    Similarly, the contractor may also purchase or produce components 
in advance of need--using an arrangement called economic order quantity 
procurement--if doing so offers substantial savings by avoiding 
repeated setup costs.
    Contractors are usually willing to enter into multiyear procurement 
contracts and to spend money up front to reduce production costs 
because the government, in the event of contract cancellation or 
termination, promises to pay for incurred costs that would have been 
recovered over the full term of the contract.
                  budgeting for cancellation liability
    Under a multiyear contract, the government may, at the end of each 
fiscal year, cancel its order for all remaining years of the contract 
if it notifies the contractor that funds are not available to proceed 
for the next fiscal year. Thus, cancellation of a multiyear contract 
occurs between fiscal years if Congress does not provide the additional 
appropriations needed to continue.
    Under a multiyear contract, some nonrecurring costs may be 
allocated to items expected to be produced in future years. Therefore, 
if the contract is canceled, the government may owe the contractor more 
than the amount appropriated for items produced in the years before the 
cancellation. The maximum liability for contract cancellation at the 
end of any given year is usually negotiated up front and included in 
the terms of the contract.\3\
---------------------------------------------------------------------------
    \3\ Contract cancellation differs from contract termination. The 
government has the right to end any contract early, when doing so is in 
the government's interest, but must pay the contractor for any 
authorized work performed before it was notified to cease work. 
Contract termination is the act of rescinding orders for items for 
which funds have already been appropriated and on which work has 
already begun. The cost of terminating an annual procurement contract 
early should not exceed the available appropriations because an agency 
should have sufficient appropriations to cover all recurring and 
nonrecurring costs before it initiates an annual procurement contract.
---------------------------------------------------------------------------
    DOD sometimes chooses not to request budget authority specifically 
for the cancellation liability because it considers cancellation a 
contingent liability with only a remote probability of happening.\4\ 
Although the amount of the government's actual liability depends on how 
the program proceeds, its minimum liability is the sum of the 
production costs for the items ordered in the first year and the 
cancellation costs at the end of that year. Regardless of whether the 
multiyear procurement contract proceeds for the full term or is 
canceled early, the government's initial obligation to the contractor 
will exceed the amount required to pay for items ordered in the first 
year. For example, after the first year of the 3-year contract proposed 
for the F-22, the Air Force could either cancel the remaining 2 years 
of production and pay the costs for cancellation, or it could continue 
production for the second program year and pay for the cost of those 
aircraft. Under the multiyear contract, the Air Force would not have 
the option of forgoing future production lots without paying the 
cancellation charge. Thus, in no case would the government pay only the 
cost of the aircraft produced in the first year. An appropriation that 
covered only the cost for each annual production lot as it was 
manufactured would therefore be insufficient to finance the 
government's minimum obligations under the multiyear contract.
---------------------------------------------------------------------------
    \4\ DOD is authorized by 10 U.S.C. 2306b to pay cancellation costs 
from funds originally available for performance of the contract 
concerned, appropriations currently available for procurement of the 
type of property concerned and not otherwise obligated, or funds 
appropriated for cancellation payments.
---------------------------------------------------------------------------
    The Air Force indicates that it may be able to pay contract 
cancellation costs with funds appropriated for procuring the F-22, 
which could lead some observers to conclude that there would be 
sufficient funds to pay both the cost of canceling future production 
lots and the cost of procuring the aircraft that had been ordered up to 
that point. In fact, the Air Force would be committing the same 
appropriations for both purposes simultaneously. But with no funds set 
aside specifically for cancellation costs, the Air Force would have to 
terminate orders for some or all of the aircraft that had already 
entered production if a decision was made to cancel subsequent orders. 
Thus, if it canceled the remaining years of the multiyear contract at 
the end of the first year, the government would not only forgo the 
aircraft to be produced in later years but also would not receive all 
of the planes it had ordered in the first year--and the taxpayers' 
investment in those aircraft would be lost. In particular, at the end 
of the first year, the Air Force would have ordered 20 aircraft. If the 
government decided to cancel the contract at that point but had not set 
aside funds specifically for cancellation costs, it would not only 
forgo the 40 aircraft that had not entered production, but, to free up 
funds for cancellation costs, it would have to stop work on some of the 
20 aircraft that had already been ordered.
    Although DOD has requested sufficient appropriations to cover its 
minimum obligations for some multiyear contracts, it has not allocated 
resources for cancellation liabilities for many of them. That failure 
to request funding for cancellation liabilities may distort the 
resource allocation process by understating the cost of decisions made 
for the budget year and may require future Congresses to find the 
resources to pay for decisions made today.
        combining multiyear procurement and incremental funding
    Even though Congress has authorized and appropriated funds for 
capital assets on an incremental basis, CBO is unaware of any instances 
in which Congress has authorized incremental funding of a multiyear 
procurement contract. In fact, Congress recently disapproved such a 
proposal by the Air Force. In its fiscal year 2003 budget request, the 
Air Force proposed to use advance procurement funding--typically used 
to buy components with significantly longer production time than other 
system components--for the multiyear procurement of C-17 cargo 
aircraft. That incremental funding approach would have effectively 
resulted in progress payments on the aircraft rather than full funding 
in the initial year of production.
    In the National Defense Authorization Act for Fiscal Year 2003, 
Congress prohibited that approach proposed for the C-17 by amending the 
statute governing multiyear procurement to allow DOD to obligate funds 
to procure end items only if they were ``complete and usable.'' 
Congress also added $586 million to the department's budget request for 
fiscal year 2003 to fully fund the acquisition of 15 C-17 aircraft 
entering production that year. The conference report accompanying the 
Department of Defense Appropriations Act for Fiscal Year 2003 
explicitly disapproved the Air Force's proposed approach: ``This 
financing scheme runs counter to the `full funding' principles which 
guide Federal Government procurement practice, and thereby creates a 
future liability for the Air Force and Congress. For this reason, the 
conferees disapprove the Air Force's C-17 financing proposal.'' For the 
F-22 program, the Air Force has proposed a statutory waiver of the 2003 
authorization law's prohibition against incrementally funding the 
purchase of end items under a multiyear contract.
    Although the Air Force indicates it may be able to pay cancellation 
costs from funds appropriated for the F-22's procurement, combining 
multiyear procurement and incremental funding makes that unlikely. The 
smaller amount appropriated under the incremental funding approach 
would be obligated and spent more rapidly than the full amount. CBO 
estimates that even if orders for aircraft in production were 
terminated, as little as 10 percent of the initial appropriation would 
be available to pay cancellation costs at the end of the initial year 
of incremental funding for each of the three lots. Consequently, 
cancellation might necessitate taking funding from other aircraft 
procurement programs or might require Congress to provide additional 
appropriations to pay those costs.
    Employing an incremental funding strategy in conjunction with a 
multiyear procurement contract introduces the risk that the Air Force 
might pay for aircraft that would not be completed if the contract was 
canceled. At the end of each year of the contract except the last one, 
there would be some aircraft in production that would require 
appropriations to complete. If Congress declined to provide further 
funds to continue the contract in the next fiscal year, the Air Force 
would have to cancel the contract for all subsequent years and 
terminate orders for aircraft that had not been fully funded. If the 
contract was canceled after 2007, the Air Force would not receive any 
completed aircraft. If the contract was canceled after 2008 and no 
additional funds were provided for 2009, the Air Force would receive 
the 20 aircraft ordered in 2007 but would receive only components of 
the aircraft that had been ordered in 2008.
    Incremental funding and multiyear procurement are conceptually 
inconsistent budgetary practices. On the one hand, multiyear 
procurement contracts suggest a firm and substantial commitment on the 
part of the government. The contractor is encouraged to make 
investments promoting efficiency on the basis of the government's 
commitment to purchase multiple annual production lots or to compensate 
the contractor for those investments if it chooses to cancel the 
contract. On the other hand, the amount of budget authority provided 
under an incremental funding arrangement suggests a very limited 
government liability--only for the cost of the components that are 
produced in that year.

    Senator McCain. Thank you very much.
    Mr. Bolkcom.

   STATEMENT OF CHRISTOPHER BOLKCOM, SPECIALIST IN NATIONAL 
            DEFENSE, CONGRESSIONAL RESEARCH SERVICE

    Mr. Bolkcom. Mr. Chairman, Senator Chambliss, thank you 
very much for inviting me to speak to you today about the F-22 
Raptor. As requested, my testimony will address DOD's proposed 
funding strategy and its plan to proceed with a multiyear 
procurement of 60 aircraft.
    I'd like to make some observations that you'll find treated 
at greater length in my written statement, which I request be 
included in the record.
    Senator McCain. Without objection.
    Mr. Bolkcom. As part of its fiscal year 2007 budget 
request, DOD proposes to add $930 million to the program and to 
incrementally fund F-22 procurement. Aircraft subassemblies 
will be funded in 1 year, and final assembly will be funded in 
the second. A multiyear procurement contract and two economic 
order quantity purchases are key components of this strategy. 
DOD leaders say that this proposal is unorthodox, and it may 
require congressional waivers of statute or standard practice.
    At least three aspects of this proposed strategy may 
present significant issues for DOD and Congress:
    First, if the Air Force is allowed to incrementally fund F-
22 procurement, future Congresses could be deterred from 
cutting program funds, in fear of taking delivery of 20 half-
assembled aircraft. DOD may argue that the program is stable 
and mature, which would make budget cuts unlikely. However, the 
authority to appropriate funds, of course, belongs to Congress, 
not to DOD.
    Second, this strategy appears risky, because many questions 
about its feasibility remain. For instance, reducing the annual 
procurement rate could, in Air Force parlance, ``create upward 
cost pressure.'' The savings from the multiyear procurement 
contract and the economic order quantity purchases are intended 
to offset this upward cost pressure, but it is currently 
unclear if they will save enough. Also, the discovery, in 2005, 
of a flaw in some of the titanium components may cast doubt on 
both the F-22's maturity and the Air Force's ability to monitor 
the program.
    The third risk of this strategy is that it may set a 
precedent. DOD argues that this strategy is a one-time 
opportunity to save money and to reduce risk. The F-22 is at 
the end of its production, they argue, and the Air Force will 
not need to ask for incremental funding a second time. But 
today's leaders cannot guarantee that future officials won't 
cite this case as a precedent for some future exception they 
wish Congress to approve.
    It is not clear that the potential benefits of this 
strategy outweigh the risks just described. The primary benefit 
that DOD leaders say the strategy will confer is to close the 
gap between F-22 and JSF production. Air Force Secretary Wynne 
recently testified that, ``it is not in this Nation's interest 
to terminate this fifth-generation fighter until we get access 
to another fifth-generation fighter.'' Being able to 
manufacture advanced fighter aircraft would be useful, Mr. 
Wynne said, if we were to encounter a ``hot engagement.''
    This may sound reasonable, but questions could emerge about 
the value of an F-22 production capability during a crisis. 
Why? Because it takes 3 to 4 years to build and deliver a lot 
of F-22s. If the United States found itself unexpectedly drawn 
into a major conflict, and more Raptors were desired, it 
appears unlikely that a large number could be rapidly built and 
delivered. Even if large numbers of aircraft were rapidly 
produced, pilots and maintenance personnel would need to be 
trained and organized. Tools, supplies, and spare parts would 
likely need to be acquired. The most intense and demanding air 
combat in recent operations has been measured in days and 
weeks, not in months or years.
    A final observation is that under last year's F-22 funding 
plan, production would end in December 2010. At this point, 21 
operationally capable JSFs will have been produced and 
delivered to DOD. The JSF will not have achieved initial 
operational capability (IOC) by this point, but the 
manufacturing lines for the two aircraft clearly overlap by 
approximately 2 years.
    Mr. Chairman, this concludes my remarks. Thanks for the 
opportunity to appear before you. I look forward to your 
questions.
    [The prepared statement of Mr. Bolkcom follows:]
               Prepared Statement by Christopher Bolkcom
                 proposed f-22a raptor funding strategy
    Mr. Chairman, distinguished members of the subcommittee, thank you 
for inviting me to speak to you today about the F-22A. As you 
requested, my testimony will address the Air Force's proposed new 
funding strategy for the F-22A, and its plan to proceed with a 
multiyear procurement of 60 F-22A aircraft.
                              introduction
    As part of its fiscal year 2007 budget request, the Department of 
Defense (DOD) has proposed a change in how it plans to fund its 
remaining production of the F-22A Raptor, which in its parlance is 
``nontraditional, but executable.'' \1\ The new strategy is complex, 
but can be described in a simplified way. DOD proposes to add an 
additional production lot, and to stretch the funding of its final 60 
Raptors over an additional 2-year period (from fiscal year 2008 to 
fiscal year 2010). This incremental funding will reduce the average 
annual rate of procurement, and split the funding of annual production 
over a 2-year period (subassembly activities are funded in the first 
year, those subassemblies then transition to final assembly to create a 
complete aircraft in the second year). The Air Force also desires 
authority to enter into a multiyear procurement (MYP) contract, and a 
reprogramming of fiscal year 2006 funds to execute an economic order 
quantity (EOQ) purchase prior to MYP authority. This revised strategy 
is expected to increase program costs at least $930 million more than 
the program's cost estimate under the fiscal year 2006 plan.\2\
---------------------------------------------------------------------------
    \1\ USAF Briefing on F-22A New Funding Strategy and Multiyear 
Procurement. Provided to CRS on March 2, 2006 by SAF LLW.
    \2\ Fiscal year 2006 and fiscal year 2007 Budget Estimates. 
Aircraft Procurement Air Force OPR: SAF/FMB. Volume I. U.S. Air Force.
---------------------------------------------------------------------------
    The DOD expects this plan would enable it to purchase four 
additional aircraft (for a total of 183), and extend the F-22A 
production line approximately 1 year, to reduce the gap between F-22A 
and F-35 production. Secretary of the Air Force Michael Wynne has 
testified to the full committee that ``it is not in our Nation's 
interest to terminate this fifth-generation fighter [the F-22A] until 
we get access to another fifth-generation fighter [the JSF].'' Mr. 
Wynne's principal concern was that the United States might get into a 
``hot engagement'' without either the F-22A or the Joint Strike Fighter 
(JSF) in production.\3\
---------------------------------------------------------------------------
    \3\ Hearing of the Senate Armed Services Committee on the National 
Defense Authorization Request for Fiscal Year 2007 and the Future Years 
Defense Program. March 2, 2006.
---------------------------------------------------------------------------
    The DOD cannot pursue this new funding strategy without 
congressional approval. Specifically, for this plan to move forward, 
DOD needs Congress to: (1) grant it approval to negotiate an MYP 
contract with Lockheed Martin for the final three production lots, (2) 
grant it the authority to reprogram funds to make an EOQ purchase in 
fiscal year 2006, and (3) approve the plan to incrementally fund the 
last 60 aircraft.
                             complications
    A number of factors may complicate DOD's ability to secure 
congressional approval of its ``unorthodox plan'' for the F-22A. For 
example, the F-22A program has experienced noteworthy turbulence 
between the fiscal year 2005 and fiscal year 2007 budget requests. 
Total program budget, annual budget requests, total inventory, annual 
procurement rate, and program duration have all changed. These changes 
may engender closer scrutiny than is customary of the underlying 
criteria for MYP authority.
    Considering the changes to the F-22A program that have occurred, 
and changes which are being proposed, some may question the Air Force's 
ability to comply with some provisions of 10 USC 2306b(a), including 
provision (2) ``That the minimum need for the property to be purchased 
is expected to remain substantially unchanged during the contemplated 
contract period in terms of production rate, procurement rate, and 
total quantities.'' and (3) ``That there is a reasonable expectation 
that throughout the contemplated contract period the head of the agency 
will request funding for the contract at the level required to avoid 
contract cancellation.''
    A further complication may be a problem with sections of the F-
22A's titanium ``forward boom frame'' (a series of load-bearing 
structures within the aircraft's fuselage, located between the engine 
and the wing) which was discovered by the manufacturer in December 
2005. 10 USC 2306b(a)(4) requires that ``There is a stable design for 
the property to be acquired and that the technical risks associated 
with such property are not excessive.'' Air Force officials say that 
the cause of the problem has been identified, and is not expected to 
affect any aircraft built after Lot 5. Air Force officials say that 
``Neither a redesign nor a retrofit are expected at this time.'' \4\ 
However, Air Force officials also note this issue is still being 
evaluated, so making conclusive statements on potential ramifications 
may be premature.\5\ Further, 91 aircraft were potentially affected by 
this problem. Inspecting these aircraft and taking corrective action, 
if any, may require substantial time and effort that was previously 
unforeseen.
---------------------------------------------------------------------------
    \4\ ``Bullet Background Paper on F-22A Forward Boom Heat Treatment 
Issue.'' March 16, 2006. U.S. Air Force.
    \5\ Tony Capaccio. ``Lockheed F-22A May Have Flaw Forcing Redesign, 
Rep. Young Says.'' Bloomberg News Service. March 15, 2006.
---------------------------------------------------------------------------
    Even if this potential flaw is easily resolved, some may raise 
questions about how this problem was made public. The Air Force briefed 
committee and other congressional staff on the F-22A's proposed funding 
strategy on February 22, 2006 and March 13, 2006, but did not mention 
the potential flaw in either briefing. Yet the potential flaw was 
discovered in December 2005. Were Air Force leaders unaware of this 
potential problem in February and March? Or, on the other hand, were 
Air Force leaders aware of this problem when they briefed congressional 
staff, and chose not to mention it? If so, this may suggest a lack of 
disclosure and transparency on the Air Force's part. Questions may 
remain on whether other problems associated with F-22A manufacture may 
emerge.
    Another complication for the Air Force is the proposed incremental 
funding of F-22A procurement. Section 8008 of the fiscal year 2006 
Defense Appropriations Act (PL 109-148) states that multiyear 
procurement must be based on ``full funding of units to be procured 
through the contract.'' Supporting legislation, such as H.R. 4613 (H. 
Rept. 108-553 of June 18, 2004) make clear that some appropriators find 
incremental funding to be incompatible with MYP contracts: ``the 
committee directs these requirements be met before future multiyear 
production contracts can be entered into: (1) Multiyear contracts must 
follow full funding policies and not be used as vehicles for 
incrementally funding procurement. . .'' Some Members of Congress have 
already expressed concern over the proposed F-22A funding strategy, and 
specifically singled out the incremental funding as objectionable.\6\
---------------------------------------------------------------------------
    \6\ Rep. Duncan Hunter. Opening Statement. Hearing of the Senate 
Armed Services Committee on the Defense Authorization Request for 
Fiscal Year 2007 and the Future Years Defense Program. March 2, 2006.
---------------------------------------------------------------------------
    Air Force leaders are candid about the unorthodoxy of this 
proposal, and that it may have a difficult time gaining consensus among 
all parties involved in this decision. Air Force leaders describe this 
strategy as a ``one time opportunity'' to save money and to reduce 
risk.
                                 issues
    The issues associated with this proposed funding strategy lend 
themselves to a simple cost benefit calculation: what are the potential 
risks, who is taking the risks, who benefits, and how great are the 
potential benefits? This proposal may present a number of risks 
regarding the full funding principle and the question of ``tying the 
hands of future Congresses.'' For example, incremental funding appears 
to obligate the government to spend money that has not been 
appropriated. If Congress were to cancel the F-22A program under annual 
funding it would have a ``useable end item.'' If it were to terminate 
the F-22A program at the end of a year when the subassembly of an F-22A 
production lot were completed, then the U.S. Government would take 
possession of half-completed aircraft. To get any benefit from these 
incomplete aircraft, the Government would have to spend more money to 
complete manufacture.
    Air Force officials maintain that the chances of the F-22A 
encountering production problems at this stage are remote. Over 100 
aircraft have been manufactured, and the aircraft's design is mature 
and stable. Further, they argue that ``half-finished'' aircraft are not 
useless. They could be broken into piece parts and used to resupply the 
F-22A fleet. This may be true, but it is likely that a cost penalty 
would be incurred by acquiring piece parts in this way. The prime 
contractor is being paid to build an airplane, not supply parts. 
Presumably, some of the cost of building these ``half-finished'' 
aircraft would be to cover assembly line overhead, and workers' 
salaries, for example. These costs would be absent from parts purchased 
directly from a supplier.
    Another potential risk is that the potential cost savings from the 
EOQ purchases and MYP contract (if approved) would not suffice to 
offset ``upward cost pressure'' caused by the reduced annual rate of F-
22A production. Building 20 aircraft per year is appreciably fewer than 
the most efficient rate of production, which is estimated to be 32 
aircraft per year.\7\ The Air Force has not yet calculated how great 
the ``upward cost pressure'' will be. Again, it may be that the Air 
Force will require additional funds in the future to execute this 
proposed funding plan.
---------------------------------------------------------------------------
    \7\ Under the previous funding strategy, the Air Force would have 
funded procurement of 29 aircraft in fiscal year 2007 and 27 aircraft 
in fiscal year 2008, closer to the more efficient rate of 32 per year.
---------------------------------------------------------------------------
    Some would see a more general risk in setting this precedent. The 
Air Force says that this proposed strategy is a ``one time 
opportunity,'' to reduce risk and to save money. The F-22A production 
line is drawing to a close, they say, and the Air Force won't ask for 
such exceptions again. The F-35 JSF program, however, could potentially 
be delayed further. In that case, and based on the arguments made by 
DOD in support of this funding strategy, DOD could plausibly return to 
Congress in years hence and request more money to extend F-22A 
production to close the widening gap between it and JSF production. If 
the Air Force were successful in securing its requested waivers from 
Congress, the other Services may be motivated to seek similar 
concessions from Congress on their high priority procurement programs. 
If approved, this funding strategy may be cited by future DOD leaders 
as a precedent. Congressman Duncan Hunter, stated that the Air Force is 
``asking us to approve incremental funding for the F-22A, a precedent 
in and of itself,'' and that he wished to understand ``how we've 
arrived at this very unusual, precedent setting funding strategy.'' \8\
---------------------------------------------------------------------------
    \8\ Rep. Duncan Hunter. Opening Statement. OpCit.
---------------------------------------------------------------------------
    The Air Force does not have a history of requesting incremental 
funding. This may be its first such request. At one point, requesting 
incremental funding in the Navy was also unusual. Today it has become 
common. For example after the Navy's LHD-6 program received incremental 
funding in fiscal year 1993 and fiscal year 1994, the instances of 
incremental funding in Navy ship building appeared to accelerate. Since 
the mid-1990s, the LHD-8, LHA-6, CVN-21 and DD(X) programs have either 
been incrementally funded, or incremental funding has been proposed. As 
a final example of how the Services cite precedent to justify 
unorthodox requests, in 2001, Navy officials requested the use of 
advance appropriations for Navy ship procurement, noting that this 
funding approach had been used by several Federal agencies other than 
DOD.\9\
---------------------------------------------------------------------------
    \9\ CRS Report RL32776. Navy Ship Procurement: Alternative Funding 
Approaches. Ronald O'Rourke.
---------------------------------------------------------------------------
    The primary benefit that Air Force leaders say will result from 
this unorthodox plan is that by adding a 9th production lot to the F-
22A program, the assembly line will remain open for a longer period of 
time. The Air Force says that this will reduce the potential gap 
between the end of F-22A production and the beginning of F-35 
production. DOD believes that, as Air Force Secretary Wynne testified, 
it is in the Nation's interests to maintain a continuous production of 
advanced fighter aircraft in case we encounter a ``hot engagement.''
    This rationale may sound reasonable, but questions persist about 
how beneficial such continuous production may be, and whether these 
potential benefits merit the potential risks involved. The need for 
extending the F-22A production line has already been the subject of 
congressional scrutiny. At a March 1, 2006, hearing of the House Armed 
Services Committee, Chairman Duncan Hunter asked:

          If there was a need to have a fifth-generation fighter 
        production line open, why was the decision made last year to 
        cut the F-22 production line and then this year reverse that 
        decision and extend the production, in both cases producing 
        about the same number of aircraft, only now for a billion 
        dollars more in program cost? \10\
---------------------------------------------------------------------------
    \10\ Rep. Duncan Hunter. Opening Statement. OpCit.

    It is unclear what immediate value keeping the F-22A production 
line open would have in a crisis. If, for example, the United States 
found itself unexpectedly drawn into major conflict and a larger 
inventory of Raptors was desired, it does not appear likely that the 
manufacturer could rapidly produce additional aircraft in large 
numbers. Due to the need to appropriate ``long-lead'' items, such as 
titanium, and to procure in advance other aircraft components, it takes 
3 to 4 years to build a production lot of F-22As from start to 
finish.\11\ Even if large numbers of aircraft were rapidly produced, 
pilots for these aircraft, and maintenance personnel would need to be 
trained and organized. Tools, supplies, and spare parts would likely 
need to be acquired. How long does DOD envision such a ``hot 
engagement'' to last? The most intense and demanding air combat in 
recent operations has been measured in days and weeks, not in months or 
years.
---------------------------------------------------------------------------
    \11\ Conversation with SAF/LLW. March 14, 2006.
---------------------------------------------------------------------------
    If the F-22A production line were to replace lost capability rather 
than add to fielded capability, it is unclear what scenario DOD 
envisions that would result in such heavy attrition of the Raptor. The 
F-22A has been touted as the only aircraft that can operate in the most 
threatening wartime environments from ``day one.'' Air Force leaders 
have stated that the F-22A will be the aircraft that will ``kick down 
the door,'' by eliminating the most challenging threats and thus enable 
``persistence'' forces like the F-35 JSF and ``legacy'' forces like the 
F/A-18E/F to operate safely and effectively. If the Air Force is 
concerned that the F-22A could suffer such extensive attrition in a 
near-term conflict (circa 2011), that keeping the production line open 
is a prudent measure, one might ask whether the Air Force has 
overestimated the Raptor's capabilities.
    Air Force leaders assert that they require 381 Raptors not 183. 
Consequently, keeping the production line open longer does not reflect 
a lack of confidence on their part. Instead it simply preserves the 
option of purchasing more aircraft in the future if budgets and 
circumstances permit, which would reduce the gap between the number of 
F-22As the Air Force needs, and the number it can currently afford. 
Although the Air Force has been consistent in recent years in stating 
its requirement for 381 F-22As, it could also be said that DOD must be 
satisfied with the currently planned Raptor inventory, or else it would 
not have cut $10.5 billion from the F-22A budget.
    A final question addresses how effective the proposed F-22A funding 
strategy may be in facilitating the continuous production of DOD's 5th 
generation fighter aircraft. Under last year's plan, F-22A production 
would end in December 2010. According to the JSF Joint Program Office 
(JPO), 21 JSF aircraft are planned for delivery to DOD by that 
date.\12\ These aircraft would enter production in 2008 to make a 2010 
delivery.\13\ Thus, it appears that under the old F-22A funding 
strategy, JSF and F-22A production overlapped by 2 years and that there 
is no break in the production of fifth-generation fighter aircraft.
---------------------------------------------------------------------------
    \12\ E-mail from Office of the Secretary of Defense, Legislative 
Affairs. March 13, 2006.
    \13\ Technically, production will begin once advance appropriations 
for long-lead items is obligated. This is expected to occur by the 
second quarter of 2006.
---------------------------------------------------------------------------
    Under the new F-22A funding strategy, production would end in 
December 2011. It appears that the only material difference between the 
old and proposed plans, in terms of overlapping with JSF production, is 
that 71 F-35s are expected to be delivered by December 2011; 50 more 
than under the old plan. In terms of schedule, however, the proposed 
funding plan would bring F-22A production 1 year closer to the Marine 
Corps' planed JSF initial operational capability (IOC) in March 2012, 
and the Navy's and Air Force's planned IOC in 2013.
                               conclusion
    Mr. Chairman, this concludes my remarks on the F-22A. Thank you for 
the opportunity to appear before you and discuss this important issue. 
I look forward to addressing any questions you or the committee may 
have.

    Senator McCain. Thank you very much.
    General Hoffman.

STATEMENT OF LT. GEN. DONALD J. HOFFMAN, USAF, MILITARY DEPUTY, 
    OFFICE OF THE ASSISTANT SECRETARY OF THE AIR FORCE FOR 
                          ACQUISITION

    General Hoffman. Mr. Chairman, thank you for very much for 
the opportunity to be here.
    I'm the Military Deputy for Acquisition. As you're aware, 
we do not have an Assistant Secretary of the Air Force for 
Acquisition, so my boss is Secretary Wynne. The good news is, 
we now have a confirmed Secretary, and he is very savvy in the 
acquisition arena. I have great access to him. So, I really do 
not feel a significant gap with the fact that we are missing an 
assistant secretary. We look forward to sharing the workload 
with him or her, when they do show up. But we do have a good 
relationship between the military deputy, who is precluded from 
a lot of statutory acquisition decisions, and the secretary, 
who now fulfills that role.
    For today's hearing on the F-22, I think there are really 
two issues. One is multiyear, and one is full, versus split, 
funding.
    If you look at the multiyear discussion, I think it boils 
down to the first question is: does this Nation want to go 
forward with 60 additional F-22s? The second question is: do we 
intend to perhaps change our mind in the next 12 or 24 months? 
So, if you answer yes to the first question and no to the 
second question, then multiyear funding is the best value for 
the taxpayers' dollars. We think, with the right negotiating 
strategies and the right permissions from Congress and from the 
Office of the Secretary of Defense (OSD), that we can save the 
taxpayer about $400 to $500 million by doing multiyear versus 
three distinct lots. So, we look forward to making the case of 
why we think we've answered the six criteria for when a 
multiyear is applicable.
    The second question is full funding versus split funding. 
This is really an independent question of whether you're a 
multiyear or whether you have discrete annual buys. As the Air 
Force budget went forward to OSD, this was not part of our 
budget. But as the budget was evolved throughout the 
discussions of the QDR in the immense budget pressures that 
occurred in 2007 and 2008 to fund the global war on terrorism, 
to do hurricane relief, and other budget pressures, the cash 
flow within the program was examined, and it was determined 
that there was sufficient cash flow to continue production as 
we know it, but to get the actual authorization for the money, 
and appropriation of the money, in subsequent years. Hence, the 
construct of the split funding evolved. This is not unusual. 
It's been done before, as some of the witnesses have mentioned, 
with Navy programs, with Corps of Engineers programs, and with 
NASA programs. It's really the first time I think any of us can 
recollect that this has been applied to an Air Force program or 
an aircraft program.
    So, the benefit of incremental funding is it frees up 
resources for other uses in the near-years and you pay it back 
in the out-years. This is not unlike what we did about 8 years 
ago, when all military members were paid on the first of the 
month, as opposed to the last day of the month. There was 
immediately billions of dollars of windfall savings for that 
particular fiscal year. But you can only do that once. Once you 
step across the line, you have to buy the whole thing back, or 
you have to continue that split-funding strategy throughout the 
rest of the life of the program.
    But we look forward to explaining both of these topics with 
you today.
    Thank you.
    [The prepared statement of General Hoffman follows:]
          Prepared Statement by Lt. Gen. Donald Hoffman, USAF
    Mr. Chairman and distinguished members of the committee, thank you 
for the opportunity to appear before you today to discuss Air Force 
acquisition and the modernization and recapitalization plan in the 
fiscal year 2007 President's budget request. Our joint warriors are the 
best in the world. However, they can only be as effective as the tools 
we give them. Within today's fiscal constraints, we must fight the 
global war on terror and protect the homeland while transforming the 
force and maintaining an appropriate level of risk. The Air Force is 
committed to balancing the health of today's force with the 
modernization and recapitalization necessary for the capabilities of 
the future. The Air Force appreciates all the support this committee 
has provided to the warfighter and ongoing operations around the world.
    The Air Force has three priorities: winning the war on terror, 
developing and caring for our airmen, and maintaining, modernizing, and 
recapitalizing our aircraft and equipment to meet the Nation's 
requirements. Our Air Force has been at combat for 15 consecutive 
years--from the initial Operation Desert Shield deployments in 1990 to 
our ongoing operations in Iraq and Afghanistan. We have learned a great 
deal from these operations about our capabilities: Global Strike, 
global intelligence surveillance and reconnaissance (ISR), global 
mobility, and information operations and cyberspace. Based on our 
lessons learned, we must adjust our force structure and recapitalize 
our Air Force to continue to meet our obligations under the U.S. 
National Security Strategy. We are operating the oldest inventory of 
aircraft in our history, while maintaining the intense operations tempo 
(OPTEMPO) required by the global war on terror, humanitarian crises, 
and routine requirements. As part of the Air Force transformation 
roadmap, we need to divest some of our older, less capable, and most 
costly aircraft to free up funding to acquire newer aircraft with 
greater capability, increased availability, and lower maintenance 
requirements/costs.
                                aircraft
    Our primary fighter modernization and recapitalization program is 
the F-22A Raptor. The F-22A is a 5th generation fighter aircraft that 
delivers joint air dominance to counter persistent and emerging 
national security challenges. Given its vast improvements in every 
aspect--air-to-air, air-to-ground, all-aspect stealth, and an adaptable 
architecture--the F-22A is an insurance policy against future threats 
to joint air dominance and represents a best value capability for the 
American taxpayer. The F-22A is the only fighter in production that 
will defeat evolving threats to joint air dominance in anti-access 
environments over the next 20-30 years. The F-22A is flying today and 
is in full rate production with 63 aircraft delivered and 44 in 
production. Its performance continues to meet or exceed key performance 
parameters and spiral modernization will further enhance its air-to-air 
and air-to-ground target engagement capability.
    In the fiscal year 2007 President's budget (PB), $1.05 billion was 
added to the Future Year Defense Plan (FYDP) for a total of 183 
aircraft. To reduce unit cost, the PB requests multiyear procurement 
authority from Congress to procure the next 60 aircraft (Lots 7-9) and 
requests economic order quantity funding of $200 million to achieve the 
projected Lot 8 and 9 savings. In addition to procuring more F-22s, the 
multiyear procurement strategy will extend the production to fiscal 
year 2012 and allow the Department to keep this fifth-generation 
fighter line ``hot'' in the event there are delays to the Joint Strike 
Fighter (JSF) program.
    The F-35 JSF, also a fifth-generation fighter aircraft, will 
complement the tremendous capabilities of the F-22A. The JSF will 
recapitalize combat capabilities currently provided by the F-16 and A-
10. Optimized for all-weather performance, JSF will provide affordable 
precision engagement. The JSF program will develop and produce a family 
of affordable, stealthy, multi-role strike fighter aircraft meeting the 
operational needs of the U.S. Air Force, U.S. Navy, U.S. Marine Corps, 
and allies.
    The fiscal year 2007 PB recommends termination of the F136 engine 
development program to provide cost savings of $1.8 billion through 
fiscal year 2011. The Department concluded a single engine supplier 
provides the best balance of risk and cost based upon recent experience 
with engine development for the F-22 and F/A-18E/F which indicates 
sole-source risks were modest and acceptable. The Pratt and Whitney 
F135 engine continues to meet or exceed stringent JSF performance 
requirements.
    The C-17 continues to be a success story for the joint warfighter, 
deploying troops and cargo to Iraq and Afghanistan, as well as numerous 
locations around the world. The Air Force is on schedule for delivery 
of the next 40 aircraft through 2008--for a total of 180. During the 
past year, C-17s flew over 63,000 sorties, bringing the total number of 
Operation Enduring Freedom and Operation Iraqi Freedom missions to over 
109,000. Additionally, the C-17 flew over 100 humanitarian and disaster 
relief missions following Hurricanes Katrina and Rita, as well as the 
October 2005 earthquake in Pakistan. Since September 11, 2001, C-17s 
have over flown projected service life hours by 30 percent 
(approximately 190,000 hours). The C-17, in concert with C-5 
modernization programs, is critical to meeting our U.S. intertheater 
airlift requirements.
    The C-5 fleet is a strategic airlift force multiplier as it enables 
the C-17 to exploit its unique multi-role mission. Born in the 1960s, 
our 112 C-5s have served us well; however, the size and complexity of 
the aircraft have always been a challenge to maintainers. The typical 
C-5 mission capable rate is around 55 percent. To improve the rate, the 
Air Force plans a two-phase technical refresh, the first is the C-5 
Avionics Modernization Program. This program will replace legacy 
equipment with a glass cockpit and updated avionics that allow 
navigation through increasingly restrictive airspace as well as modern 
communications to allow connectivity with the global grid. We are 
installing this modification now and will complete operational testing 
next year. The second phase is the C-5 Reliability Enhancement and Re-
engining Program. This program will improve reliability by replacing 
over 70 high failure items, to include the engines. With these two 
efforts combined, we expect to raise our wartime mission capable rate 
to at least 75 percent and lower our operating cost significantly, 
allowing our C-5 fleet to continue service for decades to come.
    Today, the current KC-135 fleet of 531 aircraft has an average age 
of 45 years. The KC-135 was developed during the Eisenhower era with 
the primary purpose of refueling the B-52 in support of the Single 
Integrated Operations Plan. The KC-135 role expanded during the Vietnam 
War to support tactical combat and combat support missions. Now, in the 
post-Cold War and global war on terror environment, the KC-135 serves 
as a critical joint force enabler . . . it is key to this Nation's 
ability to project joint power globally. The aircraft's primary role 
still supports tactical combat and combat support missions; however, 
the environment in which it operates and the extent of its mission has 
changed dramatically with the evolution of technology, both that of our 
enemies and ours. This change calls for a tanker with greater 
capabilities.
    The tanker replacement program and fiscal year 2007 budget request 
were based on a notional contract award in fiscal year 2007 with first 
delivery in fiscal year 2010. This program builds upon fiscal year 2005 
and fiscal year 2006 legislation regarding tanker replacement and the 
stated congressional intent to procure 100 aircraft within 10 years. 
Presently, the Air Force tanker recapitalization efforts are on pause 
until the Under Secretary of Defense for Acquisition Technology and 
Logistics (USD (AT&L)) provides the Air Force direction to resume. When 
we receive this direction, we will work with the USD (AT&L) to develop 
the appropriate acquisition strategy and timing. This acquisition 
strategy will take into account the warfighters' requirements, the 
recent KC-135 Recapitalization Analysis of Alternatives, the Mobility 
Capability Study, affordability concerns, and the material condition of 
the KC-135 fleet. We recognize the funding profile will then need to be 
refined to reflect this strategy, particularly in light of the current 
program pause. We remain dedicated to ensuring our warfighters, both 
present and future, continue to have this critical capability.
    To meet continuing intratheater airlift demands, we have a two-
pronged approach to modernize our C-130s. First, we are striving to 
replace our oldest aircraft with new C-130Js. Second, the remaining C-
130s are being standardized and modernized via the C-130 Avionics 
Modernization Program and center-wing box replacement programs. C-130s 
have been the workhorse for intratheater airlift during numerous 
contingencies. The new C-130Js have supported global war on terror and 
humanitarian operations since December 2004 and have proven to be a 
force enhancer as they deliver more cargo in a shorter time than older 
C-130s. C-130 modernization, coupled with the wing-box modification, 
reduces operation and sustainment costs and improves combat capability.
    The third strategy for intratheater airlift is direction from the 
Office of the Secretary of Defense to establish an Army/Air Force Joint 
Program Office (JPO) for a future cargo aircraft and light cargo 
aircraft to meet the intratheater airlift capability to reach remote 
areas with small, unimproved runways. The Air Force is working with the 
Army to ensure a joint strategy for this program which is now called 
the Joint Cargo Aircraft (JCA). The Army and Air Force are also 
developing a memorandum of agreement for the JCA program.
    From our heritage to horizon, the Air Force understands that the 
challenges of the 21st century must be met by continued exploitation of 
our Nation's technological leadership and by the ability to respond 
quickly to the demands of a rapidly changing world. Our goal is to 
field today's technology today, not yesterday's technology tomorrow. 
Air Force Smart Operations 21 (AFSO 21) will enact process re-
engineering throughout the Air Force. Use of commercially-proven 
methodologies such as Lean, Six Sigma, Continuous Process Improvement 
and business process re-engineering can yield not only savings for our 
tight modernization budgets, but also reduce cycle time and provide a 
better product for the warfighter. The acquisition and sustainment 
communities have been actively pursuing process change over the past 2 
years while emphasizing a ``back to the basics'' approach in how we do 
acquisition. We are developing and prototyping flexible management 
methodologies to more effectively allocate resources and oversight 
across the acquisition domain. Additionally, there are ongoing efforts 
to recruit, develop, and retain the right mix of military, civilian, 
and support contractors with the right skill sets to get the job done. 
Given that the acquisition community will continue to operate in an 
environment of constrained resources and high operational activity, we 
are refining our processes to be more responsive to warfighter needs 
and operate more efficiently. Our intent is to bring back stability and 
credibility to our recapitalization and modernization efforts.
    Again, I appreciate the support provided by Congress and look 
forward to working with this committee to best satisfy our warfighter 
needs in the future.

    Senator McCain. Thank you very much, General.
    General Hoffman, current law requires that you enter into a 
multiyear procurement contract, only if doing so results in a 
substantial savings, right?
    General Hoffman. Yes, sir.
    Senator McCain. Has the Air Force completed a business-case 
analysis (BCA) yet?
    General Hoffman. Sir, we are using Institute of Defense 
Analyses (IDA) to do an independent assessment of the BCA. They 
have promised their results in May--I think we'll have an 
earlier peek at those results in April--to make that business 
case for what we think will be about 5 percent, plus or minus a 
percent, of savings.
    Senator McCain. Mr. Sullivan, have you ever heard of 
incremental funding for a weapons system such as this?
    Mr. Sullivan. Only to the extent that I've heard about it 
in some of the Navy shipbuilding where they've done split 
funding and things like that. Ships under construction take 
longer. I don't believe I've ever heard of any multiyear 
procurement funding that was incrementally funded on any 
aircraft program. I know that, for example, the F-18 is a 
multiyear procurement for the procurement of the Es and Fs, and 
that was fully funded.
    Senator McCain. General Hoffman, I am obviously concerned 
about this precedent-setting kind of proposal, particularly in 
light of the cost increases and the technical difficulties 
associated with this new weapons system. I understand that, 
given the enhanced capabilities and new technologies, that some 
of that is, historically, probably not precedented. But now 
you're asking us to approve a proposal that is not in keeping 
with any standard procedures that we have followed in the past. 
Are you asking us to proceed on a basis of trust?
    General Hoffman. Sir, I think we have a good-news story to 
say in the F-22 program on cost, and when we talk about 
production cost, it's a firm, fixed-price, negotiated contract. 
Over the last three lots, we have reduced the flyaway cost of 
the aircraft by 16 percent, 11 percent, and 14 percent, I 
believe are the numbers. So, lot by lot by lot, we are 
negotiating continually lower costs in the cost of the 
platform.
    We think the manufacturing base is stable, and we're ready 
to move forward to a multiyear construct to reap additional 
savings.
    Now, those cost savings that I described there were with a 
production rate of around 23 or 24 aircraft per year. As we 
reduce that rate to 20, obviously costs go up. So, anytime you 
perturbate one variable in the equation, you perturbate other 
variables, as well. So, in the multiyear we're talking about 
20, 20, 20. I'm not talking about trying to negotiate a lower 
cost per aircraft, but we're going to cost avoid the impact of 
that spike by lowering the production rate.
    Senator McCain. So, the cost has gone down, but, now that 
we're lowering the number of aircraft to be procured, the cost 
is going up.
    General Hoffman. Yes, sir. Multiyear will allow us to have 
it go up less than if we did not have multiyear.
    Senator McCain. Mr. Sullivan?
    Mr. Sullivan. Yes, one of the things that we looked at when 
we saw the proposal as it is now--and I know that their 
proposal isn't complete, and it will be completed in May, so we 
haven't seen the final--but if you compare it to what was in 
the fiscal year 2006 President's budget, where they were going 
to buy 4 fewer aircraft, but the funding for the 56 they were 
going to buy, that was going to be $166 million per aircraft. 
Under this new multiyear procurement plan for the final 60 
aircraft, the unit cost would actually be $179 million, so it 
goes up by about 8 percent.
    Now, in the final analysis, that's because, I think what's 
really happening here is, they're trying to extend the program 
for 2 years in order to keep the production line hot for the 
fifth-generation fighters, and then probably the question is, 
is that really what needs to be done? But the multiyear 
procurement is not, by any means, going to reduce costs from 
what the President's budget was a year ago. In some of the 
plans that they're working on now, the more optimistic 
scenarios, it shows only a 5-percent reduction. So, I think 
that's questionable.
    Senator McCain. Mr. Marron? On this issue.
    Mr. Marron. We've seen just the numbers that we got to see 
yesterday--some of the preliminary figures that have been 
provided. Obviously, we haven't seen the full BCA yet. It seems 
that there may be some benefits from doing multiyear 
procurement. There may be some cost reduction that flows from 
that. But, again, as hinted, the figures seem to be somewhere 
in the 5-percent-of-the-total-contract-cost range.
    Senator McCain. General Hoffman, isn't it putting the cart 
before the horse to request this before you've done a BCA?
    General Hoffman. Sir, we could get all our ducks in a row 
and do the BCA, answer all the stability and other questions 
here, and come back next year for a 2-year multiyear, but then 
you don't have the cost avoidance. So, the sooner you do a 
multi-----
    Senator McCain. But how do you know that there's cost 
avoidance if you haven't done an analysis?
    General Hoffman. We are going to do that. That's what IDA 
is doing.
    Senator McCain. But how could you decide it before you've 
done the analysis? You say you are doing it, but you haven't 
done it.
    General Hoffman. We don't have the results of it yet, sir, 
but we do have a rough analysis that shows there are potential 
savings--we think, in the order of 5 percent--by doing a 
multiyear versus three discrete, separate buys.
    Senator McCain. The reason why we have the requirement for 
analysis is so that we do an analysis, not because we have a 
rough analysis. But we require an analysis, and that's by law. 
It's interesting that OMB Circular A-11 states very clearly, 
``Good budgeting requires that appropriations for the full cost 
of asset acquisition be enacted in advance to help ensure that 
all costs and benefits are fully taken into account at the time 
decisions are made to provide resources. Full funding with 
regular appropriations in the budget year also leads to 
tradeoffs within the budget year with spending for other 
capital assets and with spending for purposes other than 
capital assets,'' which brings to mind we obviously need a new 
tanker--all of us agree with that--for the Air Force. Some 
tradeoffs are going to have to be made at some time. So, if we 
lock in this program, where do we get the money for the new 
tanker?
    General Hoffman. Mr. Chairman, we've already done, I think, 
the bow-wave adjustments for all the programs--CSAR-X and many 
of the other high-ticket items that are in our out-years 
there--Joint Cargo Aircraft and so forth. We included the 
appropriate growth wedges in the Future Years Defense Plan 
(FYDP). Especially on the even years, which would be 2006 and 
2008 are where we level that across. In the odd years, a little 
bit of broken glass, perhaps, accumulates, because the ground 
rules for doing the odd-year one is, we don't submit new 
initiatives, and we don't do anything other than fix what has 
to be fixed in that particular year. These are the OSD rules 
for the 2-year budgeting cycle that we're on. Then, in the even 
years, we go out there and make sure that the FYDP is properly 
balanced and, beyond the FYDP, does not have a growth spike out 
there that is not digestable by what we have as our projected 
share of the total obligation authority. So, we think our game 
plan for F-22, JSF, future tanker replacement, and so forth is 
disgestable within our share of the Total Obligation Authority 
(TOA).
    Senator McCain. I thank the witnesses.
    Senator Chambliss.
    Senator Chambliss [presiding]. Thank you, Mr. Chairman.
    Mr. Bolkcom, you said that this is unusual, there's no 
precedent for the Air Force requesting incremental funding. But 
you would agree, as Mr. Sullivan said, this is quite common in 
the Navy, in the purchase of weapons of systems, is that 
correct?
    Mr. Bolkcom. I agree that it is common in shipbuilding, 
Senator.
    Senator Chambliss. Okay. So, this is not some new animal 
that we are setting sail on here with respect to this.
    General Hoffman, some of your F-22A critics regarding 
incremental funding approach have compared what the Air Force 
is trying to do with F-22A funding this year to what the Air 
Force attempted to do with C-17 in 2003. I understand there are 
some important differences in those cases. Would you care to 
explain why the F-22A funding is not the same as C-17 proposal 
years ago?
    General Hoffman. Yes, Senator.
    I think--and I was not around during the C-17 timeframe--
but my understanding of what happened there is that we had, in 
the advanced procurement, excessive amounts of what is 
traditionally used for advanced procurement. So, there was 
money in excess of what was needed just for the long-lead 
items. In addition, the contractor, through efficiencies on the 
production line and all that, got ahead of his production 
schedules. The combinations of those events allowed us to start 
actually getting into aircraft assembly prior to the 
authorization for aircraft assembly by Congress. So, we 
basically outran our permissions with the available funding. We 
had the money, but we outran our permissions. So, that's the 
simplistic view I have, as I understand the situation back 
then.
    With the F-22, we're going into this with eyes wide open 
right from the front, with the dialogue to say, ``here's what 
our intentions are with the money, year-by-year.'' We have 
established, and will negotiate with the contractor, very 
specific control mechanisms that do not allow him to outrun the 
permissions that have been established by Congress.
    Senator Chambliss. Anybody else care to comment on that C-
17 comparison?
    Mr. Bolkcom. Sir, I would just offer that, in their own 
words, the Air Force says, ``This is an unorthodox program,'' 
whether it's like the C-17 or not. It is unusual. It is 
contrary to the way they normally do business.
    My research led me to believe that the onus is really on 
the Air Force to present an ironclad case, a really compelling 
case, for why these risks are justified, what potential 
benefits we're going to get.
    Mr. Marron. I'd just like to second that----
    Senator Chambliss. Sure.
    Mr. Marron.--and to say that, at some level, this is a 
burden-of-proof argument, in that the default position is that 
full funding is the way these types of assets ought to be 
acquired. It's required by law that if you do multiyear 
procurement, you can't do incremental funding. So, presumably 
there's a fairly high burden to explain why, in this case, we 
would deviate.
    Senator Chambliss. Part of the argument, as I understand 
it, is that you get to the end of the road on the current 
schedule, with the procurement of the F-22, and there's the 
potential you don't have anything else out there. We're in the 
middle of a war and we have to have a weapon system that does 
what the F-22 does, and potentially does what the JSF does. So, 
I'm inclined to think they've made a pretty good case for that 
assuming your argument's true.
    General Hoffman. Senator, if I could, we don't view 
multiyears as unorthodox at all. That's standard practice for 
any long-term production run. What is unusual this year is 
split funding. That is unusual. It's brought about by the need 
for near-year funding for the DOD that needed, in the numbers 
of billions of dollars, to pay other bills this year. The F-22 
was the program they looked to, because they had those amounts 
of money, and they could, without perturbating the production 
flow, harvest those amounts of money and pay them back in later 
years. Had there been other programs of that magnitude and at 
that stage of their production maturity, I believe the DOD 
would have looked at a couple of other programs, as well.
    Senator Chambliss. Mr. Bolkcom, Mr. Sullivan, and Mr. 
Marron, I heard what General Hoffman said, relative to the fact 
that with a multiyear we're not going to necessarily save any 
money, but we're going to keep the costs from increasing. I 
believe you said there's a possibility of some savings. Would 
you all care to comment on that? Because normally when we think 
of doing a multiyear, there are, in some cases, significant 
savings. Any comment you all have, relative to that?
    Mr. Sullivan. I would say that when we're looking at this 
program, this program is at the end of its production run. In 
fact, in last year's budget, it was to terminate production in 
2008. So, it's not a multiyear procurement that's happening 
near or at the beginning of production where they can really 
ramp up and get some of those efficiencies. So, in that regard, 
this is a little different animal.
    What we did is--I'll go back to what I said earlier to 
Senator McCain--we looked at where the program was before they 
introduced the idea of multiyear procurement, and found that 
they added a billion dollars to the budget in order to carry 
out the 3 years of 20 aircraft each under multiyear 
procurement. So, we see, really, no savings in going in that 
direction.
    In addition to that, I think now that Congress is going to 
receive a package to have to deliberate over, that justifies 
multiyear procurement a lot sooner than it was going to in the 
past, I think that's due in May, and you'll have to deliberate 
over that quickly, I think, in order for them to pull this off. 
So, along with the other issues that come up that Mr. Marron 
discussed, things like tying future Congress' hands, those are 
issues that concern us.
    Senator Chambliss. Yes.
    Mr. Bolkcom. Is 5 percent significant? General Hoffman says 
he believes the IDA analysis would show that the multiyear 
procurement will give us about a 5-percent savings. The last 
time this statute included any hard numbers, it said the 
requirement was for 10 percent. That's been changed, and the 
statute says ``significant savings.'' I guess it really depends 
on if 5 percent is your idea of significant.
    General Hoffman. It's all a matter of scope, 5 percent of 
this program is still $400 to $500 million. So, if we don't 
consider that significant, we don't need to be talking about 
multiyear.
    Senator Chambliss. Buys a lot of body armor.
    Mr. Marron, in your written statement you criticized the 
Air Force and the DOD for not requesting appropriations 
sufficient to cover a potential cancellation liability relative 
to F-22A multiyear procurement program. However, later in your 
statement you mentioned that, in fact, DOD has taken a similar 
approach regarding budgeting for cancellation liability for 
many other multiyear contracts. The fact that DOD does this 
often doesn't necessarily make it right, but it does help us 
see this issue in a different light.
    Mr. Marron and General Hoffman, I'd appreciate your 
thoughts and comments on this particular issue.
    Mr. Marron. Certainly. It's definitely important to 
distinguish the incremental funding issue inside a multiyear 
procurement, which is a unique special case, from the 
nonfunding of the cancellation liability, which, as you point 
out, is increasingly commonplace among military acquisitions.
    On the civilian side, cancellation liabilities are funded 
upfront. There is still full funding. Not so much, in practice, 
on the military side.
    From a perfect budgeting point of view, that's problematic. 
It would be preferable to fully fund all the potential costs up 
front. If you don't fund the cancellation liability, there is a 
chance that you find yourself, at the end of the year, wanting 
to cancel the program, and not having the resources allocated 
to do so, and there will be the need to come back to Congress 
to get additional appropriations, or you'd have to find 
somewhere else to cut.
    So, that is a challenge from the budget process point of 
view, but I agree with you, it is a less-unique, less-new issue 
than we have with incremental funding.
    Senator Chambliss. General Hoffman.
    General Hoffman. Senator, I'd like to be a little more 
precise, perhaps, in the terms here. We use the term 
``termination liability,'' and that's a liability that's 
carried on many programs in case the Government terminates the 
program before all the funding has transpired. In that case, 
we'd tell the contractor, ``Stop doing what you're doing,'' but 
we'd still owe them for what they've already done. So, 
termination liability covers that, and that's carried within 
the program. As you fully execute a program, that dwindles 
down, then, because you'd have less and less that is unfunded. 
You've covered your hedge, if you will.
    The other term is ``cancellation ceiling,'' and that 
applies only to multiyear contracts. With OSD's permission, 
that can be carried. That contingent liability for us changing 
our mind for future years' business can be carried outside the 
program, with OSD permission.
    So, I think we're blending terms here. There's termination 
liability and there's cancellation ceiling, and the two are 
independent of each other.
    Senator Chambliss. Mr. Marron, in your written statement, 
you comment that, although the Air Force indicates that it may 
be able to pay cancellation costs from funds appropriated for 
the F-22A procurement, combining multiyear procurement and 
incremental funding makes that unlikely. I believe that what 
the Air Force has said is that they will be able to cover any 
termination liability with F-22 funding.
    It may sound like I'm mincing words, but ``cancellation 
liability'' or ``cancellation ceiling'' that we just referred 
to is not the same thing as ``termination liability.''
    My previous question illustrated that, perhaps with most 
multiyear contracts DOD does not fully budget for cancellation 
costs. General Hoffman, in this case, the Air Force does plan 
to cover any termination costs within the current funding for--
--
    General Hoffman. Termination liability will be covered 
within the program. We have enough for 2007. It will be covered 
by 2008 program objective memorandum (POM) submission to 
continue to cover that in the future years from within the 
program.
    Senator Chambliss. Okay, and the point is that you never 
want to get to the point in the program where you're using a 
line of credit to pay for things.
    Mr. Bolkcom, you discussed the justification for the F-22A 
multiyear contract in your written statement and raised a few 
concerns relative to consistency in the budget request for the 
F-22A, as well as issues related to the forward-aft boom. 
Regarding your first concern, I believe the QDR sustained the 
requirement for continued F-22A production and funding through 
at least 2010, and program budget decision (PBD) 720 enacts 
this plan in the fiscal year 2007 President's budget. Regarding 
your second issue, DOD recognized the maturity of F-22A 
production processes a year ago, in April 2005, when they 
approved the program for full-rate production.
    I know that some have claimed that this forward boom 
titanium heat-treating issue indicates a design stability 
problem. Rather, all the facts we have on this situation 
indicate that the design is completely stable, and instead, 
this is an issue of a contractor, which the prime contractor is 
no longer using, by the way, not following the stated design, 
rather than there being a problem with the design.
    Now, it is clear that this is not a structural-integrity or 
safety-of-flight issue. Does anybody have any disagreement with 
that or wish to comment on that?
    Mr. Bolkcom. If I may, sir, thank you for your question.
    Senator Chambliss. Sure.
    Mr. Bolkcom. The point I was trying to convey in the first 
point is that this plan is quite a turnabout from what we saw 
just last year. PBD 753 cut $10 billion from the program. So, I 
guess you could argue it either way. But I do see some recent 
changes in the direction of the program.
    On the second point, I would not argue that it is a design 
stability issue. I think many things suggest the design is 
stable. My point is, it's premature to say what it is or what 
it isn't, because the Air Force itself has said, ``We're still 
evaluating this problem.'' In fact, they do have to inspect a 
number of airplanes, some of which will require invasive 
evaluations.
    So, my point is that it's a little premature to say what it 
is and what it isn't.
    Senator Chambliss. General Hoffman.
    General Hoffman. Senator, on the requirements side, I think 
we do have stable requirements. On the funding streams, I think 
we have been all over the map here, as we've seen in PBD 753 
and the cuts to it, and the increases we have this year. So 
there's a difference here between whether the requirements are 
going up and down, or whether the funding to support those 
requirements are going up and down. I will acknowledge that our 
support of the program has gone up and down, but I don't think 
the requirements have.
    As far as the boom, this gets confusing. When you hear a 
``boom,'' people don't know what we're talking about. I think 
we do have some pictures here. I think we may have some to pass 
out. But this is the article we're talking about, right here. 
These two lugs, right here, are the part of the article that's 
in question. When this is put in a furnace to heat treat it, 
the heat treating is designed to rearrange the molecular 
structure of the metal to make it more resistant to crack 
propagation. Whether a crack forms in the first place or not, 
and whether being heat treated or not heat treated properly has 
any impact on the initiation of a crack, we don't know. The 
logic is that if you heat treat it, it'll prevent the 
propagation of a crack. When these irons are put in an oven, 
they're brought up to the proper temperature and stuff, but as 
this form was placed in the oven, it was held in place by some 
supports, and so the heat didn't propagate properly into that 
portion of the forging.
    Just like in the old days of TV dinners, when you left the 
tin foil on a certain part, and you peel the back on a 
different part, you get different heating properties in your 
dinner. The same thing happened here, and the heat didn't get 
all the way into this part. Now, whether or not that has an 
effect on the long-term sustainment of the aircraft, we don't 
know. We have some engineering studies going on right now. We 
don't believe it's a safety issue. We have not restricted the 
aircraft in any way. They're out there flying right now and as 
we open these aircraft up for other maintenance activities that 
we'd have to go into this area, because the wings have to come 
off to get into this particular area, over time, we'll continue 
to study and monitor any issues that may occur with this.
    But right now we believe this certainly is not a stability 
of manufacturing or a design flaw. It's perhaps an application 
of a standard to a particular subvendor.
    Senator Chambliss. Let's include this, ``Frame 2, lower lug 
bore, four sheets'' here to the record.
    [The information referred to follows:]
     
    
    
     
    
    
     
    
    
     
    
    
     
    Senator Chambliss. General Hoffman, the criteria for a 
multiyear contract are pretty clear and relate to having a 
stable requirement, configuration, and funding; realistic cost 
estimates; preserving the defense industrial base; and saving 
money. Another perhaps more subjective argument that Secretary 
Rumsfeld made in the QDR dealt with preserving a fifth-
generation fighter production line until the next fifth-
generation fighter is in stable production. None of us know 
exactly what's going to happen with the JSF program, but it is 
certainly not going to begin delivering any earlier than 
currently planned, which, at this point, is 2010.
    I'm a big supporter of the JSF, but, to me, keeping the F-
22A line open at least until JSF production is mature and 
stable makes sense and adds some additional rationale for an F-
22A multiyear, which the formal multiyear criteria does not 
necessarily capture. Would you care to comment on that?
    General Hoffman. I think that argument lends itself to 
continuing production of the F-22. Whether we do it multiyear 
or in three or more discrete buys, I think, is independent of 
the argument about the industrial base and preserving our 
fifth-generation fighter capability. We could do this year by 
year by year and achieve those same objectives. There's more 
stability to the workforce, and there's potential savings to 
the taxpayers if we go the multiyear route.
    Senator Chambliss. Okay, gentlemen, thank you all very 
much. I appreciate your being here.
    We'll ask our second panel to come forward, which I believe 
is a couple of gentlemen we already have sitting here, Mr. 
Sullivan and Mr. Bolkcom. We would also ask Rear Admiral Thomas 
Kilcline and Rear Admiral Steven Enewold.
    Okay, gentlemen. Now that we've solved all the problems 
with the Air Force's tactical air (TACAIR) issues, we'll move 
to the Navy's TACAIR issues. We'll start with again Mr. 
Sullivan, if you kick off any opening statement relative to 
Navy TACAIR, we'll be glad to hear from you.
    Mr. Sullivan. The opening statement I made at the beginning 
of the first panel consumed what I would say on JSF.
    Senator Chambliss. All right. Mr. Bolkcom, anything 
additional from you?
    Mr. Bolkcom. Yes, Senator Chambliss. I have a brief 
statement.
    Senator Chambliss. Sure.
    Mr. Bolkcom. Thank you for inviting me to stay for the 
second panel and discuss the F136 alternate engine program. As 
requested, my testimony will address the program and the 
analysis recommending its termination.
    Again, I request that my more complete written statement be 
included in the record.
    Senator Chambliss. Without objection.
    Mr. Bolkcom. Thank you.
    DOD's fiscal year 2007 budget request proposes to cancel 
the F136 engine, a program initiated by, and consistently 
supported by, Congress. The reason given for this decision is 
that it would save $1.8 billion and entail little operational 
risk. However, Air Force leaders such as Michael Wynne have 
expressed concern over potential industrial-base problems 
resulting from this termination. Also, by terminating the F136, 
DOD may lose an effective tool for promoting accountability and 
cost control in the acquisition process.
    Deputy Secretary of Defense England has written and 
testified that, ``the Department's analysis concluded that a 
second engine source would not yield program cost savings.'' 
However, it appears that DOD's cost analysis is incomplete and 
makes a number of assumptions that are open to debate. For 
example, DOD appears to amortize F136 costs over a production 
run of only 3,000 engines, rather than the approximately 8,500 
engines current JSF partners will require. Further, the DOD 
analysis does not consider the potential savings from 
competition during the operation and support of these engines 
over the JSF's 20- to 30-year life. When these variables are 
included, projections of cost savings appear to easily pay for 
the cost of a second JSF engine.
    DOD argues that canceling the alternate engine would incur 
little operational risk. Again, DOD's analysis appears to be 
incomplete and to contain a number of assertions that are open 
to debate.
    First, DOD notes that the JSF's primary engine, the F135, 
and its predecessor, the F119, are operating well, and that the 
F119 has successfully amassed 18,000 test-flight hours. These 
facts, however, do not guarantee that future problems will not 
emerge. Engines that have accumulated millions of operating 
hours still have required upgrades and modifications to address 
performance and reliability issues.
    Second, the DOD analysis does not appear to consider a 
number of factors that will increase risk or the consequences 
of relying on a sole JSF engine type. For example, the JSF will 
be a single-engine aircraft, unlike the twin engine F-22 and F/
A-18. Also, one of the JSF variants will field a complex and 
new type of short takeoff, vertical landing (STOVL) engine.
    Finally, unlike past experience, the JSF will be DOD's only 
fighter aircraft. If the JSF engine develops a problem, no 
similar aircraft will exist to satisfy the mission.
    Some are concerned that terminating the F136 will lead to a 
weakening of the fighter aircraft engine industrial base. A 
definitive response to this concern is elusive, but, arguably, 
the longer the F135 exists as the sole JSF engine, the more 
difficult it would be for others to enter a competition.
    Another industrial issue is whether terminating the F136 
might hurt JSF export. Pratt & Whitney and General Electric 
(GE) currently compete against each other to supply engines for 
foreign sales of F-15s and F-16s. This competition makes the 
aircraft attractive to potential buyers. Some fear that if the 
JSF can only offer a single engine type, sales may not live up 
to expectations.
    A final issue about terminating the F136 is that, by doing 
so, DOD may weaken its leverage over industry in the 
acquisition process. The last time they succeeded in fostering 
an alternate engine, Air Force leaders say that the resulting 
competition conferred benefits that today's acquisition 
officials would have a difficult time replicating. These 
benefits included fixed-price contracts from the very first 
production lot, engine improvements well in advance of what had 
been promised prior to the competition, and dual sources and 
separate prices for critical parts that allowed the Government 
to reprocure spare parts from sources other than the prime 
contractors.
    Mr. Chairman, Senator Chambliss, this concludes my remarks 
on the F136. Thank you for the opportunity to appear before 
you.
    [The prepared statement of Mr. Bolkcom follows:]
               Prepared Statement by Christopher Bolkcom
  cancellation of f136 alternate engine for f-35 joint strike fighter
    Mr. Chairman, distinguished members of the subcommittee, thank you 
for inviting me to speak to you today about the F136 Alternative Engine 
Program. As you requested, my testimony will address the F136 program 
and the Air Force's analysis and conclusions recommending its 
termination.
Introduction
    The Department of Defense's (DOD) fiscal year 2007 budget proposes 
to cancel the F136 alternate engine for the F-35 Joint Strike Fighter 
(JSF), a program which was initiated by Congress in the National 
Defense Authorization Act for Fiscal Year 1996, and which has received 
consistent congressional support since its inception. The reason cited 
for this proposed cancellation was that it would save $1.8 billion over 
the Future Years Defense Plan (FYDP), yet entail little operational 
risk.
    Some DOD leaders, however, have expressed mixed feelings about this 
decision. On February 16, 2006 Secretary of Defense Rumsfeld testified 
that the merits of terminating the F136 were ``clearly debatable.'' 
\14\ On March 1, 2006, Air Force Secretary Michael Wynne testified that 
he was worried about the ``downstream effects'' of this decision.\15\ 
These statements may suggest that there is a lack of consensus within 
DOD regarding this course of action, or it may simply presage the 
congressional scrutiny to follow.
---------------------------------------------------------------------------
    \14\ Michael Bruno. ``House defense appropriators push back on JSF 
engine.'' Aerospace Daily & Defense Report. February 17, 2006.
    \15\ CONGRESSIONAL TRANSCRIPTS. Reuters. Congressional Hearings. 
March 1, 2006. House Armed Services Committee Holds Hearing on Fiscal 
Year 2007 Budget: Air Force.
---------------------------------------------------------------------------
Background
    In fiscal year 1996, defense authorization conferees (H. Rept. 104-
450, Sec. 213) expressed their concern over a lack of engine 
competition in the JSF program and directed DOD to ensure that the 
program ``provides for adequate engine competition.'' (p.706) \16\ In 
fiscal year 1998, authorization conferees (H. Rept. 105-340, Sec. 213) 
directed DOD to certify that ``the Joint Strike Fighter Program 
contains sufficient funding to carry out an alternate engine 
development program that includes flight qualification of an alternate 
engine in a joint strike fighter airframe.'' (p.33)
---------------------------------------------------------------------------
    \16\ At that time, the JSF program was The Joint Advanced Strike 
Technology Program (JAST).
---------------------------------------------------------------------------
    Congress' interest in establishing and funding an alternate engine 
to the JSF's primary engine--the Pratt & Whitney (PW) F135--may have 
been informed by what has become known as ``The Great Engine War'' that 
ran from 1984 to 1994. The Great Engine War describes the competition 
between PW and General Electric (GE) to produce engines (the F100 and 
F110 respectively) to power the Air Force's F-16 Falcon and F-15 Eagle 
fighter aircraft. This competition was held annually between 1984 and 
1994 to produce and maintain these engines for the Air Force. After 
1994, PW and GE continued to compete for engine business among foreign 
air forces that operated the F-16 and F-15. At the time, this 
acquisition strategy was unprecedented, and controversial. Many 
extolled the advantages of competition and the benefits it conferred to 
DOD and the taxpayer.
    The Great Engine War's roots extend well before 1984. Most 
observers credit Congress with initiating this competition by providing 
funds in fiscal year 1976 and fiscal year 1979 to develop a new engine 
that might serve to power the Navy's F-14 Tomcat, or the Air Force's F-
15 and F-16. Ultimately, DOD spent over $376 million to develop the 
F110 to compete with the F100, and $600 million to improve the F100's 
durability and reliability to make it a stronger competitor. Proponents 
believe that the annual competition during the Great Engine War 
produced better engines, on better terms, for less money than would 
purchasing from a single company facing no competition. Recently, 
contrary opinions have emerged, and critics say that ``There is no 
evidence that the F-16 engine competition saved money.''\17\
---------------------------------------------------------------------------
    \17\ ``Joint Strike Fighter--Engine Development,'' (JSF Talk-3) 
Talking Points. Pratt & Whitney. February 23, 2006.
---------------------------------------------------------------------------
    Some have criticized DOD as being ``penny wise and pound foolish'' 
in its proposal to terminate the F136. Critics argue that this decision 
appears driven more by immediate budget pressures on the department 
rather than long term pros and cons of the F136 program. For example, 
Secretary of the Air Force Michael Wynne reportedly said that the idea 
of cancelling the F136 ``came up during the Quadrennial Defense Review 
(QDR), in the course of attempts to identify ways to save costs at the 
Pentagon.'' \18\ Others applaud this decision, and say that single 
source engine production contracts are the norm, not the exception. 
Long-term engine affordabilty, they claim, is best achieved by 
procuring engines through multiyear contracts from a single source.
---------------------------------------------------------------------------
    \18\ Richard Mullen. ``Cutting JSF Engine Was Navy Idea: Wynne.'' 
Defense Today Instant Update. March 2, 2006.
---------------------------------------------------------------------------
    It is not clear if the decision to terminate F136 was based on its 
merits or if it was the result of tradeoffs in a budget cutting 
process. However, the program is clearly handicapped in budget 
considerations by the fact that its benefits won't be realized for a 
decade, while much of its costs are immediate.
Issues
    As DOD has noted, cancelling the F136 poses questions on 
operational risk and potential cost and savings. Additional issues 
include the potential impact this termination could have on the U.S. 
defense industrial base, and on U.S. relations with key allied 
countries. Finally, eliminating competitive market forces for DOD 
business worth billions of dollars may concern those who wish to reform 
DOD's acquisition system and conform to higher standards of 
accountability.
    This testimony addresses these issues in detail, except the 
potential impact on relations with key allied countries. However, it is 
worth briefly noting that friction currently exists between DOD and 
many foreign partners in the JSF program. Denmark, Italy, the 
Netherlands, Norway, and Turkey have expressed dissatisfaction with the 
quality and quantity of the work their companies have been awarded on 
the F-35.\19\ These countries have threatened to reduce their 
participation in the program, or purchase the Eurofighter Typhoon 
instead of the F-35. The governments of Italy and the United Kingdom 
have both lobbied for F-35 assembly facilities to be established in 
their countries. Canceling the F136 would likely mean a considerable 
loss of revenue for GE's U.K.-based partner, Rolls-Royce. Although 
Rolls-Royce has established business relations with PW, this business 
appears to be far short of the 40 percent partnership Rolls enjoys with 
GE. As the full committee has recently heard, the U.K. has warned that 
it may cancel its participation in the JSF if its concerns are not 
satisfactorily addressed.
---------------------------------------------------------------------------
    \19\ ``Norway Signs Industrial Partnership with Eurofighter 
Consortium,'' Defense Daily, Jan. 29, 2003. Joris Janssen Lok, 
``Frustration Mounts Among JSF Partners,'' Jane's Defense Weekly. Mar. 
24, 2004. Thomas Dodd, ``Danish Companies Consider Quitting JSF 
Programme,'' Jane's Defence Weekly, Jan. 9, 2004. Tom Kingston, 
``Unsatisfied Italy May Cut JSF Participation,'' Defense News, May 
10,2004. Lale Sariibrahimoglu, ``Turkey may withdraw from JSF 
program,'' Jane's Defence Weekly, Nov. 10, 2004.
---------------------------------------------------------------------------
    Operational Risk
    DOD officials argue that terminating the F136 poses little 
operational risk. The decision to pursue an alternate engine for F-14s, 
F-15, and F-16s, they say, came at a time when the Services were 
dissatisfied with the performance of existing engines (TF30 and F100). 
During the ``Great Engine War,'' DOD pursued alternate engines not only 
for cost savings, but to improve engine performance, reliability, and 
to reduce operational risk. DOD argues that these same conditions do 
not exist today.
    In a briefing provided to Congress, \20\ the DOD Office of Program 
Analysis and Evaluation (PA&E) states that the F135 engine produced by 
PW for the F-35 is performing well. The first F135 aircraft engine was 
delivered December 2005. Current F135 testing is ``on track and 
successful,'' PA&E notes, and is 33 percent complete as of February 
2006. Further, PA&E states that the F119 engine that PW produced for 
the F-22A Raptor, which served as the basis of the F135, is also 
performing well. It asserts that the F119 has performed well after 
roughly 18,000 flight hours, PA&E notes, and will achieve 100,000 
flight hours by 2009. This briefing also notes that the F-22A Raptor 
and the F/A-18E/F Super Hornet rely on sole source engine suppliers 
(the PW F119 and GE F414 respectively), implying that the F-35 can 
likewise rely on a single engine manufacturer.
---------------------------------------------------------------------------
    \20\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February 
27, 2006.
---------------------------------------------------------------------------
    DOD also argues that industry advances in engine design tools such 
as computational fluid design for airflow prediction, and advanced 
software for prognostic health monitoring, further reduce the risk of 
powering the F-35 with a single type of engine. Presumably, using these 
tools will result in better-made engines that would encounter fewer 
problems during their lives, and will also provide the means of 
predicting or detecting engine problems before they occur. DOD and 
industry witnesses before the full committee have noted that aircraft 
engines are more reliable today than they were in the past. (Some may 
argue that today's engines are more reliable than in the past due to 
the competitive pressures experienced by engine manufacturers in the 
1984-1995 timeframe.) As one yardstick, witnesses have noted that the 
Class A mishap rates for the single-engine F-16 as one example, have 
dropped from 10 per 100,000 hours to 1 per 100,000 hours.
    Others who support DOD's decision to terminate the F136 argue that 
an alternate engine will not help mitigate risk. They say that there 
are no instances in the historical record of a fighter aircraft fleet 
being grounded by an engine defect. Engine problems, they say, are 
typically limited to a specific model, or engine series, or to a 
particular airfield or base.
    A number of observations can be made regarding these arguments. 
First, the comparison between the F-22A and the F/A-18E/F and the F-35 
may not be apt. Both the Raptor and the Super Hornet are equipped with 
two engines. The F-35 will have one engine. A single engine aircraft is 
inherently subject to higher risk than a two-engine aircraft, as the 
consequences of engine problems in the F-35 will be worse than for the 
F-22A or F/A-18E/F. As one simple datum to consider, between fiscal 
year 1990 and fiscal year 2004, the single-engine F-16 suffered 80 
Class A engine-related mishaps for a rate of 1.31 per 100,000 flight 
hours. The twin-engine F-15 suffered 21 engine related Class A engine-
related mishaps for a rate of .64 per 100,000 flight hours.\21\ Mishap 
statistics must be used cautiously, however, when trying to support 
arguments about aircraft engine reliability. Many different factors 
contribute to military aviation safety and the improvements described 
in previous testimony. Because mishap rates have improved does not 
necessarily mean that improved engine reliability was the cause. Most 
safety experts attribute improvements in mishap rates over the past 30 
years to the implementation of improved safety awareness techniques 
such as Operational Risk Management (ORM). Similarly, it is not clear 
that the F-15's two engines are the primary reason this aircraft has a 
mishap rate one-half that of the F-16. Interviews with safety 
professionals and military pilots, however, indicate a large majority 
believes two engines to be safer than one engine.\22\
---------------------------------------------------------------------------
    \21\ Fighter/Attack Aircraft. Engine-Related Class A Mishaps. USAF 
Safety Center. http://afsafety.af.mil/stats/e--stats--2.asp.
    \22\ CRS Report for Congress RL31571. Military Aviation Safety. 
Christopher Bolkcom.
---------------------------------------------------------------------------
    Unlike the Raptor and Super Hornet, one of the F-35 variants will 
be powered by an engine capable of vertical/short takeoff and landings 
(VSTOL). The VSTOL engine will be more complex than the conventional 
engines and will be subject to different operational stresses and 
conditions. The AV-8B Harrier, the Marine Corps short takeoff, vertical 
landing (STOVL) fighter aircraft has one of the highest mishap rates of 
all military aircraft. Importantly, unlike most aircraft-types which 
are subject to mishaps most frequently through human error, two-thirds 
of AV-8B's mishaps are related to the aircraft materiel failures.\23\ 
Further, the four primary material problems related to AV-8B mishaps 
reportedly are engine, flaps controller, nose wheel steering, and 
ejection system.\24\ It is to be hoped that the VSTOL JSF will improve 
upon the AV-8Bs safety record and engine problems. However, it appears 
optimistic to contend that engines generally, and VSTOL engine in 
particular, do not contribute to safety concerns.
---------------------------------------------------------------------------
    \23\ Sandra Ervin. ``Navy Aims to Curtail Aviation Mishaps Caused 
by Crew Error.'' National Defense. October 2000. First annual report of 
the Harrier Review Panel (HaRP). USMC. 30 September 1998 Executive 
Summary. Chaired by Deputy Chief of Staff (Aviation), Lt.Gen. T. Dake. 
Since its introduction the AV-8B has outpaced all aircraft types with 
68 (Now 77) Class A mishaps for a cumulative rate of 12.1 per 100,000 
flight hours. The Class A mishap rate for the first model of the 
Harrier, the AV-8A, was 31.77 mishaps per 100,000 hours.
    \24\ Alan C. Miller and Kevin Sack. ``The Widow Maker.'' Los 
Angeles Times. December 15, 2002.
---------------------------------------------------------------------------
    A second point that might be made regarding DOD's risk assessment 
is that the experience with the F119 and F135 engines is still 
relatively modest. By the time the decision was made to divide engine 
production contracts between GE and PW in 1984, the PW F100 engine had 
accumulated 2,000,000 hours of operational service. Even with this 
extensive experience with the engine, over the following 25 years PW 
and the Air Force made numerous improvements to the engine as it 
competed for business with GE. By comparison, the 18,000 hours of 
testing appears to be a modest foundation to make projections of the 
F119's future performance.
    It does not appear that there are any overt performance or 
reliability problems with today's fighter aircraft engines that an 
alternate engine would be required to remedy. However, it may be worth 
noting, that in the future, the JSF will be the only fighter aircraft 
in service. If any engine problems are encountered, the entire fighter 
aircraft fleet may be affected, not just one model of aircraft. In 1984 
when the decision was made to award engine production contracts to both 
contractors, the Air Force, Navy, and Marine Corps flew roughly 11 
different models of combat aircraft.\25\ While DOD was experiencing 
problems with some combat aircraft engines, it also had sufficient 
aircraft diversity that an F-4, for example, might be able to perform a 
mission if an F-14 or F-18 were grounded due to engine problems. DOD 
will not have this diversity in the future, so consequences of 
potential engine problems again appear to be more troubling than in the 
past.
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    \25\ Air Force: A-7D, A-10, F-4, F-15, F-16. Navy: A-6E, A-7E, F-4, 
F-14. Marine Corps: A-4M, A-6E, AV-8C, F-4N, F-18.
---------------------------------------------------------------------------
    DOD's statements about grounding aircraft may be incomplete. A 
number of aircraft has been grounded over the past 5 years, including 
the KC-135, C-130, and B-1B, and none of these groundings was for 
engine-related problems. However, aircraft have been grounded for 
engine-related problems. The Marine Corps, for example, grounded 106 
AV-8B Harriers in July 2000 after a faulty engine bearing was cited as 
the cause of a crash.\26\ Further, aircraft groundings whether or not 
for engine-related problems may not occur often because as a matter of 
policy, the Services try not to ground aircraft. If aircraft are 
grounded, a positive action or finding must take place before the 
aircraft return to service. Instead, the Services try to (stand down( 
aircraft when safety is a concern. These stand downs are typically for 
a defined period of time and are either anticipatory, or in response to 
some general concerns. As one example, on March 6, 2006, the commander 
of Naval Air Forces directed a mandatory, half-day safety stand down 
for all naval aviation squadrons and detachments. Although safety stand 
downs for individual wings or squadrons take place more frequently, 
this was the first service-wide stand-down in 4 years.\27\
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    \26\ Mark Oliva. ``Pilots defend Harrier jet.'' Stars and Stripes. 
(Pacific Edition). January 19, 2003.
    \27\ ``CNAF Directs Half-Day Stand-Down.'' Naval Safety Center. 
U.S.Navy. http://www.safetycenter.navy.mil/articles/a-m/CNAF--directs--
standdown.htm.
---------------------------------------------------------------------------
    One issue that pertains to operational risk that has not been 
discussed by DOD is that of reduced fleet readiness due to, for 
example, a lack of spare parts. Two manufacturers would maintain two 
supply chains, and perhaps additional suppliers for critical parts. 
Eliminating one manufacturer could lead to fewer suppliers and 
potentially leave the remaining supply chain more vulnerable to 
disruptions caused by labor disagreements, foreign takeovers, terrorist 
attacks, or natural disasters.
    Finally, it may be noted that DOD statements on the potential risk 
of operating the F-35 with a single engine-type appear to be 
inconsistent, or potentially contradictory. For example, DOD's Office 
of Program Analysis & Evaluation (PA&E) claims that ``Relying on a 
single engine supplier incurs minimum operational risk.'' In the same 
document, PA&E notes that the JSF alternate engine offers ``significant 
benefits'' in readiness, reliability, availability, and protection from 
fleet grounding.\28\ Logic suggests that if a course of action offers 
``significant benefit,'' the elimination of that course of action would 
elicit a negative or harmful effect. During a March 1, 2006 hearing, 
Secretary of the Air Force Michael Wynne discussed the potential cost 
and risk of having one engine supplier versus two. Secretary Wynne said 
that the decision to terminate the F136 was ``a very tough call because 
it involves the industrial base and involves long-term reliability 
statistics and involves economics.'' In the context of reliability and 
risk, Secretary Wynne continued with the statement that ``I don't like 
to see our industrial base go to a single supplier.'' \29\
---------------------------------------------------------------------------
    \28\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February 
27, 2006.
    \29\ Congressional Transcripts. Reuters. Congressional Hearings. 
March 1, 2006. House Armed Services Committee Holds Hearing on Fiscal 
Year 2007 Budget: Air Force.
---------------------------------------------------------------------------
Cost and Savings \30\
---------------------------------------------------------------------------
    \30\ To date, $1.07 billion has been obligated to the F136 program. 
A $2.4 billion contract awarded in August 2005 would have funded the 
program's system development and demonstration phase, slated to run 
until September 2013. DOD estimates that if it cancels the F136 it 
could incur between $50-$70 million in termination costs and an 
increase of approximately $100 million in the F135 program due to the 
need for additional flight test assets. Source: ``Information Paper.'' 
Department of Defense. February 27, 2006. Provided to CRS by SAF LLW.
---------------------------------------------------------------------------
    Many believe that estimating cost lends itself to quantitative 
analysis more than estimating risk. However, this may not be the case. 
The time lines involved in these estimates are long, the variables are 
numerous, and cost estimating tools are imperfect.\31\ Like any 
quantitative assessment, assumptions made about the variables measured 
can influence significantly the analyses' output. When calculating the 
amount of competition-generated savings required to recoup the costs of 
developing the F136 engine, two variables can sway the analysis 
considerably: the amount of money being amortized over the life of the 
F-35, and the number of engines to be purchased. Additional assumptions 
and assertions can also affect the analysis. Therefore, costs and 
savings estimates by parties on both sides of the F136 debate may be 
matters of some subjectivity.\32\
---------------------------------------------------------------------------
    \31\ Military Jet Engine Acquisition: Technology Basics and Cost-
Estimating Methodology. RAND. Santa Monica, CA. 2002 and Factors 
Affecting the Use of Competition in Weapon System Acquisition. RAND 
(Santa Monica, CA) February 1981. p.53 which noted that ``the existing 
body of analysis has not provided an adequate set of management tools 
for estimating the benefits or the costs of competitive 
reprocurement.''
    \32\ The Navy's F404 engine competition may serve as an example of 
the difficulties involved in estimating cost savings resulting from 
competition. A press account stated that ``Although Navy officials were 
able to identify the direct costs of establishing a second source for 
the F404, they could not estimate the total cost of keeping two 
production lines open. (emphasis added)'' ``Navy Spent At Least $58.6 
Million To Set Up Second F404 Line.'' Aerospace Daily. August 30, 1989.
---------------------------------------------------------------------------
    Deputy Secretary of Defense Gordon England has written that ``The 
Department's analysis concluded that a second (engine) source would not 
yield program cost savings.'' \33\ Mr. England has also reiterated this 
position in recent testimony. The analysis that DOD shared with 
Congress and Congressional Research Service (CRS) on JSF alternate 
engine cost issues contained a single chart that depicts the output 
from its analysis, and a number of anecdotes and historical examples 
that DOD maintains support its analysis.
---------------------------------------------------------------------------
    \33\ Cover letter. JSF Alternate Engine Decision'' Briefing. OSD/
PA&E. February 27, 2006.
---------------------------------------------------------------------------
    DOD's ``Break Even Analysis'' chart is meant to show the percentage 
of savings required to ``break even'' (i.e. recoup F136 costs) over a 
16-year period in which DOD purchases 3,036 JSF engines. If competition 
in the production of these engines were to result in 25 percent cost 
savings, DOD would recoup the F136 $2.8 billion System Development and 
Demonstration (SDD) costs in fiscal year 2019 when the 2,259th engine 
is purchased. If 20 percent savings occurs, DOD will break even in 
fiscal year 2021. Fifteen percent savings will come close to $2.8 
billion (approximately $2.6 billion) by the end of the production run, 
never fully recouping F136 SDD costs by DOD's calculations. Thus, DOD 
argues that to fund an alternate engine for the F-35, must generate at 
least 15 percent cost savings to justify itself on a cost basis.
    DOD states that this much cost savings is unlikely because of its 
experience during the ``Great Engine War,'' and the competition between 
GE and PW for the Navy's F404 business in the late 1980s, \34\ indicate 
that engine competition generates only ``minimum cost benefit.'' \35\ 
Cost benefit is minimized DOD asserts because ``Splitting the buy 
between two competitors can make production and support costs 
increase.'' DOD cites reduced ``learning curve effect,'' decreased 
buying power for each source, and amortizing fixed costs over fewer 
units for each source, as specific cost pressures.\36\
---------------------------------------------------------------------------
    \34\ The Navy awarded PW approximately $59 million starting in 1985 
to initiate a competition between it and GE (the incumbent) for 
production of different F404 engine variants for the F/A-18 and other 
Navy aircraft.
    \35\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February 
27, 2006.
    \36\ Ibid
---------------------------------------------------------------------------
    On its ``Break Even Analysis'' chart, DOD expresses these projected 
cost increases as $700 million that is added to the $2.8 billion in SDD 
costs that must be recouped. To recoup the SDD costs and make up for 
this ``loss of learning'' caused by a second competitor, DOD argues 
that 25 percent savings will be required to break even by fiscal year 
2021, and that 20 percent savings generated by competition will almost 
break even by the end of the production run in fiscal year 2026 
(approximately $3.4 billion).
    PW has offered a similar analysis, but using a slightly different 
methodology and different assumptions. PW estimates that the amount of 
money needed to be recouped through competition generated savings is 
$3.5 billion, apparently including the $1.07 billion spent on the F136 
prior to SDD. PW estimates that 4,000 JSF engines will be purchased, 
but amortizes the $3.5 billion over only the engines that GE might win 
in a competition. A 50 percent win rate, or 2,000 engines, is assumed 
for the analysis. By this methodology, GE would have to generate over 
$1.7 million worth of savings per engine to pay for the cost of 
development. It is unreasonable to expect, PW argues, $1.7 million 
worth of savings on a $6 million engine.\37\ During recent testimony 
before the full committee, a PW witness also made the point that engine 
life cycle costs such as component improvement, and mid-life upgrades 
would be doubled if a second engine were to be funded. Any potential 
savings from competition would need to defray these additional costs to 
justify a second engine on a cost basis.
---------------------------------------------------------------------------
    \37\ ``Joint Strike Fighter--Engine Development,'' (JSF Talk-3) 
Talking Points. Pratt & Whitney. February 23, 2006.
---------------------------------------------------------------------------
    There are a number of observations that can be made regarding DOD's 
cost estimating methodology, and its underlying arguments. Perhaps the 
most important observation is on some of the assumptions made in DOD's 
and PW's analyses. In both analyses it appears that the number of 
engines over which the SDD costs is amortized may be too small, based 
on historical experience. Further, it can be argued that the $3.5 
billion figure cited by both studies as the F136 costs to be amortized, 
is too high. Individually, the assumptions made on the number of 
engines, and the amount of money to be recouped, make competition 
appear to be less cost effective. Together, these assumptions may lead 
to the conclusion that competition is without financial merit in this 
case.
    DOD's estimate of 3,036 JSF engines over which the SDD costs would 
be amortized appears to be too low because many more engines are 
typically purchased than the total number of aircraft. DOD currently 
plans to purchase a total of 2,443 F-35s, and international partners 
plan to purchase 733 for a combined purchase of 3,716 aircraft. Over 
the 20-30 year lifetime of a fighter aircraft, more engines and many 
spare parts will be purchased. DOD recognizes this, so it plans to 
purchase initial spare engines at 15 percent of the fleet for a total 
(366 for DOD, 110 for partners). More engines, however, will be needed.
    A conservative and illustrative planning factor is that a single 
aircraft will require 2.5 engine equivalents (either whole engines, or 
piece parts) over its lifetime.\38\ If this planning factor is applied 
to the JSF program, one can expect a total of 6,474 engines purchased 
for DOD and 8,417 engines total, not including additional potential 
future international sales. PW's figure of 2,000 engines appears to be 
low for similar reasons, but also because competition should decrease 
the cost of both engines, not just the alternate engine. So, SDD costs 
would be recouped by the cumulative cost savings of all engines 
produced, not just those awarded to GE.
---------------------------------------------------------------------------
    \38\ Rough estimates of the number of engine equivalents will be 
required per aircraft over its lifetime were provided by PW and GE. One 
set of estimates was calculated by adding the value of initial engine 
spares to the value of forecasted replenishment spares , divided by the 
unit recurring flyaway (URF) cost of the propulsion system. In the case 
of the JSF engines, this equation leads to rough planning factors of 
2.44 engines for the Navy variant, 2.17 for the Air Force variant, and 
2.59 for the Marine Corps variant. Clearly, assumptions on spares will 
affect the analyses results. A planning factor of 1.5 engine 
equivalents, for example, per aircraft will result in a smaller total 
purchase, and a planning factor of 3.0 will result in a larger total 
engine purchase.
---------------------------------------------------------------------------
    A key assumption implicit in both DOD's and PW's analysis is that 
SDD costs are only amortized over engine production. PW and GE would 
annually compete to produce the F-35's engines, and also to support the 
engines over the 20-30 year life of the aircraft. A larger fraction of 
an aircraft engine's life cycle cost is attributed to support 
activities than to production. Therefore, it appears that both the DOD 
and the PW analyses ignore a considerable body of potential work over 
which the contractors would compete and potentially generate savings 
which could help defray upfront SDD costs. Air Force officials who 
participated in the ``Great Engine War'' believe that cost savings from 
competition during operations and support (O&S) were considerably 
greater than cost savings from competition during engine 
production.\39\
---------------------------------------------------------------------------
    \39\ Telephone interview with Col. James Nelson (Ret.) Former 
Deputy for Propulsion, Aeronautical Systems Division, Air Force Systems 
Command. March 5, 2006.
---------------------------------------------------------------------------
    It can be argued that PW's inclusion of $1.07 billion in F136 costs 
to be recouped during competition is inappropriate because these are 
``sunk costs.'' No decision made today, or next year, will recoup them. 
If DOD were to cancel the F136 program, it could recoup all of the $2.8 
billion awarded for SDD, minus termination liability. Thus, the savings 
from terminating the program can be weighed against the potential costs 
and savings of keeping it. It is noteworthy that DOD does not include 
this $1.07 billion in its cost analysis.
    DOD's assertion that costs to DOD increase by $700 million when it 
funds a second engine producer because of a ``loss of learning'' 
appears to be central to DOD's claim that a second manufacturer does 
not save money. Yet, it is unclear how this ``loss of learning'' has 
been quantified, and whether this figure is offset by the competitive 
forces that can increase learning, productivity, and innovation. 
Similarly, DOD's argument that ``splitting the buy between two 
competitors can make production and support costs increase'' has not 
been substantiated in documents provided to Congress.
    To support it's ``Break Even Analysis,'' DOD's states that it 
experienced only ``minimum cost benefit from engine competition,'' 
during the Great Engine War. This assertion is at odds with statements 
made earlier by senior Air Force officials. Several sources estimate 
that through competition, the Air Force saved 21 percent ($4 billion of 
an $18.8 billion program) over the 20-year life cycle of the improved 
F100 and F110 engines compared to operating legacy F100 engines over 
the same period of time.\40\ It should be noted that the Air Force's 
estimate of $4 billion in savings does not appear to account for all of 
the F110 development costs.\41\ If these costs are also considered, the 
$4 billion in savings due to competition may be closer to $3.5 billion.
---------------------------------------------------------------------------
    \40\ Prepared Statement of Hon. Thomas Cooper. U.S. Congress, 
House, Committee on Armed Services, Air Force Alternative Fighter 
Engine, Hearings before the Subcommittee on Procurement and Military 
Nuclear systems, 98th Cong. 2nd Sess., March 8, 1984. Point Paper on 
Air Force Alternate Fighter Engine (AFE) Competition. Aeronautical 
Systems Division. Directorate of Development and Production, DCS/
Research, Development and Acquisition. February 18, 1987.
    \41\ Donald L. Pilling. Competition in Defense Procurement. 
Brookings (Washington, DC) 1989. Telephone and e-mail exchanges with GE 
representatives March 22, 2006.
---------------------------------------------------------------------------
    Also, the Navy's aborted F404 engine competition may not be the 
best cost analogy to today's potential JSF engine competition, because 
it reportedly was not pursued to save money. Navy spokespersons stated 
that Secretary of the Navy Lehman ``opted to open the second F404 line 
to ensure that an adequate industrial mobilization base existed to meet 
the national defense needs and to promote competition. It was not based 
on projected cost savings.'' \42\ Evaluating the F404 competition is 
complicated because PW reportedly was found guilty of illegally 
obtaining GE's confidential pricing data, and conspiring with Navy 
officials to defraud the Government.\43\ This may have played a more 
significant role in DOD's decision to terminate the competition than 
cost savings estimates.
---------------------------------------------------------------------------
    \42\ Statement by Naval Air Systems Command (NAVAIR) August 23, 
1989, as cited in ``Navy Spent At Least $58.6 Million To Set Up Second 
F404 Line.'' Aerospace Daily. August 30, 1989.
    \43\ ``United Technologies Admits ``Ill Wind' Role, Will Pay 
Fine.'' Aviation Week & Space Technology. September 7, 1992.
---------------------------------------------------------------------------
Industrial base
    As noted earlier, DOD officials have expressed concern over the 
potential impact of this proposed termination on the industrial base. 
Further, DOD analyses acknowledge that the F136 alternate engine 
provides ``significant'' industrial base benefits.\44\ Therefore, it is 
reasonable to assume that the decision to terminate the F136 may have 
negative consequences on the industrial base. The debate focuses on how 
significant these negative consequences may be.
---------------------------------------------------------------------------
    \44\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February 
27, 2006.
---------------------------------------------------------------------------
    The industrial base issues discussed and debated in hearings and 
other public fora have focused on whether a single supplier of fighter 
aircraft engine will result in costlier engines over time and whether 
reliable access to engines and spare parts might be jeopardized. The 
root of this question is what effect canceling the F136 engine will 
have on GE's ability to continue to compete in the high performance 
fighter aircraft engine business. Currently, the only U.S. 
manufacturers of fighter aircraft engines are PW and GE.
    GE is a dominant player in the large, commercial aircraft engine 
market. By most estimates, GE has captured approximately 50 percent of 
this market. GE's current business in building and supporting high 
thrust, high performance, fighter aircraft engines is more modest. 
Currently, GE builds and maintains engines (F400 series) for the Navy's 
planned inventory of 462 F/A-18E/F Super Hornets. It is expected to 
also build engines for the Navy's planned inventory of 90 EA-18G 
Growlers. GE supports the F110 series of engines for domestic and 
international clients. Finally, GE may be competitive in engine 
competitions for large unmanned aerial vehicles (UAVs).
    It appears that if the F136 were cancelled, GE's fighter aircraft 
design and manufacturing capabilities would not peter out immediately. 
The business outlined above likely is sufficient to maintain GE's 
design teams, engineers, and assembly line workers, and much technology 
and expertise might be extracted from the commercial business lines. 
GE's own experience during the Great Engine War shows that a company on 
the periphery of a business area can ``catch up,'' and beat an 
incumbent in head-to-head competition, even if that incumbent had been 
producing a particular type of engines for a decade.
    If the F136 program were canceled today, and in, say 10 years time, 
DOD requested GE to design and build an alternate to the F135, GE might 
face noteworthy challenges. It already trails PW by 3 years of 
development, for example, and PW's lead would grow with each year GE 
was out of this business. GE's successful competition with PW in the 
Great Engine War was expedited by GE already having an engine (the 
F101) in the same thrust class as the PW F100. GE was developing the 
F101 for the B-1B bomber, and this work gave the F110 program 
considerable leverage.
    GE does not have another engine in the same thrust class (40,000 
lbs.) as the F136, and no other high performance fighter aircraft 
programs after the JSF appear to be in DOD plans. The F110 and F400 
series engines that GE maintains are in a different class than the F136 
and are the focus of maintenance and upgrade efforts, not design 
efforts. The leverage that GE's commercial engine business might offer 
to developing a new 40,000 lb. thrust engine is unclear. Commercial 
engines share some qualities with fighter aircraft engines, but they 
are also very different. Commercial engines do not employ afterburners, 
or thrust vectoring, for example, and they are designed to meet fuel 
efficiency goals, not performance goals like fighter aircraft engines.
    Additional industrial base issues have not yet been widely debated, 
but may also inform decisions on the future of the F136. One issue 
concerns export and competitiveness. The JSF is a centerpiece of the 
Federal Government's fighter aircraft policy. Since the program's 
beginning, the desire to produce a cost-effective, multi-role aircraft 
appears to have been shaped by consideration of what the international 
market would bear.\45\ The F-35 is designed as an export aircraft, and 
one that is hoped to leverage the international success of the F-16 
Falcon (another cost effective, single engine, multi-role fighter) to 
perpetuate U.S. dominance in this market. Foreign participation in the 
JSF program was sought to defray development costs, but also to ``prime 
the pump'' for export.\46\
---------------------------------------------------------------------------
    \45\ See for instance John Tirpak. ``World Market Forces Improved 
Military Exports.'' Aviation Week & Space Technology. February 14, 
1994. John Morrocco. ``No JAST Prototypes to Fly Until After 2000.'' 
Aviation Week & Space Technology. December 13, 1993, and ``Brits Visit 
JAST to Position for Next Round of Contracts.'' Aerospace Daily. June 
1, 1994.
    \46\ ``Australia, Belgium Enter Joint Strike Fighter Program as EMD 
Partners,'' Inside the Air Force, April 21, 2000.
---------------------------------------------------------------------------
    A key question appears to be whether the JSF will achieve the same 
export success with one engine-type as it might with two. Some argue 
that the F-16's export success is directly attributable to having two 
engine types: ``The F-16 became a much more exportable aircraft when GE 
and Pratt were killing each other in the international market. So, if 
you are selling these JSF's and you have one engine . . . that reduces 
the attractiveness to these international customers . . .'' \47\ 
Singapore and South Korea have both selected the GE F110 engine to 
power their F-15 Eagles, and Saudi Arabia is giving serious 
consideration to re-engining its F-15s with GE engines. These decisions 
contrast with U.S. Air Force decisions to power its Eagles with PW 
engines. Further, while GE engines power a large fraction of USAF F-16 
Falcons, PW engine sales to international F-16 customers have dominated 
GE sales. This background lends credence to the suggestion that 
competition in engine selection can enhance U.S. fighter aircraft 
export success.
---------------------------------------------------------------------------
    \47\ Carlo Munoz. ``Congress, Defense Department Square Off Over 
Second JSF Engine.'' Inside the Air Force. March 3, 2006.
---------------------------------------------------------------------------
    Would cancelling the F136 and the attendant competition with the 
F135 adversely affect potential future advances in engine performance, 
reliability, and maintainability? If so, might this be at the expense 
of U.S. competitiveness? Many of those who participated in, or studied 
the ``Great Engine War'' assert that the competition between GE and PW 
made both companies better and ``proved invaluable to future engine 
development.'' \48\
---------------------------------------------------------------------------
    \48\ Maj. John Nix and Maj. Riley Shelnutt. ``Behind the Alternate 
Fighter Engine Competition.'' Aerospace America. May 1984.
---------------------------------------------------------------------------
    The economic stakes in international fighter engine competition 
appear to be high. U.S. companies face competition from France, Sweden, 
Russia, and a European consortium of companies, and it is argued that 
some of these governments heavily subsidize their aerospace industries. 
Aerospace is an important export for the United States. Despite this 
competition, aerospace has at times provided the U.S. economy with its 
highest trade surplus.\49\ Many observers project that the size of the 
international market for fighter aircraft will remain high for the next 
decade, after which it may peak and then decline.\50\ Thus, the 
importance of maintaining the competitiveness of the U.S. fighter 
aircraft engine industry may grow, if U.S. fighter aircraft 
manufacturers are to ``make hay while the sun shines.''
---------------------------------------------------------------------------
    \49\ ``The trade surplus generated by aerospace foreign trade in 
2005 totaled $37 billion. With an $8.4 billion increase in exports and 
$2 billion rise in imports, the industry's trade surplus expanded $6.4 
billion. The aerospace trade balance, before its sharp rise this year 
and last, had fallen $14 billion from its $41 billion peak in 1998 due 
to $12 billion fewer exports and $2 billion more imports. In 2004, the 
latest year of comparative data, the U.S. aerospace industry posted the 
highest trade balance of all industry categories. (emphasis added).'' 
2005 Year-End Review and 2006 Forecast--An Analysis. David H. Napier, 
Director, Aerospace Research Center. Aerospace Industries Association.
    \50\ ``Market Overview: Fighter/Attack Aircraft.'' World Military & 
Civil Aircraft Briefing. Teal Group Inc. (Fairfax, VA) February 2006.
---------------------------------------------------------------------------
Acquisition Reform and Accountability
    The final point one can make about the potential termination of the 
F136 pertains to acquisition reform, or (good government). This 
committee has recently held multiple hearings on defense acquisition 
reform, and members have consistently expressed concern about perceived 
shortcomings in the current acquisition system, or a lack of personal 
accountability in acquisition decisions. As this committee has tried to 
determine and correct the root causes of growing weapon system cost 
growth it has heard from witnesses a litany of problems such as funding 
instability, unrealistic requirements, poorly structured contractor 
incentives, too much reliance on lead system integrators, and the 
improper use of commercial contracts to purchase military items.
    In this context, it may be worth noting that the competition during 
the ``Great Engine War'' appears to have conferred a number of benefits 
to government that today's acquisition officials would have a difficult 
time duplicating. For example, prior to the first contract award, the 
Air Force demanded that GE and PW provide 6 years of cost projections 
to include the production of engines, but also the price of support 
equipment, spare engines, technical data and dual sourcing data and 
second sourcing data for operations and support. The contractors were 
held to these cost projections for 6 years: the Air Force let 6 years 
of firm-fixed price, or ``not-to-exceed'' contracts from the first 
production lot. Prior to the ``Great Engine War,'' Government had 
succeeded in negotiating firm-fixed price contracts only after the 
engine had been operating in the field for several years, and 
contractors were not compelled to provide cost projections years into 
the future.\51\
---------------------------------------------------------------------------
    \51\ Telephone interview with Col. James Nelson (Ret.) OpCit.
---------------------------------------------------------------------------
    By requiring GE and PW to compete for annual production and O&S 
work, DOD may have reaped a number of benefits such as better contract 
terms and conditions, better warranties to assure engine quality, 
consistency, and long-term stability of support.\52\ Further, after 
competition was introduced, the incumbent (PW) offered ``engine 
improvements to the Air Force earlier than the Air Force had been led 
to expect without the competition.'' \53\ To avoid potential 
disruptions in production, and to protect itself against price gouging, 
DOD ``required (each contractor) to provide his plan for providing dual 
sources of critical parts. These separately priced options in the 
proposals would allow the Government to reprocure spare parts from 
sources other than the prime contractors.'' \54\
---------------------------------------------------------------------------
    \52\ U.S. Congress, House, Committee on Armed Services, Air Force 
Alternative Fighter Engine, Hearings before the Subcommittee on 
Procurement and Military Nuclear systems, 98th Cong. 2nd Sess., March 
8, 1984.
    \53\ Robert W. Drewes. The Air Force and the Great Engine War. NDU 
Press (Washington, DC) 1987.
    \54\ Prepared Statement of Hon. Thomas Cooper. Air Force 
Alternative Fighter Engine, Hearings OpCit.
---------------------------------------------------------------------------
    An often cited study on competition during defense procurement--the 
``Pilling Study''--notes that ``. . . the benefits of competition do 
not accrue simply by holding a competition'' and ``starting up a second 
source is no guarantee that performance, schedule, or cost problems 
will be eliminated.'' \55\ Competition between manufacturers must be 
effectively managed. It is unclear whether DOD's leadership today would 
be able to exploit the JSF Alternate Engine competition as effectively 
as Air Force leaders orchestrated the Great Engine War in the mid-
1980s. It appears clear however, that the very large production run of 
JSF engines required to make competition between to producers cost 
effective, is unlikely to be replicated in future aircraft programs.
---------------------------------------------------------------------------
    \55\ Donald L. Pilling. Competition in Defense Procurement. 
Brookings (Washington, DC) 1989.
---------------------------------------------------------------------------
                               conclusion
    Mr. Chairman, this concludes my remarks on the F136. Thank you for 
the opportunity to appear before you and discuss this important issue. 
I look forward to addressing any questions you or the committee may 
have.
    Senator Chambliss. Admiral Kilcline.

 STATEMENT OF RADM THOMAS J. KILCLINE, JR., USN, DIRECTOR, AIR 
              WARFARE DIVISION, UNITED STATES NAVY

    Admiral Kilcline. Thank you, Senator Chambliss. It's a 
privilege for me, as a Navy lead on aviation requirements, to 
appear before you today and discuss naval aviation programs in 
the recently submitted 2007 President's budget.
    I request that my written testimony be presented before 
this committee.
    Senator Chambliss. Without objection.
    Admiral Kilcline. In the interest of time, I'd like to ask 
Admiral Enewold if he'd like to talk, as the program manager 
for the JSF, about the JSF.
    [The prepared statement of Admiral Kilcline follows:]
           Prepared Statement by RADM Thomas J. Kilcline, USN
    Mr. Chairman, distinguished members of the subcommittee, thank you 
for this opportunity to appear before you to discuss the Department of 
the Navy's (DON) fiscal year 2007 tactical aviation programs.
    Your naval aviation team continues to play a major role in 
providing credible power to help shape our strategic landscape and in 
prosecuting the global war on terrorism with significant involvement in 
Operations Enduring Freedom (OEF) and Iraqi Freedom (OIF). These 
efforts are reflective of the substantive return on your investment in 
our combat readiness, our people, and our unique maritime warfighting 
capabilities. These investments clearly demonstrate the latest 
technologies in surveillance, command and control and persistent strike 
as our forces operate from sovereign U.S. territory and exploit the 
vast maneuver space provided by the sea.
    The Navy's tactical air (TACAIR) programs are comprised of both 
platforms and weapons in direct support to the Sea Strike, Sea Shield, 
Sea Basing, and ForceNet pillars. The fiscal year 2007 President's 
naval aviation TACAIR budget request balances continued 
recapitalization while simultaneously sustaining the legacy fleet 
aircraft that are performing magnificently in current operations. The 
Department's fiscal year 2007 naval aviation TACAIR budget request 
continues multiyear procurement (MYP) arrangements for the F/A-18E/F 
(both airframe and engine), the E-2C, and MH-60S. Our proposed plan 
will procure 44 tactical, fixed-wing aircraft (30 F/A-18E/F aircraft, 
12 EA-18G low rate initial production (LRIP) aircraft, and 2 E-2C 
aircraft. This plan also continues the development of the Joint Strike 
Fighter (JSF), the E-2D Advanced Hawkeye, and the EA-18G.
    The global war on terrorism, OEF, and OIF continue to demonstrate 
the enormous contributions that naval aviation makes to the 
effectiveness of joint and coalition forces. The naval aviation systems 
we are pursuing in our Naval Power 21 vision will greatly enhance our 
warfighting concepts and capabilities.
    Our recapitalization plan includes the JSF, a stealthy, multi-role 
fighter aircraft designed jointly (domestically and internationally) to 
be an enabler for Naval Power 21. The JSF will enhance precision strike 
capability with unprecedented stealth, range, sensor fusion, improved 
radar performance, combat identification, and electronic attack 
capabilities compared to legacy platforms. The carrier variant JSF 
complements the F/A-18E/F and EA-18G in providing long-range strike 
capability and much improved persistence over the battlefield. The 
short takeoff and vertical landing (STOVL) JSF combines the multi-role 
versatility of the F/A-18 and the basing flexibility of the AV-8B. The 
commonality designed into the JSF program will reduce acquisition and 
operating costs of Navy and Marine Corps tactical aircraft, and allow 
enhanced interoperability with our allies and sister Services. The 
DON's fiscal year 2007 naval aviation TACAIR budget request contains 
$2.0 billion research, development, test, and evaluation (RDT&E) for 
continuation of systems development demonstration (SDD) of the JSF and 
$245 million aircraft procurement, Navy for long lead requirements for 
the initial lot of DON LRIP aircraft.
    The JSF has completed its fourth year of SDD, and the program 
continues working to translate concept designs to three producible 
variants. Manufacture and assembly of the first flight test aircraft, a 
conventional takeoff and landing (CTOL) variant, is well underway, with 
assembly times much less than planned and exceptional quality 
demonstrated in fabrication, assembly and mating. Over 4,100 engine 
test hours have been completed through mid-January 2006 and engine 
performance is meeting expectations. Detailed design work continues for 
the CTOL and STOVL variants and first flight (CTOL aircraft) is planned 
later this year. The JSF program has aggressively addressed earlier 
performance issues associated with weight and airframe design. The 
November 2005 actual weight of 7,600 delivered components for the first 
test aircraft was within 1 percent of predicted JSF weight.
    While the first test aircraft lacks some future design changes, 
demonstrated manufacturing processes and outcomes justify high 
confidence in design and weight predictions for all variants due to 
commonality of design, tools and manufacturing methods. The JSF 
acquisition strategy, including software development, continues to 
reflect a spiral acquisition approach. The Air System Critical Design 
Reviews for the STOVL and production CTOL configurations were held this 
February to evaluate design maturity and performance against 
requirements and the overall consensus was that the designs display 
appropriate maturity, but moderate level risks still exist. All three 
variants are projected to meet key performance parameter requirements. 
The JSF program is executing to the approved replan that commenced 2 
years ago.
    The F/A-18E/F continues to transition into the fleet, improving the 
survivability and strike capability of the carrier air wing. The Super 
Hornet provides a 40 percent increase in combat radius, 50 percent 
increase in endurance, and 25 percent increase in weapons payload over 
our older Hornets. Over 350 F/A-18E/Fs will be procured through fiscal 
year 2006, and the program is on track to complete procurement of the 
program of record (462 aircraft) in 2011. The fiscal year 2007 naval 
aviation TACAIR budget requests $2.34 billion for 30 F/A-18E/F aircraft 
for the third year of the 5-year MYP contract (fiscal years 2005 to 
2009). The Super Hornet uses a spiral development approach to 
incorporate new technologies, such as the Joint Helmet Mounted Cueing 
System, Advanced Targeting Forward-Looking Infrared Radar (FLIR), 
Shared Reconnaissance Pod System, and Multifunctional Information 
Distribution System data link. The first F/A-18F with the LRIP Advanced 
Electronically Scanned Antenna (AESA) radar system has been delivered 
to the fleet and the AESA radar system will undergo operational testing 
this year to support a full rate production decision in 2007.
    The E/A-18G continues development as the Navy's replacement for the 
EA-6B Airborne Electronic Attack (AEA) aircraft. The EA-18G will 
replace carrier-based Navy EA-6B aircraft by 2012. The fiscal year 2007 
naval aviation TACAIR budget request reflects $372 million for research 
and development and $905 million for the procurement of the first 12 
LRIP aircraft. The Navy is using the F/A-18E/F MYP contract to buy 12 
aircraft in fiscal year 2007. These aircraft will support EA-18G fleet 
replacement squadron stand-up and allow the Department to deliver the 
next generation (AEA) capability at reduced cost and in the shortest 
possible timeframe. The SDD continues on schedule with construction 
well underway of the two development aircraft. First flight continues 
on schedule for the fourth quarter of fiscal year 2006. A total 
quantity of 30 systems will be procured in LRIP with a planned fiscal 
year 2009 initial operational capability (IOC) and fiscal year 2012 
final operational capability.
    The fiscal year 2007 naval aviation TACAIR budget request contains 
$389.7 million for the continuation of the systems upgrade programs for 
the F/A-18A-F platforms. As the F/A-18 program transitions to the F/A-
18E/F, the existing inventory of over 600 F/A-18A/B/C/Ds will continue 
to comprise half of the strike aircraft assigned to a carrier air wing 
until 2012. Included in this request is the continued procurement of 
recently fielded systems such as Joint Helmet Mounted Cueing System, 
Advanced Targeting FLIR, Multi-Function Information Distribution 
System, and Digital Communications System. These upgrades ensure that 
our F/A-18s remain viable and relevant in support of TACAIR integration 
and expeditionary maneuver warfare. The fiscal year 2007 naval aviation 
TACAIR budget request also includes procurement of Center Barrel 
Replacements to extend the service life of F/A-18A/C/Ds by 7 years to 
meet fleet inventory requirements until 2022.
    The fiscal year 2007 naval aviation TACAIR budget request of $49.0 
million reflects continuing EA-6B upgrades and readiness improvements 
which increase the operational availability of this low density high 
demand aircraft and reduce operating costs. This includes installation 
of four Improved Capability (ICAP) III aircraft systems and four 
Multifunction Information Distribution System kits, which will provide 
dramatically improved emitter identification and location information 
as well as Link-16 connectivity to share the information. It also 
allows for the procurement of three Low Band Transmitters to provide 
new jamming capability as well as replace inadequate quantities of 
aging transmitters, which are in near continuous use in Iraq and 
Afghanistan today in support of our troops on the ground. The naval 
aviation TACAIR budget also provides for Operational Safety Improvement 
Program procurements for avionics and structural equipment. The EA-6B 
has been in ever-increasing demand as DOD's only tactical electronic 
attack aircraft that also engages in communications jamming and 
information operations. Program priorities are current readiness, 
successful first deployments of ICAP III aircraft, which are currently 
at sea with two squadrons, and continued procurement of the Low Band 
Transmitter.
    The E-2D Advanced Hawkeye is a critical enabler of transformational 
intelligence, surveillance, and reconnaissance, providing a robust 
overland capability against current and future cruise missile-type 
targets. The Advanced Hawkeye program will modernize the E-2 platform 
by replacing the current radar and other system components to maintain 
open ocean capability while adding transformational surveillance as 
well as theater air and missile defense capabilities. First flight of 
the E-2D will be in the fourth quarter of fiscal year 2007. The fiscal 
year 2007 naval aviation TACAIR budget requests $204 million to procure 
two E-2Cs in the last year of a 4-year MYP. This effort will keep the 
production line viable while the AHE continues spiral development 
toward an IOC of fiscal year 2011.
                    unmanned aircraft systems (uas)
    The fiscal year 2007 naval aviation TACAIR budget request contains, 
$239 million in RDT&E funding to establish a Navy Unmanned Combat 
Aircraft System (UCAS) program to develop and mature technologies for 
carrier operation of a low-observable unmanned combat air system. The 
2005 Quadrennial Defense Review (QDR) recommended terminating the Joint 
Unmanned Combat Air Systems (J-UCAS) capability demonstration program. 
The QDR allocated limited resources to the DOD's overall joint 
capabilities portfolio to support future military operations by joint 
air forces. PDM-III subsequently cancelled J-UCAS and allocated 
resources to DON to develop and demonstrate technologies for carrier 
operation suitability of a low-observable UCAS with the goal of 
fielding a carrier based persistent intelligence, surveillance, and 
reconnaisance (ISR) capability. Navy UCAS is part of the naval strategy 
for a family of unmanned aircraft systems that will provide persistent 
surveillance, penetrating surveillance, and tactical ISR to support the 
warfighter. The Navy UCAS program will heavily leverage the work, 
accomplishments, and technology of the terminated J-UCAS program.
    Additionally, the Broad Area Maritime Surveillance UAS is integral 
to the Navy's ISR recapitalization strategy and will provide a 
persistent, maritime ISR capability for fleet commander maritime 
dominance, mobility, decision superiority and precision strike support. 
IOC for this platform is scheduled to occur in 2013.
                                weapons
    The fiscal year 2007 TACAIR budget provides for affordable 
precision-guided weapons programs to support that vision and ensure 
that America is secure at home; sea and air lanes are open for 
peaceful, productive commerce; and the capability developed and 
delivered is large enough, agile enough, and lethal enough to deter 
threats or defeat foes in support of joint and coalition forces.
    The combat proven JSOW family of joint Navy and Air Force air-to-
ground weapons continues on the highly successful path broadened in 
2005 when the JSOW system hit a milestone of 400 successful combat 
employments; won the highly competitive `Packard-Award' for acquisition 
excellence; and conducted the first and very successful JSOW Block II 
test flight on October 11, 2005. We continue to implement lean 
initiatives, innovative processes, and engineering changes in this 
program that will be leveraged for future enhanced capabilities. The 
fiscal year 2007 naval aviation TACAIR budget requests $125.6 million 
to procure 397 JSOW-Cs, a highly lethal precision weapon that employs 
an Imaging Infrared Seeker, Global Positioning System/Intertial 
Navigation System (GPS/INS), and an augmenting charge with a follow-
through penetrator bomb for use against hardened targets. Production of 
other JSOW variants remain deferred as we continue to work with the 
Office of the Secretary of Defense and our sister Services to resolve 
unexploded battlefield ordnance issues that are of a concern to the 
Department and our allies.
    The Navy is requesting upgrade of surface-launched Harpoon cruise 
missiles to provide the all-weather, anti-surface warfare capability 
needed to operate with `improved selectivity' in the cluttered 
environment of the littoral battlespace. Under the Harpoon BLK III 
program, we plan on upgrading this very capable system to improve 
selectivity and enhance our standoff operations via integration of a 
two-way data-link for use under stringent rules of engagement. The 
fiscal year 2007 naval aviation TACAIR budget requests $36.3 million in 
RDT&E to develop this capability and $55.5 million in weapons 
procurement in the out years to procure and install 197 weapon upgrade 
kits and associated systems.
Dual-Mode Direct Attack Weapons
    Based on an urgent needs statement and feedback from the combatant 
commanders in Iraq and Afghanistan directly engaged in the global war 
on terrorism, the Navy determined that improved responsiveness and 
flexibility was required for close air support missions in support of 
Marine and Army ground forces. To address these shortcomings, the 
Department leveraged congressionally-directed funding in the research 
of dual-mode laser-guided weapons and successfully competed laser-
guided bomb manufacturers to develop and integrate GPS/INS and laser 
guided technologies into a single direct-attack weapon. This capability 
will be integrated on F/A-18A-D and AV-8B aircraft to reduce the number 
of sorties needed to destroy intended targets, while providing the 
warfighter with increased flexibility in adverse weather against time-
sensitive targets. The fiscal year 2007 naval aviation TACAIR budget 
requests $23 million to modify 2,272 single-mode Laser-Guided Bombs 
(LGB) into Dual-Mode LGB Weapons. Further, with fiscal year 2006 
congressional language, the Navy will also conduct nonrecurring efforts 
and testing of a non-developmental laser kit for the Joint Direct 
Attack Munition.
Advanced Anti-Radiation Guided Missile (AARGM)
    The fiscal year 2007 naval aviation TACAIR budget requests $97.3 
million for the continuation of the development of the AARGM. AARGM 
upgrades legacy High-Speed Anti-Radiation Missiles and leverages the 
Department's highly successful investment and partnership with the 
European Combatant Commander on the `Quick-Bolt' advanced concept 
technology demonstration program. Further, we are pleased to announce 
that AARGM is now also an international cooperative program as formal 
agreement with the Italian Air Force was signed during the first 
quarter of fiscal year 2006. The AARGM development program is on cost 
and schedule to deliver a supersonic fly-out, multi-spectral targeting 
capability to destroy sophisticated enemy air defenses and time 
sensitive strike targets. The system will also utilize our networks and 
is scheduled to be deployed in fiscal year 2009 on the F/A-18 Hornet 
and Super Hornet, and fiscal year 2010 on the EA-18G Growler. The 
fiscal year 2007 funding request will continue development of an AARGM 
derivative to further expand the target set. This software upgrade to 
AARGM is on track for fleet deployment in fiscal year 2011.
Advanced Medium-Range Air-to-Air Missile (AMRAAM) AIM-120
    AMRAAM is a Joint Navy/Air Force (Air Force led) advanced, medium 
range missile that counters existing aircraft and cruise missile 
threats having advanced electronic attack capabilities operating at 
high/low altitudes from both beyond visual range and within visual 
range. AMRAAM provides an air-to-air first look, first shot, first kill 
capability working within a networked environment in support of Sea 
Power 21's Theater Air and Missile Defense Mission Area. We plan to 
complete the AIM-120D missile SDD during the next year. The fiscal year 
2007 naval aviation TACAIR budget requests $6.7 million in RDT&E to 
complete development efforts and $98.7 million for production of 150 
all-up rounds and associated hardware to equip our strike fighter 
squadrons.
Sidewinder AIM-9X Air-to-Air Missile
    The Joint Navy/Air Force (Navy led) Sidewinder missile is the only 
short-range infrared air-to-air missile integrated on U.S. Navy/U.S. 
Air Force strike-fighter aircraft. The AIM-9X is the newest variant in 
the Sidewinder family. This fifth-generation air-to-air weapon 
incorporates high off-bore sight acquisition capability and thrust 
vectoring to achieve superior maneuverability and provides increased 
sensitivity through an imaging infrared focal plane array seeker and 
advanced processing. The fiscal year 2007 naval aviation TACAIR budget 
requests $40.4 million for production of 174 all-up rounds and 
associated hardware to equip our strike fighter squadrons.
                         self protection system
Integrated Defensive Electronic Countermeasures (IDECM)
    The fiscal year 2007 naval aviation TACAIR budget reflects $5.4 
million in RDT&E for completion of integrated test and evaluation of 
IDECM Block III (ALQ-214 combined with the ALE-55 Fiber Optic Towed 
Decoy) that began in fiscal year 2006. Additionally, $35.2 million in 
aircraft procurement funding is included for the procurement of 16 ALQ-
214 systems. There is also $18.5 million in ammunition procurement 
funding for 480 ALE-55 decoys, pending a full-rate production decision.
                                summary
    Mr. Chairman, and distinguished members of this subcommittee, on 
behalf of the men and women of Navy TACAIR, I thank you for your 
commitment, service, and continued support of the Armed Forces as we 
continue to execute the war on terror and continue challenging 
operations in critical areas overseas. Navy TACAIR forces are at a high 
level of combat readiness today and the current plan extends that same 
high level of readiness--balanced with other naval aviation TACAIR 
budget priorities--throughout the 5-year defense plan. Our naval 
aviation TACAIR budget plan makes sound investments and is a firm 
foundation for current and future readiness. Thank you again for this 
opportunity to appear today. I am happy to answer any questions you may 
have.

    Senator Chambliss. Admiral Enewold.

  STATEMENT OF RADM STEVEN L. ENEWOLD, USN, PROGRAM EXECUTIVE 
             OFFICER, JOINT STRIKE FIGHTER PROGRAM

    Admiral Enewold. Good afternoon. Thank you too for allowing 
me to be here, Senator.
    In addition to General Hoffman's written testimony, which 
he submitted for the record, I thought I'd add some amplifying 
comments just to make sure everybody is on the same page.
    As you heard in the prior panel and many times before, 
there's general agreement that there needs to be a 
recapitalization of the strike fighter forces and I think 
there's general agreement that the F-35 could, and will, meet 
those requirements.
    JSF has completed 4\1/2\ years of development out of a 12-
year development program. We continue to mature the design of 
all three variants, to make them produceable, reliable, and 
lethal as a system. We have completed the manufacture assembly 
of the first test airplane. We fueled it 3 weeks ago without 
leaks, thank goodness. We are currently shaking it, doing 
ground vibration testings, in preparation for first flight 
later this year.
    We also, in February, completed critical design reviews at 
the air system level for the STOVL design, and the conventional 
airplane, and there was unanimity on the engineering side of 
the house that the design meets the maturity requirements to 
complete a critical design review.
    There are still risks. We've identified several that we're 
putting mitigation plans in place to capture and make sure that 
we don't repeat lessons of the past. Where there is general 
disagreement among people is in the overall acquisition 
strategy.
    The Department strongly supports the approved acquisition 
strategy we put in place a year ago, and they agree that the 
OSD policy for risk-managed and knowledged-based acquisition is 
met by our strategy. Others disagree.
    By design, the JSF program is unique in many respects, sir. 
It's a joint tri-level, or three-service program with 
international participation. It has new management approaches 
that I don't think anybody has seen before. We could talk about 
that if you like. We have a strong focus on the life-cycle cost 
of the airplanes, not just the development or production or the 
operating and support costs later on. We have to try to 
accommodate all those. Those unique elements make the program 
more complex and more stable, surprisingly.
    The strategy's built on leveraging the large cost 
efficiencies of high volumes, commonality, and learning in the 
design and test, and use of risk-managed decisionmaking. I've 
reviewed and analyzed many scenarios for changing the 
acquisition strategy. In every scenario, I see some risk of 
increasing cost and operational impacts.
    For the F136, in particular, I wasn't going to rehash the 
hearings from last week, but, in that case, in particular, the 
Department feels that it is low risk, from both a cost and an 
operational perspective, to cancel the F136, starting in fiscal 
year 2007.
    My recommendation: to try to regress the program back into 
a more classical acquisition approach would either slow the 
development, slow the production ramp rates, or delay 
transition to a modern support system. Any of these three would 
dramatically change the business case that we've talked about, 
increase the cost, and generate schedule delays.
    No program has zero risk. The key is to capitalize on the 
benefits of speed and commonality, and avoid the consequences 
of speeding, which we are working at.
    So far, our successes have been mixed. The initial designs 
from 2\1/2\ years ago would not have yielded a design that met 
the STOVL key performance parameters, and probably wouldn't 
have met the key performance parameters for the Carrier-based 
Variant (CV) or Conventional Take off and Landing (CTOL). The 
redesign efforts and costs associated with them were really 
arduous, but successful. We now project all variants to meet 
their key performance parameters aerodynamically.
    On the positive side, I know that no other strategy that 
would produce our first flight-test aircraft for ground test, 
parts, and assembly for 5 more airplanes that are being put 
together right now, 9 ground-test engines in 2 different 
configurations, 2 conventional engines for flight test, 3 
radars, 3 optical missile warning systems, 52 integrated core 
processors, 3 electronic warfare (EW) countermeasure suites, 9 
electronic surveillance measuring units, a whole bunch of 
flightworthy subsystems, 33 man-in-the-loop simulators, 62 
avionics test stations, and 5 million lines of code.
    We'll have issues. But I don't think they'll be the same as 
everybody else. I think we've learned a lot from other 
programs, and we are committed not to re-learn those lessons. 
We should not revert to old business practices and create a 
system where we incur cost increases and schedule delays.
    So, thank you for the opportunity to talk today, and I'm 
hopeful I can answer your questions.
    Senator Chambliss. Admiral, when are the test flights of 
this airplane supposed to begin?
    Admiral Enewold. We are measuring ourself against a 28 
August first flight date. My assessment right now is, we are 2 
months late. So, we're going to fly probably in October this 
year.
    Senator Chambliss. Where does the Navy test its planes?
    Admiral Enewold. Navy tests will be conducted at Patuxent 
River, Maryland, and Air Force tests at Edwards Air Force Base.
    Senator Chambliss. That's right. Now, you mention that 
there are no unusual risks here. I've never known a weapons 
system to go through the development/production stage and get 
to this point without having some problems. So, are you saying 
that sure, you expect there'll be some problems, but you're 
ready to address them?
    Admiral Enewold. We've already taken on a huge challenge in 
the issue we had on weight. We took, in the STOVL variant, in 
particular, about 10 percent of the empty weight of the 
airplane out in the redesign, which I don't think any other 
tactical airplane has ever done. Frankly, the STOVL 
configuration is the most mature of our designs right now. The 
weight continues to stay below where it has to be. So, that's 
the first challenge that we met. It was painful, but we think 
we successfully met that one.
    Senator Chambliss. Mr. Sullivan, you've stated that the JSF 
acquisition program can reduce cost and schedule risks by 
adopting a new knowledge-based business case, and that the JSF 
program should delay production until the aircraft design has 
been proven to work in flight testing. You further state that 
capabilities that demand technological advances which are not 
yet demonstrated should be part of future increments that are 
funded and managed separately, once demonstrated.
    The program office projects the JSF will enter service for 
the Marine Corps in 2012. The Air Force and Navy variants will 
enter service the following year. How long do you propose that 
the program be delayed? Do you believe that the Department's 
current acquisition strategy will allow it to achieve the JSF 
program objectives?
    Mr. Sullivan. The current strategy, we believe, is still 
very high risk for achieving the cost and schedule objectives 
they have. There are a couple of technologies. One of them is 
the prognostics and health maintenance technologies that they 
need on the aircraft, which, in fact, are some of the 
technologies they're using to be able to forecast significant 
total ownership cost savings in the future. There are still 
rather immature technologies, that will be immature for some 
time. It won't be demonstrated, I think, until sometime after 
2010. There are a lot of the mission capabilities, a lot of the 
offboard sensor fusion capabilities that they're going to need, 
to become interoperable and things like that, that have not yet 
been demonstrated, and will take a while to be demonstrated.
    Right now, the first flight that I think the program is 
referring to now is not a production representative aircraft. 
It's an aircraft that was an overweight version. It was a 
version of the aircraft that they were working on when they 
discovered significant weight problems on the aircraft. That 
was, I think, maybe 2 years ago, when, at that time, to the 
program and the Department's credit, they stopped the program 
and solved that weight problem with a lot of very intensive 
design reviews and things. It seems like they have the weight 
under control now. But the aircraft that's going to fly later 
on this year is an overweight aircraft. The first production 
representative-type aircraft that they're going to fly, they 
won't start flying until, I think, 2009--much later than this 
one that's going to fly now. As I said in my oral statement, 
the first really fully integrated JSF, with all the 
capabilities that they plan to procure, will not fly until 
2011. At that time, they plan to have actually purchased 
hundreds of aircraft. So, that's why we think there's risk.
    You've heard of ``break it big early,'' ``fly before you 
buy,'' phrases like that, that people like Norm Augustine have 
talked about. That's what we're talking about with this 
program. This program, I think, still has an opportunity to 
slow down the ramp-up to production and discover what they're 
going to discover during flight tests, and maybe take a little 
more time up front to save time later. Or it can become a 
program that goes down the same kind of road that the B-2 
bomber went down, that we saw happen to the F-22 program, the 
Comanche helicopter, the Crusader, many of these major weapons 
systems that we believe had immature technologies and ramped to 
production before they fully tested.
    Senator Chambliss. So, again, what is the projected delay 
schedule in your recommendation?
    Mr. Sullivan. What we are recommending in the report we 
issued is that they should not spend procurement dollars on the 
JSF until they have tested the aircraft to a point where they 
believe the risk has been reduced to acceptable levels. That's 
something that the Department and the Services can determine. 
But when you're entering into procurement contracts using cost-
plus arrangements with the contractor for possibly hundreds of 
aircraft, that's a clear sign that there's still significant 
risk to the unit cost of what those aircraft are going to cost.
    So, we should delay sometime at least until the fully-
integrated production representative prototype should be out 
there flying, at least. They should be starting to close off 
some of the performance envelope a little more than what they 
have planned right now. They have procurement dollars spent in 
2007.
    Senator Chambliss. So, you're suggesting 2009?
    Mr. Sullivan. I'm not in a position right now to be 
specific about that. But I would say that they're too early to 
be spending procurement dollars right now.
    Senator Chambliss. Okay.
    Mr. Sullivan. There should be more flight testing 
completed.
    Senator Chambliss. I stole one of your questions, Mr. 
Chairman.
    Senator McCain. Any more?
    Senator Chambliss. I'd be happy to turn it back to you.
    Senator McCain [presiding]. Thank you very much, Senator 
Chambliss.
    I welcome the witnesses. I apologize, I had to go to the 
floor to make a forgettable statement. [Laughter.]
    Admiral Enewold, going sole source on the engine, has the 
decision been made already?
    Admiral Enewold. The Department has proposed that in the 
budget, yes, sir.
    Senator McCain. How do you keep costs down if there's no 
competition?
    Admiral Enewold. We currently have two or three mechanisms 
for doing that.
    Senator McCain. Do you have a fixed-cost contract?
    Admiral Enewold. We do not have a fixed-price contract yet. 
What we have in the development----
    Senator McCain. Could you get one?
    Admiral Enewold. We intend to get one in the Low Rate 
Initial Production (LRIP) process, probably at LRIP-4 or -5.
    Senator McCain. When would that be?
    Admiral Enewold. In 2011 or so.
    Senator McCain. In other words, they could have a cost-plus 
contract, sole-source, until 2011?
    Admiral Enewold. That's correct. Year-by-year lot.
    Senator McCain. Do you think that's smart?
    Admiral Enewold. I don't see risk to it right now. Here is 
why. The acquisition strategy for the engine, and the airplane, 
for that matter, are both set up to incentivize both cost and 
schedule. So, there are going to be cost and schedule 
incentives in both contracts for delivery of the airplane at 
the targeted cost. Even more than that, in the development----
    Senator McCain. Why not just have a fixed-cost contract, 
Admiral Enewold, if there's no competition?
    Why worry about an incentive contract? Just do what we did 
during the 1980s, and let's just have a fixed cost and say, 
``You meet that or you pay a penalty.''
    Admiral Enewold. Senator, I believe our experience with 
fixed price has not been good.
    Senator McCain. I think, if you look back in the 1980s, 
they came forward with products and weapons systems that met 
costs and met schedules. We don't anymore. Nine of the 11 major 
weapons systems have been over cost and behind schedule, in the 
case of the Future Combat Systems, it's gone from $90 billion 
to $130 billion. How can you make a case that fixed-cost 
contracts don't work?
    Admiral Enewold. I think our view of it is right now is 
that the price that we pay under a firm fixed price would have 
to include the risk that the contractor would have to assume to 
put a fixed-price contract in place. I don't think that we 
could afford a fixed-priced contract at that price with those 
risk dollars in there.
    Senator McCain. Maybe you could compete for the contract 
and we could find a contractor that could.
    Admiral Enewold. No matter what, even if we kept F136, we 
would not be in a position to compete F136 until about 2011 or 
2012. So, we're going to be in a sole-source environment for 
F135, no matter what, until 2011 or 2012.
    Senator McCain. Mr. Sullivan, Mr. Bolkcom--can we start 
with Mr. Bolkcom, and then we'll go to Mr. Sullivan?
    Mr. Bolkcom. Thank you, Mr. Chairman.
    If I could make only one point about the alternate engine 
program today, it would be that DOD has really shared no 
analysis with Congress justifying its position. They have 
provided a very brief briefing. But after reading it very 
closely, considering the magnitude of this problem, the 
analysis, as they call it, really does not appear to be robust 
and comprehensive. My only point is, if we are to pursue this 
strategy of going sole-source, it would, I think, be prudent to 
be based on a robust analysis.
    Senator McCain. Do you want to respond to that, Admiral 
Enewold?
    Admiral Enewold, may I say, I have the greatest respect for 
you and Admiral Kilcline, and I'm not trying to be in any way 
offensive here. We're trying to, obviously, share the same goal 
that you do and get the best product for the lowest cost. But I 
think you--I hope you can understand, for example, the 
statement by Mr. Bolkcom that we have serious questions.
    Would you like to respond to the statement that there 
really has been no in-depth analysis?
    Admiral Enewold. I guess, first of all, I'd like to say 
that the analysis and decisions were done outside the program. 
They were done as part of the QDR. As the Deputy Secretary said 
last week, they were based on the assessment by he and the Vice 
Chiefs, that, based on the risk they saw in the program, both 
from a cost and operational perspective, they thought it was 
the best course forward for the Department.
    As far as the analysis that was done, and what was 
provided, frankly, I don't know.
    Senator McCain. I thank you, Admiral.
    Admiral Kilcline, did you want to say anything about that?
    Admiral Kilcline. No, sir. I'll leave it at that.
    Senator McCain. Good idea. [Laughter.]
    Mr. Sullivan.
    Mr. Sullivan. I would just like to add that, in fact, the 
Senate Armed Services Committee and Congress have asked us to 
take a look at this and get back to them very quickly. We've 
seen a lot of, I think, the briefing slides and everything that 
has been referred to here. But I think we have a date of 
September 12 where we're going to try to review what analysis 
has been done and determine how substantive that has been, and 
get back to your committee.
    Senator McCain. Good, and I think, Admiral Enewold and 
Admiral Kilcline, you would both agree that usually in the 
production of an aircraft--in an acquisition of a new aircraft, 
almost always the major problem is with the engine, either time 
and schedule for development or problems that arise. Obviously, 
it's the most complicated kind of engineering. Would you agree 
with that, from your experience, Admiral Enewold?
    Admiral Enewold. I would have thought so, until 2 years 
ago. My experience with F135, and as I look back on F119 
development, and even F414 development, I haven't seen that 
recently. So, my feel, from history, is exactly yours, Senator, 
that the engine was something you want to make sure you get 
right, early--break it early, whatever. But that has not been 
my experience on the F135.
    Admiral Kilcline. Senator McCain, from my experience, in 
looking back at the engine--and I'll talk specifically about 
the F404 and F414--the F414 is the E and F engine. When that 
engine was looked at, it came from the core of the F404. We 
found we've had some extraordinary success with that motor, in 
bringing it online. We looked at the F119 as a core, and some 
of the things it had done, realizing that the thousands of 
hours that are on it were indicative of what we thought the 
F135 would do. Then looking at what the F135 had done on 
reliability in the limited testing that had gone on so far, 
part of the decision, I believe, was made on reliability. Would 
this engine be, as you've already mentioned, something we could 
count on as we went forward into the future? I believe, from 
what I've seen in the F404, going to F414, that the technology 
we have today in our core is pretty phenomenal.
    Senator McCain. I certainly take your word. But I'm not 
sure that's sufficient and compelling evidence to abandon the 
fundamental precept that we functioned under, and that was 
``fly before you buy.'' So, it seems to me we're taking----
    Admiral Enewold. Well, let me make----
    Senator McCain. Go ahead.
    Admiral Enewold.--that ``fly before you buy'' discussion--
    Senator McCain. Sure.
    Admiral Enewold.--because I want to make sure it's 
characterized correctly.
    Specifically on the engine, we're going to fly, this year. 
The engine, unlike the mission systems and other things we've 
talked about, is a production-representative engine. There'll 
be some changes that we make as we learn through the test 
program, but we think the F135 that we're going to fly in the 
test airplane this year is, if not production, very close to 
production representative or production configuration. By the 
time we get to full rate, or even ``reasonable'' rate, we will 
have made what we call a final release, which will be the 
production engine for the airplane. So, we don't see major 
changes over the engine we've already delivered to Fort Worth. 
We envision flying that engine this fall.
    Senator McCain. In your experience, Mr. Sullivan, haven't 
we generally had an alternate engine for most of these major 
aircraft procurements, at least for a period of time?
    Mr. Sullivan. We've had a--yes, there was tremendous 
success--I guess, I kind of go back to the engine wars that 
happened when the F-16, for example, had competition in their 
engines, and had a significant amount of cost savings and risk 
reduction as a result. There are many other examples, as well, 
where competition really has over the--some of the things that 
we're interested in looking at are some of the sustainment 
issues, not just the initial spares that go with buying the 
aircraft, but also the equivalent engines over a 30- or 40-year 
lifetime of an aircraft, and the improvements that can be made 
to reliability and quality if competition is present.
    Senator McCain. Mr. Bolkcom, do you recall how much the 
British are investing in the JSF?
    Mr. Bolkcom. Mr. Chairman, it's a 40-percent partnership 
with GE. I can tell you that.
    Senator McCain. Mr. Sullivan, I think it's $4 billion, or 
something like that?
    Mr. Sullivan. Overall, I think research, development, 
testing, and evaluation (RDT&E)--you might know better than I--
but it's about, I think, $4 billion.
    Admiral Enewold. The U.K. is a level-one partner. They are 
investing $2.2 billion in direct support of the overall system 
design and development (SDD) program.
    Senator McCain. Having had conversations with our friends 
from the U.K., they are quite disturbed about this decision--
not only that the decision was made, but, in their stated view 
they were not consulted. That puts at risk at least some of 
that development. I think part of that's understandable. Is 
that your impression, Mr. Sullivan?
    Mr. Sullivan. On their feelings right now? Yes, there's 
been an awful lot in the press, not only with the engine, but 
other things, as well, yes.
    Senator McCain. Senator Chambliss?
    Senator Chambliss. Is there any explanation for why we 
didn't talk to the Brits about this?
    Admiral Enewold. Like I said, sir, it happened as part of 
the QDR, and I didn't have any insight into that, so I don't 
know.
    Senator Chambliss. I don't have anything further, Mr. 
Chairman.
    Mr. Chairman, I just would say this is what is so 
frustrating to me, that we're sitting here and I know these 
guys are experts, and they're doing exactly what they've been 
charged to do. But why we can't sit here today with an airplane 
that's in this developed a stage and look at doing a multiyear, 
where we can save money, is really what's frustrating to me, 
from a policy standpoint. I don't know whether this is a 
program that we can do some of the things that you and I have 
talked about before relative to reforming our procurement 
process, but maybe there is something here we can do.
    Senator McCain. I hope so. We are looking at the whole 
issue with a lot of assistance from our friends at GAO and CBO, 
and we're appreciative that you're here today. Admirals, we're 
appreciative of the job that you're doing. I recognize that 
you're carrying out orders, and you're doing it very well. I 
understand that some of these questions like decisions that 
were made in the QDR are difficult for you to respond to. So, 
we thank you for your good work. I know you'd much rather be at 
sea. But this is the price you pay. [Laughter.]
    Thanks very much. This hearing is adjourned.
    [Questions for the record with answers supplied follow:]
               Questions Submitted by Senator John McCain
                 definition of ``substantial savings''
    1. Senator McCain. Mr. Bolkcom, General Hoffman testified that the 
Air Force expects its multiyear procurement proposal to be about 5 
percent less expensive than the total anticipated cost of carrying out 
the program through a series of annual contracts. In your opinion, does 
that 5 percent constitute ``substantial savings'' within the meaning of 
10 U.S.C. 2306b section (a)(1)? What is the basis of your opinion?
    Mr. Bolkcom. To address this question in a meaningful way, it must 
be placed in the proper context. The Air Force's proposed acquisition 
plan for the F-22A would add $1.05 billion to the budget and slow down 
the annual production rate, to 20 aircraft per year, which will likely 
lead to additional cost increases. The goal of a multiyear procurement 
(MYP) would be to defray the known and unknown cost increases that the 
Air Force is proposing to the F-22A program. Within this context, it is 
accurate to say that the MYP will not save money. It may avoid 
additional cost increases.
    There may be several reasons why a projected 5-percent savings from 
MYP versus annual procurement may not constitute ``substantial 
savings.'' First, although 10 U.S.C. 2306b section (a)(1) no longer 
requires a 10-percent cost savings, this historic benchmark suggests a 
level of savings that can be achieved, and could be pursued. It can be 
counter-argued that replacing the 10 percent cost criterion with 
``substantial savings'' corroborates the acceptability of lesser 
savings.
    Second, Congress has expressed dissatisfaction with, and rejected, 
proposed MYP contracts with anticipated savings of 5 percent over 
annual procurement. For example, during negotiations on fiscal year 
1996 supplemental appropriations, House appropriators insisted that an 
MYP contract for 80 C-17 aircraft achieve ``closer to the historical 
average of 10 percent compared with buying the program by lot.'' 
Responding to congressional pressure, Department of Defense (DOD) re-
engaged the C-17 prime contractor and was able to negotiate an MYP 
contract that promised 7-percent savings rather than the 5-percent 
previously projected.
    Third, other MYP contracts for military aircraft have achieved 
greater savings than the 5 percent projected for the F-22A. The two MYP 
contracts that the Navy has used to procure the F/A-18E/F have achieved 
savings of 7.4 percent and 10.95 percent when compared to annual 
procurement. The most recent MYP contract for the C-130J program 
achieved a savings of 10.9 percent over annual procurement. The second 
MYP contract under which 60 C-17s were produced is to have achieved 
savings of 8.7 percent.
    Fourth, projections of MYP savings are not always fully realized. 
For example, in April 2002 when the Marine Corps and Air Force decided 
to jointly procure C-130J aircraft under an MYP contract, the projected 
savings over annual procurement was 13.3 percent. As mentioned above, 
the actual savings is now estimated to be 10.9 percent, 2.4 percent 
less than anticipated. Also, in June 1996, Under Secretary of Defense 
for Acquisition Paul Kaminski estimated that the first C-17 MYP 
contract would result in a total of $1.025 billion in savings. This 
figure, based on a contract value estimated at $14.2 billion would have 
represented roughly 7 percent savings over annual procurement. However, 
the first C-17 MYP contract ultimately cost $19.9 billion, and final 
MYP savings appear to be closer to 4.4 percent over annual procurement.
    Neither the Air Force nor Boeing were able to provide estimated MYP 
savings as a percent of what annual procurement would cost. The Air 
Force estimates that the second C-17 MYP resulted in savings of $1.309 
billion on the $13.8 billion contract. Lacking precise data, CRS 
calculated the 8.7 percent savings using these figures. 8.7 percent is 
likely a rough approximation of actual MYP savings, which could be 
higher or lower than this figure. The 4.4 percent savings was derived 
using the same methodology.

                               precedent
    2. Senator McCain. Mr. Bolkcom, the Air Force previously argued in 
favor of the KC-767 tanker lease by saying that it was following the 
precedent set by the long term lease of four 737 aircraft. Do you think 
that incrementally funding F-22A production may similarly set a 
precedent that we may come to regret? Please explain.
    Mr. Bolkcom. Whether something is or is not a precedent is subject 
to interpretation. In the case you mention, the Air Force did cite the 
lease of four 737 aircraft as a precedent for leasing 100 KC-767s. 
However, I think it is fair to say that a number in Congress did not 
find this argument persuasive. I know of no other example of Congress 
granting the Air Force permission to incrementally fund aircraft 
procurement. Therefore, many may see incrementally funding the F-22 as 
precedent setting. Congressman Duncan Hunter, for one, has stated in a 
recent House Armed Services Committee hearing that he believed it to be 
precedent setting. I can't say whether you or Congress may come to 
regret setting a precedent for incrementally funding aircraft 
procurement. It is fair to say, however, that once something becomes 
common practice, such as incremental funding for shipbuilding, it 
becomes more difficult to deny such requests.

                        economic order quantity
    3. Senator McCain. Mr. Bolkcom, the Air Force is requesting that 
Congress authorize an economic order quantity (EOQ) procurement before 
it has been determined whether a multiyear procurement will result in 
``substantial savings'' over a series of annual contracts. What are 
your thoughts regarding this issue?
    Mr. Bolkcom. The reprogramming of funds to make an EOQ purchase 
outside an MYP contract is unconventional, and controversial. This 
proposal's compliance with statute is a matter of debate among 
legislative, Air Force, and DOD counsel. As I mentioned in my verbal 
statement, the Air Force's proposal presents risk. If the EOQ purchase 
is denied, additional risk of production cost increases will be 
incurred. If the EOQ purchase is approved, it is hoped it will mitigate 
the risk of F-22 production costs growing due to a reduction in 
procurement rate. However, an EOQ purchase outside of an MYP could add 
to other factors that might deter some in future Congresses from 
potentially reducing or canceling the F-22 program; essentially ``tying 
their hands.'' This is because a future reduction in funding or a 
cancellation of the program could eliminate the use for which items 
purchased under the EOQ were intended.

                                 f-22a
    4. Senator McCain. Mr. Sullivan, in your opinion, does the F-22A 
possess a ``stable design'' within the meaning of 10 U.S.C. 2306b 
section (a)(4)? Please explain.
    Mr. Sullivan. The baseline F-22A aircraft, designed primarily for 
the air superiority role, has successfully completed development and 
initial operational testing and its design is stable for that 
particular mission. However, the Air Force has stated that to be 
effective in the future a more robust ground attack capability is 
needed for the F-22A. It plans to spend several billion additional 
dollars to add this ground attack capability. A key to the success of 
this effort is the development and integration of a new radar. The Air 
Force expects to take delivery of the first aircraft with the new radar 
in November 2006 but the software needed to provide the robust ground 
attack capability will not be completed until 2010. According to a 
representative of the Director, Operational Test and Evaluation 
(DOT&E), the key to achieving a more robust ground attack capability 
will center on the integration of this new radar. A December 2005 
report issued by the Defense Contract Management Agency stated that 
problems encountered during the test and integration of the new radar 
have added risk to the development program. Until software and 
integration testing in the F-22A have been successfully completed, we 
consider the design unstable creating the potential for significant 
cost overruns and schedule delays.

    5. Senator McCain. Mr. Sullivan, in your opinion, are the 
``technical risks'' associated with the program ``not excessive'' 
within the meaning of 10 U.S.C. 2306b section (a)(4)? Please explain.
    Mr. Sullivan. See the answer to question 4 as technical risk is 
linked to design stability.

    6. Senator McCain. Mr. Sullivan, in your statement you conclude 
that DOD does not have an executable business case for buying the F-
22A. How do you define this business case?
    Mr. Sullivan. A critical first step to success in acquiring new 
weapons systems is formulating a comprehensive business case that 
justifies the investment decision to begin development. The business 
case should validate warfighter needs and match product requirements to 
available resources, including proven technologies, sufficient 
engineering capabilities, adequate time, and adequate funds. Several 
basic factors are critical to establishing a sound business case for 
undertaking a new product development. First, the users' needs must be 
accurately defined, alternative approaches to satisfying these needs 
properly analyzed, and quantities needed for the chosen system must be 
well understood. The developed product must be producible at a cost 
that matches the users' expectations and budgetary resources. Finally, 
the developer must have the resources to design and deliver the product 
with the features that the customer wants and to deliver it when it is 
needed.
    Once established, the business case should be revisited and revised 
as appropriate if the program or external circumstances substantially 
changes. If the financial, material, and intellectual resources to 
develop the product are not available, a program is at substantial risk 
in moving forward.
    The Air Force's business case for the F-22A program is unexecutable 
as planned because there is a significant mismatch between the Air 
Force's stated need for the F-22A aircraft and the resources OSD is 
willing to commit. According to Air Force officials, a minimum of 381 
F-22A aircraft are needed to satisfy today's national security 
requirements yet OSD states it can only afford to buy 183 F-22A 
aircraft. This results in a 198-aircraft gap in capability. 
Additionally, the Air Force now states a need for greater ground attack 
and intelligence-gathering capabilities, not included in the existing 
business case, that will require an extensive modernization program. 
The value of this planned investment in modernization is questionable 
until a new business case resolves the gap between requirements and 
affordability.

    7. Senator McCain. Mr. Sullivan, what are the prerequisites for 
developing and executing a successful business case?
    Mr. Sullivan. See the response to question 6 as it discusses the 
elements of a business case.

    8. Senator McCain. Mr. Sullivan, what concerns do you have with the 
Air Force's incremental funding approach for the F-22A?
    Mr. Sullivan. The Air Force has proposed using incremental funding 
to pay for the multiyear contract. Instead of fully funding the buy for 
each fiscal year, it plans four funding increments--economic order 
quantity, advanced buy, subsystem, and final assembly. Incremental 
funding for multiyear procurement is neither permitted by the annual 
DOD appropriations act,\1\ nor the multiyear authorizing statute which 
requires that funds only be obligated under a multiyear contract ``for 
procurement of a complete and usable end item.'' \2\ However, the Air 
Force is seeking an exception to these requirements in its request to 
Congress for statutory authorization for the multiyear contract. The 
Air Force's proposed F-22A multiyear strategy includes an increment of 
funding in each fiscal year to begin manufacturing subsystems, not 
considered a complete and usable end item. For example, the fiscal year 
2007 budget request includes $1.5 billion for subassemblies. It would 
not be until fiscal year 2008 that the final assembly would be fully 
funded.
---------------------------------------------------------------------------
    \1\ Section 8008 of the fiscal years 2005 and 2006 Department of 
Defense Appropriations Acts (Public Laws 108-287 and 109-148, 
respectively) require full funding of units to be procured.
    \2\ 10 U.S.C. Sec. 2306b(i)(4)(A). This restriction was added by 
section 820 of the Bob Stump National Defense Authorization Act for 
Fiscal Year 2003 (Public Law 107-314).

    9. Senator McCain. Mr. Sullivan, do you believe the Air Force's MYP 
proposal for the F-22A meets the criteria as delineated in title 10? 
What concerns do you have in regard to their plan?
    Mr. Sullivan. The Air Force is proposing to buy the remaining 60 F-
22As over a 3-year period with a multiyear contract and plans to submit 
its justification to Congress on May 15, 2006.\3\ To enter into a 
multiyear contract the Air Force must first meet the statutory criteria 
listed in 10 U.S.C. Sec. 2306b(a). Table 1 shows the six criteria that 
must be satisfied before entering into a multiyear contract and our 
observations on issues that could affect the Air Force's ability to 
satisfy several of the criteria.
---------------------------------------------------------------------------
    \3\ The Air Force needs statutory authorization for its proposed 
multiyear contract under 10 U.S.C. Sec. 2306b and the annual DOD 
appropriations act.

 TABLE 1: OBSERVATIONS OF F-22A MULTIYEAR CONTRACT CRITERIA AS OF APRIL
                                  2006
------------------------------------------------------------------------
            Multiyear criteria                    GAO observations
------------------------------------------------------------------------
Contract will result in substantial         The Air Force has not
 savings.                                    completed an estimate of
                                             savings but its preliminary
                                             indications are a maximum
                                             of 5 percent savings.
                                             However, when the unit
                                             procurement costs for the
                                             planned multiyear approach
                                             is compared to how the Air
                                             Force had previously
                                             planned to buy the
                                             remaining aircraft, the
                                             unit procurement costs
                                             increase under multiyear.
Minimum need expected to remain             Quantities have continually
 substantially unchanged during contract     been in a state of flux in
 period in terms of production rates and     the F-22A program including
 total quantities.                           changes in the last two
                                             budget submissions.
Reasonable expectation agency head will     The Air Force has indicated
 request funding at required level to        that its multiyear budget
 avoid contract cancellation.                is currently under funded
                                             by $400 million. Further,
                                             it is proposing to use
                                             incremental funding rather
                                             than fully funding each
                                             aircraft lot.
There is stable design, and technical       While the design for the
 risks are not excessive.                    baseline F-22A aircraft,
                                             designed primarily for an
                                             air superiority role, is
                                             stable, the design for the
                                             ground attack capability to
                                             be added has not been
                                             demonstrated and thus
                                             cannot be considered
                                             ``stable.''
Estimates of contract cost and cost         The Air Force has not
 avoidance are realistic.                    completed its analysis of
                                             contract cost or cost
                                             avoidance at this time.
Use of contract will promote national       No observation since the
 security of the United States.              contract vehicle has not
                                             been determined.
------------------------------------------------------------------------
Source: GAO Analysis and 10 U.S.C. 2306b.


                          incremental funding
    10. Senator McCain. Mr. Marron, under the Air Force's proposed MYP 
and incremental funding approach, what liabilities will go unfunded?
    Mr. Marron. Under a multiyear contract without incremental funding, 
the Air Force would initially need approximately $4 billion to $5 
billion to cover its minimum liability, rather than the $2 billion 
included in the Air Force's budget request. That total liability 
includes about $3.5 billion for the direct acquisition costs and 
between $0.5 billion and $1.5 billion in cancellation liability for the 
contract.
    The Air Force's budget request does not include funding to cover 
its liability if it cancels the multiyear contract after the first 
year. Under the multiyear contract, some nonrecurring costs may be 
allocated to aircraft that would begin production in 2008 and 2009. 
Therefore, if the contract is canceled before completion, the Air Force 
may owe the contractor more than the amount appropriated for items 
produced in the years before the cancellation. The Air Force has not 
requested budget authority to fund those liabilities.
    The Air Force has requested permission to budget and to pay for 
each annual production lot incrementally over a 2-year period rather 
than obtaining appropriations for the full cost of those aircraft in 
the year production begins. For example, funding in the first year 
would cover the cost of producing certain components of the first 20 
aircraft; funding in the second year would pay for the cost of 
assembling them. Thus, the Air Force's request does not cover the full 
costs of the aircraft at the time they are ordered or the time they 
enter production.

    11. Senator McCain. Mr. Marron, from a budgetary standpoint, is it 
responsible to fund only the subassembly of aircraft and require 
Congress to grant additional, future resources in order to procure a 
complete, usable product? Why or why not?
    Mr. Marron. The Air Force's incremental funding strategy may 
distort budgetary choices this year, and compel Congress to provide 
additional appropriations in subsequent years. If the Air Force's 
incremental budgeting approach is approved, when Congress allocates 
budget authority to programs in the 2007 defense appropriations act, 
the F-22 program would have an advantage over other programs or 
activities that did not receive that budgetary treatment. In subsequent 
years, Congress could be left with little choice but to provide 
additional appropriations to ensure the delivery of fully assembled, 
functional aircraft. Although more aircraft could be ordered in the 
first year under the incremental funding approach, fewer aircraft could 
be ordered in subsequent years within any given appropriations amount. 
Even if costs increased relative to the Air Force's current estimate, 
Congress might feel compelled to appropriate funds for aircraft that 
had already begun production to avoid wasting the funds already 
invested in the components.

    12. Senator McCain. Mr. Marron, does this approach restrict the 
ability of Congress to exercise meaningful oversight on the program? 
Why or why not?
    Mr. Marron. The Air Force's incremental funding strategy could 
hamper congressional oversight of the program by distorting budget 
choices this year, and making it necessary to provide additional 
appropriations in subsequent years.

    13. Senator McCain. Mr. Marron, does this approach limit visibility 
and accountability? Why or why not?
    Mr. Marron. Incremental budgeting reduces visibility over the cost 
of the program by deferring the recognition of budget authority to 
subsequent years. For any given lot of aircraft, an increase in cost 
relative to the budget estimate could be obscured by combining that 
cost growth with the cost of the subsequent funding increments. Even if 
it were apparent that costs had increased relative to the Air Force's 
estimate, Congress might feel compelled to appropriate funds for 
aircraft that had already begun production to avoid wasting the funds 
already invested in the components.

    14. Senator McCain. Mr. Marron, under its current proposal how does 
the Air Force fund termination liability and what future action, if 
any, would be required of Congress to terminate the contract?
    Mr. Marron. Contract termination differs from contract 
cancellation. The Government has the right to end any contract early 
when doing so is in the Government's interest, but must pay the 
contractor for any authorized work performed before it was notified to 
cease work. Contract termination is the act of rescinding orders for 
items for which funds have already been appropriated and on which work 
has already begun. The cost of terminating an annual procurement 
contract early should not exceed the available appropriations because 
an agency should have sufficient appropriations to cover all recurring 
and nonrecurring costs before it initiates an annual procurement 
contract.
    Because the Air Force will not have sufficient budget authority to 
pay for the full cost of each plane at the time it enters production, 
there could be an unfunded liability if the Service terminates the 
contract for those planes before funding for the full cost of those 
planes has been provided. If, in the course of building the aircraft, 
the contractor incurs costs that exceed the first increment of funding 
provided for that production lot, and the Air Force terminated the 
contract before it received appropriations for the second increment, 
additional funding would be required to pay those termination costs.
    Contract cancellation--unique to multiyear contracts--is the act of 
rescinding orders for items that were scheduled for production in 
subsequent years of a multiyear procurement contract and for which 
funding has not been provided. The Air Force budget request does not 
included specific amounts for the cancellation liability for the F-22 
procurement contract. Under a multiyear contract, some nonrecurring 
costs may be allocated to items expected to be produced in future 
years. Therefore, if the contract is canceled, the Government may owe 
the contractor more than the amount appropriated for items produced in 
the years before the cancellation. Thus, if the Air Force cancels the 
multiyear contract, additional amounts will be required to pay for that 
unfunded liability.
    In the case of both termination and cancellation, the Air Force 
would have to take funding from other aircraft procurement programs or 
request that Congress provide additional appropriations to pay those 
unfunded liabilities.

    15. Senator McCain. Mr. Marron, what are the pros and cons for 
incremental funding of aircraft and how does it compare to funding 
ships or military construction projects in that manner?
    Mr. Marron. The full costs of acquiring any Federal asset should be 
funded in advance to help ensure that all costs and benefits are fully 
considered at the time decisions are made to provide resources. Upfront 
funding enables Congress to control spending at the time a commitment 
is made and ensures--or at least increases the likelihood--that a 
complete and usable asset will be delivered without the need to provide 
additional appropriations in future years. These principles hold true 
regardless of the type of asset the Government acquires.
    Agencies have resorted to incremental funding because it can be 
difficult to budget for certain very expensive items if it must have an 
appropriation for the full cost in the first year. In some instances, 
the cost of a single item may exceed an agency's annual budget for 
capital acquisitions. If the cost of an asset represents a large 
portion of its budget, an agency may have to forego most other capital 
acquisitions for that year or otherwise disrupt other ongoing 
acquisition programs.
    Incremental funding, however, can have several deleterious effects. 
It may limit visibility and accountability because it obscures the full 
cost of decisions at the time they are made. In the competition for 
appropriations, it may tilt the playing field in favor of expensive 
programs that benefit from such a funding arrangement; programs may be 
selected on the basis of their apparent economy--in their initial 
stages--relative to other programs that do not have the advantage of 
such favorable budgetary treatment. Moreover, incrementally funded 
projects may be started without adequate scrutiny or a full 
understanding of the total cost. Incremental funding may provide an 
incentive to underestimate costs at the outset of a project because 
later cost increases would not have to be acknowledged as such but 
could be incorporated in subsequent funding increments.
    In cases in which an acknowledgment of the full cost upfront could 
render a program too expensive to consider, both agencies and Congress 
may end up accepting those higher costs at a later date if the only 
alternative is to abandon their previous investment in partially 
completed products. Finally, incremental funding may constrain the 
funding available for other programs in future years as programs that 
were partially funded in previous years continue to consume resources.
    Incremental funding has rarely been used for aircraft procurement 
programs. Perhaps because aircraft--even ones as costly as the F-22--
are less expensive than Navy ships, dams, and levees constructed by the 
Army Corps of Engineers, and NASA's space station, they are easier to 
budget for in full. Consequently, budgetary constraints can be 
accommodated by purchasing fewer aircraft in a given year rather than 
by funding only a part of the cost of a larger production lot.

    16. Senator McCain. Mr. Marron, has there been any instance where 
Congress has authorized and appropriated incremental funding of a 
multiyear procurement?
    Mr. Marron. CBO is not aware of any instance where Congress has 
authorized incremental funding of a multiyear procurement program. In 
fact, Congress recently disapproved such a proposal by the Air Force. 
In its fiscal year 2003 budget request, the Air Force proposed to use 
advance procurement funding--typically used to buy components with 
significantly longer production time than other system components--for 
the multiyear procurement of C-17 cargo aircraft. That incremental 
funding approach would have effectively resulted in progress payments 
on the aircraft rather than full funding in the initial year of 
production.
    In the National Defense Authorization Act for Fiscal Year 2003, 
Congress prohibited that approach proposed for the C-17 by amending the 
statute governing multiyear procurement to allow DOD to obligate funds 
to procure end items only if they were ``complete and usable.'' 
Congress also added $586 million to the Department's budget request for 
fiscal year 2003 to fully fund the acquisition of 15 C-17 aircraft 
entering production that year. The conference report accompanying the 
Department of Defense Appropriations Act for Fiscal Year 2003 
explicitly disapproved the Air Force's proposed approach: ``This 
financing scheme runs counter to the 'full funding' principles which 
guide Federal Government procurement practice, and thereby creates a 
future liability for the Air Force and Congress. For this reason, the 
conferees disapprove the Air Force's C-17 financing proposal.''

    17. Senator McCain. Mr. Marron, why would Congress be advised to 
start now?
    Mr. Marron. CBO does not believe that the Air Force has made a 
compelling case for authorizing incremental funding of a multiyear 
procurement contract for the F-22 fighter.
    Incremental funding of any program, including multiyear procurement 
programs, could distort budgetary choices by making a program appear 
less expensive than it is, and would constrain budgetary flexibility in 
subsequent years.
    Incremental funding and multiyear procurement are conceptually 
inconsistent budgetary practices. Multiyear procurement contracts 
suggest a firm and substantial commitment on the part of the 
Government. The contractor is encouraged to make investments promoting 
efficiency on the basis of the Government's commitment to purchase 
multiple annual production lots or to compensate the contractor for 
those investments if it chooses to cancel the contract. In contrast, 
however, the amount of budget authority provided under an incremental 
funding arrangement suggests a very limited Government liability--only 
for the cost of the components that are produced in that year.

    18. Senator McCain. General Hoffman, why is the Air Force pursuing 
an incremental funding strategy for the remaining F-22s?
    General Hoffman. The split funding strategy proposed for F-22 
production represents a win-win solution between competing priorities. 
Fiscal constraints faced by the Department in fiscal year 2007 and 
fiscal year 2008 drove significant budget challenges for the Air Force. 
Taking advantage of the mature F-22 production line, the Department was 
able to stretch procurement funding over 2 years for each production 
lot without impacting aircraft production or delaying deliveries. This 
decision freed over $2.3 billion of funds in fiscal year 2007 and 
approximately $1.0 billion in fiscal year 2008. The funding strategy 
also adds an additional lot of F-22 production, extending America's 
only fifth-generation fighter aircraft production capability 1 year, 
providing added stability to the F-22 supplier base and preserving the 
opportunity to add production lots in the future.

    19. Senator McCain. General Hoffman, why would the Air Force not 
fully fund the purchase of whole aircraft as you have done in the past?
    General Hoffman. The split funding strategy proposed for F-22 
production represents a win-win solution between competing priorities. 
Fiscal constraints faced by the Department in fiscal year 2007 and 
fiscal year 2008 drove significant budget challenges for the Air Force. 
Taking advantage of the mature F-22 production line, the Department was 
able to stretch procurement funding over 2 years for each production 
lot without impacting aircraft production or delaying deliveries. This 
decision freed over $2.3 billion of funds in fiscal year 2007 and 
approximately $1.0 billion in fiscal year 2008. The funding strategy 
also adds an additional lot of F-22 production, extending America's 
only fifth-generation fighter aircraft production capability 1 year, 
providing added stability to the F-22 supplier base and preserving the 
opportunity to add production lots in the future.

    20. Senator McCain. General Hoffman, please explain exactly why 
Congress should authorize an approach to procuring F-22As that Congress 
has never authorized in the past (i.e., incremental funding for a 
multiyear procurement).
    General Hoffman. The Department was faced with a tightly 
constrained fiscal environment in fiscal year 2007. Many priorities 
competed for the constrained funding, including tactical fighter 
aircraft recapitalization, natural disaster relief, and the global war 
on terror. The decision to use split funding for F-22 procurement 
allowed the Department to balance these priorities effectively and to 
ensure that the Nation maintains the capability to manufacture fifth-
generation tactical fighter aircraft. This decision freed over $2.3 
billion of funds in fiscal year 2007 and approximately $1.0 billion in 
fiscal year 2008. Further, the funding strategy adds an additional lot 
of F-22 production, extending America's only fifth-generation fighter 
aircraft production capability 1 year, providing added stability to the 
F-22 supplier base and preserving the opportunity to add future 
production lots.

    21. Senator McCain. General Hoffman, given the historical 
background for F-22A with regard to technical problems, delays, and 
enormous price increases, why should Congress give deference to this 
new proposal from the Air Force?
    General Hoffman. The F-22 program is delivering high quality, 
operational aircraft per the contractual production schedule and 
aircraft flyaway costs have decreased with each of the last three 
production lots. Over the past 2 years, the F-22 production program has 
made great strides and has matured into a world-class aircraft 
production line. From August 2004 through January 2006, the program 
delivered 37 aircraft, meeting its congressional commitment. In fact, 
during the last 6-month period, the program delivered 14 aircraft, 
proving it could produce at a rate of at least 28 aircraft per year. 
This effort has erased the lag in the delivery schedule and has put F-
22 production deliveries back on track. Efficiencies in F-22 production 
have resulted in reduced flyaway costs of 16, 11, and 13 percent, 
respectively, in the last three F-22 lots. In December 2005, the Air 
Force stood up its first operational squadron of F-22s. During day-to-
day training, practice deployments, and operational missions, the F-22 
has proven to be an overwhelmingly effective combination of stealth, 
speed, maneuverability, and integrated avionics. The F-22's ability to 
penetrate denied enemy airspace and execute a multirole mission is 
unmatched in the world.
    The new proposal extends F-22 production by 1 year, extending 
America's only fifth-generation fighter aircraft production capability, 
providing added stability to the fifth-generation supplier base, and 
preserving the opportunity to add future production lots.

    22. Senator McCain. General Hoffman, given the precedent-setting 
incremental funding scheme in this multiyear procurement proposal, one 
would expect the case for this atypical military procurement of F-22 
would need to be overwhelming and the cost-savings significant. What is 
your overwhelming case?
    General Hoffman. The overwhelming case is built on a combination of 
industrial capability and cost savings. The Institute for Defense 
Analyses (IDA) is currently building a business case analysis (BCA) for 
the F0922 multiyear. Preliminary analysis from IDA predicts the F-22 
proposal will save approximately 2.2 percent over lots 7, 8, and 9, 
translating into a savings of over $231 million. Additionally, the 
multiyear procurement will allow the Department to deliver required 
fifth-generation fighter capability efficiently and cost effectively 
(both air vehicle and engine) while providing an industrial base bridge 
to complementary capability in the Joint Strike Fighter (JSF). The 
JSF's reliance on Lockheed Martin's facilities in Palmdale, CA and Fort 
Worth, TX and many vendors common to the F-22, raises concerns about 
sustaining an experienced stealth aircraft industry. For example, BAE, 
Northrop Grumman, and Lockheed Martin in Palmdale, CA, perform work for 
both the F-22 assembled at Lockheed Martin in Marietta, GA, and the JSF 
assembled at Lockheed Martin in Fort Worth, TX, resulting in an 
estimated 1- to 3-percent decrease in the flyaway cost of both weapon 
systems. As such, F-22 production termination before JSF production 
maturity will translate into higher JSF costs. The transition from F-22 
to JSF production requires an integrated approach to keep aircraft 
production open and to control risk and cost of the JSF program and 
reduce operational risk to the combatant commanders. It is imperative 
that the United States maintain production of advanced aircraft to meet 
national defense requirements in an uncertain world. The F-22's 
procurement strategy works toward that end.

    23. Senator McCain. General Hoffman, what evidence, comparable to a 
BCA, can the Air Force give at this time to satisfy the current law 
which requires that entering into a multiyear procurement contract will 
result in substantial savings compared with a procurement through a 
series of annual contracts?
    General Hoffman. IDA is currently building a BCA for the F-22 
multiyear. Preliminary analysis from IDA predicts the F-22 proposal 
will save approximately $233 million (2.2 percent) over lots 7, 8, and 
9. The final BCA results will be delivered to Congress in mid-May.

    24. Senator McCain. General Hoffman, without a completed analysis 
of whether a multiyear procurement of the F-22A will result in 
``substantial savings'' over a series of annual contracts, on what 
basis should Congress grant authority for an EOQ procurement?
    General Hoffman. Based on an updated opinion from the DOD General 
Counsel, the Air Force will not execute an EOQ procurement until 
multiyear procurement authority is received from Congress. Not funding 
a $100 million EOQ in 2006, however, will decrease the expected savings 
of the multiyear procurement. The Air Force plans to partially mitigate 
the lost savings potential by requesting a $100 million increase to the 
$200 million fiscal year 2007 EOQ for a total fiscal year 2007 EOQ of 
$300 million. The Air Force will submit the final estimate of savings 
to Congress in mid-May once the BCA being prepared by IDA is complete. 
Preliminary data released by IDA on April 14, 2006 estimated savings of 
2.2 percent, still a savings to the taxpayer of over $230 million. This 
compares to the 5 percent number I gave in testimony which was based on 
starting EOQ in fiscal year 2006.

                          f-22a structure flaw
    25. Senator McCain. General Hoffman, a March 15, 2006 Bloomberg 
article reported a structural flaw with regard to a titanium engine 
casing on the F-22A. When did the Air Force learn of this problem?
    General Hoffman. The Air Force learned in December 2005 that F-22 
forward boom frames might have been improperly heat-treated. Upon 
further investigation it became clear that this issue is not the result 
of an improper design, but an issue with one supplier's manufacturing 
process. Subsequently, the Air Force tested improperly heat treated 
forward boom frames and determined that they do not affect safety of 
flight. Consequently, no restrictions have been put on F-22 flight 
operations.
    The heat-treat process enhances the boom frame's structural 
properties by holding the frames at a high temperature long enough to 
achieve the desired grain structure. A section of the forward boom 
frames under investigation may not have been held at this temperature 
long enough to completely achieve the desired grain structure. A series 
of material tests confirm that the atypical grain structure does not 
affect aircraft structural integrity, although, additional tests are 
underway to determine any long-term impact of the affected parts on 
aircraft service life. The Air Force expects the results of these tests 
by the end of May.
    This heat-treat issue potentially affects aircraft 4017 through 
4107 (aircraft through Lot 5 production). The supplier of these frames 
no longer manufactures F-22 forward boom frames, therefore, aircraft 
manufactured after 4107 are not affected by this heat-treat issue.

    26. Senator McCain. General Hoffman, why did the Air Force not 
inform Congress, specifically the Senate Armed Services Committee, of 
this issue prior to the Bloomberg article?
    General Hoffman. This issue was briefed as part of Air Force 
staffer day briefings to all four committees. The House Appropriations 
Committee, Subcommittee on Defense, was briefed on 21 February 2006, 
the House Armed Services Committee was briefed on 24 February 2006, the 
Senate Appropriations Committee, Subcommittee on Defense, was briefed 
on 27 February, and the Senate Armed Services Committee (SASC) was 
briefed on 21 March 2006. The Bloomberg article was dated 16 March 
2006, after the Air Force had begun briefing Congress on this issue.

    27. Senator McCain. General Hoffman, in prior meetings, Air Force 
officials stated that any cost associated with this problem would be 
covered by the contractor. In a subsequent written response, it was 
stated that this problem is not a warranty item and that any cost 
discovered in the future would have to be negotiated with the 
contractor. What is the true story and why is this not a warranty item?
    General Hoffman. It is the Government position that this issue is 
the result of a deficiency in material and workmanship that could not 
have been discovered by reasonable inspection and therefore is 
considered a latent defect. To that end, once the magnitude of the 
problem is understood, the contractor will be responsible to make any 
necessary changes at no additional cost to the Government and negotiate 
a compensation considered fair and reasonable to both parties. There is 
no warranty on the F-22.

                          incomplete planning
    28. Senator McCain. General Hoffman, in your statement you 
highlight a ``back to basics'' approach to how the Air Force does 
acquisition. The current multiyear procurement proposal for F-22A is 
significantly different from last year's plan. It requires numerous 
waivers and exclusions from Congress. It is undetermined whether there 
will be a problem meeting annual termination liability requirements, as 
well as whether the savings from the multiyear procurement contract 
will be sufficient to offset the increased costs by stretching out 
production. This plan sounds like it isn't fully developed. How do you 
respond?
    General Hoffman. In fiscal year 2007 the Department was faced with 
very tough fiscal constraints driven by many competing priorities. The 
fiscal year 2007 President's budget funding plan for the F-22 is 
unique, but it offers the opportunity to fund many of those priorities, 
including natural disaster relief and the war on terrorism, while 
continuing to produce F-22 aircraft without interruption to the 
production flow. It also adds one lot of F-22 aircraft, extending the 
Nation's fifth-generation tactical fighter aircraft manufacturing 
capability. The multiyear procurement request offers the benefit of 
stabilizing the fifth-generation production supplier base and helps 
mitigate the cost increases expected from stretching production and 
decreasing lot quantities. IDA is developing the business case that 
will detail the expected benefits of the multiyear approach. This 
business case will be delivered to Congress by mid-May. Additional 
legislative language will also be required to allow split funding 
within a multiyear procurement. The Air Force is actively engaged with 
Congress to execute the strategy with transparency.

    29. Senator McCain. General Hoffman, will you please provide a copy 
of the BCA once it has been completed?
    General Hoffman. Yes. The preliminary IDA F-22 multiyear 
procurement BCA was forwarded to the SASC on 18 April 2006. The final 
BCA will be delivered to Congress as soon as IDA submits their report 
to the Department in mid-May.

                    joint strike fighter life cycle
    30. Senator McCain. Admiral Enewold, what is the expected life 
cycle in years for the JSF?
    Admiral Enewold. Current DOD force structure planning includes 
procurement of JSFs from fiscal year 2007 until fiscal year 2027. Based 
on expected JSF aircraft service life of 8,000 hours and legacy 
aircraft experience, JSFs could be in service inventories for at least 
40 years.

    31. Senator McCain. Admiral Enewold, how many JSF aircraft do we 
expect to build for the United States, the U.K., and the rest of our 
international allies and friends?
    Admiral Enewold. DOD plans to procure 2,443 JSF aircraft, 1,763 for 
the Air Force, and 680 for the Department of Navy. JSF partners have 
not yet formally committed to production quantities. A minimum of 650 
aircraft is a conservative planning estimate for the U.K. and 7 other 
JSF system development and demonstration phase partners.

    32. Senator McCain. Admiral Enewold, how many total JSF engines 
will be purchased over the life cycle of the program?
    Admiral Enewold. Current planning reflects procurement of 
approximately 3,000 engines, including spares, for the total planned 
DOD quantity of 2,443 aircraft.

                     sole-source engine challenges
    33. Senator McCain. Admiral Enewold, at some point, the JSF will be 
the only fighter aircraft for the military. What would happen if the 
sole supplier of JSF engines encountered unforeseen disruptions in 
either engine production or the ability to support those engines (e.g., 
labor dispute, terrorism, natural disaster, etc.)?
    Admiral Enewold. Department leadership have concluded that relying 
on a single engine supplier incurs minimal operational risk, and that, 
while there are indeed benefits to having a second engine source, the 
benefits are not commensurate with the increased cost.

    34. Senator McCain. Admiral Enewold, how will you motivate a sole-
source supplier to control production and support costs, or to spend 
his own money to make performance and other improvements to the engine?
    Admiral Enewold. Several mechanisms for motivating sole-source 
suppliers exist. Contract cost and schedule incentives will be used for 
procurement. For performance based logistics, contractors are 
incentivized to improve the performance and reliability of their 
products to increase ``time on wing.''

    35. Senator McCain. Admiral Enewold, if Congress were to go along 
with the Department's recommendation to terminate the General Electric 
(GE)/Rolls-Royce F136 engine, how would the Department ensure cost 
controls on the Pratt & Whitney engine in the development, production, 
and sustainment phases of the program without competition?
    Admiral Enewold. Cost accounting standards enable the Government to 
track cost elements for the program for completeness. DOD negotiates 
and approves forward pricing rates for labor for each company. Contract 
fee structures are established to incentivize cost and schedule 
performance. Once cost profiles are established, fixed-price and 
multiyear procurement contracts incentivize contractor performance and 
long-term price stability.

    36. Senator McCain. Admiral Enewold, why is there a discrepancy 
between the total number of engines to be purchased and the number that 
was used for determining cancellation of the alternate engine?
    Admiral Enewold. All analyses and business cases make assumptions, 
and I do not have insight into the ones used in the analysis you 
reference. Reliability projections, sparing models, and support 
concepts are key factors that influence the projected procurement 
numbers.

    37. Senator McCain. Admiral Enewold, is there DOD guidance for 
conducting cost analysis that requires the total life cycle cost of the 
system to be considered?
    Admiral Enewold. DOD acquisition policy requires consideration of 
program life cycle cost at major acquisition decision milestones.

    38. Senator McCain. Admiral Enewold, do you believe that if the 20-
30 year life-cycle costs were included in the DOD analysis, as they 
should have been, the Department might have made a different 
conclusion? Why or why not?
    Admiral Enewold. Further analysis would be required to estimate any 
additional effects for the 20-30 year in-service phase of the life 
cycle. At a minimum, the costs of supporting two turbomachinery 
configurations, including spares inventories, technical manuals, fault 
and failure analyses, and personnel training would need analysis.

    39. Senator McCain. Admiral Enewold, the JSF program manager's 
advisory group (PMAG) met in 1998 and 2002. At both of those meetings 
the recommendation was the same--continue the JSF competitive engine 
program. Why has the DOD made a decision that is contrary to the PMAG's 
recommendations?
    Admiral Enewold. Both PMAGs concluded that it was beneficial to 
continue both engine efforts, but the recommendation specifically 
stated: ``Proceed with the JSF F136 engine program as currently 
planned. This recommendation is made independent of the Services' 
affordability issues which were beyond the scope of the analysis.'' 
Department leadership stated that their decision to cancel the F136 
alternate engine program is based on affordability, providing the 
Department the best balance of risk and cost.

    40. Senator McCain. Admiral Enewold, will the JSF program 
experience a Nunn-McCurdy breach this year? If so, why?
    Admiral Enewold. Yes. The major portion of this breach is due to 
historical increases previously reported in the F-35 December 2003 
Selected Acquisition Report (SAR), i.e., 26.2 percent and 21.7 percent 
for Program Acquisition Unit Cost (PAUC) and Average Procurement Unit 
Cost (APUC), respectively, including programmatic changes. Details of 
the breach, which is against the Milestone B baseline, will be provided 
in the Department's December 2005 F-35 SAR, due to Congress in early 
April 2006.

    41. Senator McCain. Admiral Enewold, the DOD says that cancelling 
the GE/Rolls-Royce F136 engine entails little operational risk, but 
former Assistant Secretary of the Navy, John Douglas, in a March 1998 
Defense Daily article said ``The alternate engine for the Joint Strike 
Fighter addresses the single biggest risk issue. . . . I would not 
recommend we go forward without the alternate engine. . . . I want to 
state again unequivocally my support for the alternate engine.'' How do 
you account for the dramatic change within the Department on the JSF 
alternate engine program?
    Admiral Enewold. The F135 is now 8 years more mature in its 
development and is on track to meet the operational requirements for 
JSF. The F119 engine, from which F135 is derived, has successfully 
accumulated thousands of flight hours. Department leadership have 
stated that their decision to cancel the F136 alternate engine program 
is based on affordability, providing the Department the best balance of 
risk and cost.

    42. Senator McCain. Admiral Enewold, why does the Department 
believe that the dynamics that created significant savings in the first 
``Great Engine War'' no longer apply to the JSF program?
    Admiral Enewold. The JSF Program Office was not involved in the 
Department's decision to cancel the F136 Program, and also was not 
involved in the related supporting analysis. I, therefore, do not have 
insight on details of the Department's analysis. My understanding is 
the Great Engine War resulted from both a desire to develop competition 
and regain the aerodynamic performance of the F-16. Clearly, the second 
motivation does not exist for JSF. Department leadership made it clear 
that their decision considered the benefits of competition balanced 
against affordability and operational risk assessments.

    43. Senator McCain. Admiral Enewold, if the JSF program does not 
meet the key performance parameter (KPP) requirement of 
interoperability, what impact, if any, will this have on the 
warfighter? Please fully explain your response.
    Admiral Enewold. The major reason for not meeting the JSF 
interoperability KPP is complexities of evolving DOD standards and 
application across platforms. If current issues remained unresolved, 
JSF would still have more communications interoperability than any 
existing fighter.
    The JSF interoperability KPP is an end-to-end assessment of the JSF 
design that reflects both (1) projected JSF performance against 
selected standards, which the air system is being designed to, and (2) 
performance against those same standards by a set of systems that 
represent all the external systems the JSF interoperates with. The 
actual measurement of performance is satisfaction of 67 critical 
information exchange requirements (IERs) that comprise the performance 
threshold. The current KPP shortfall primarily results from (1) 
variations across platforms in implementation of the Variable Message 
Format (VMF) tactical data link standards and (2) JSF's inability to 
meet the specified beyond-line-of-sight (BLOS) requirements. 
Approximately half of the 67 critical IERs are associated with VMF 
standards that primarily support air-to-ground operations (e.g., close 
air support). JSF is implementing the latest versions of the three VMF 
standards, and is projected to be 100 percent interoperable with the 
two ground systems that support forward air control (FAC). Legacy 
aircraft and helicopters participating in airborne FAC operations are 
updating to the current standards on differing schedules.
    JSF is the first fighter to integrate satellite communications 
(SATCOM), and legacy fighters successfully operated without it. JSF and 
all other platforms face the fundamental challenge of predicting the 
U.S. ultra-high frequency (UHF) SATCOM migration so we can avoid or 
minimize building to interim standards. Multiple assessments related to 
SATCOM migration are ongoing. The collective DOD JSF stakeholders have 
defined a path forward that aligns JSF planned capability fielding with 
the DOD objective SATCOM architecture. A variety of options exist that 
can mitigate the impact if the objective architecture is delayed. A 
planned operational requirements document change will address this 
issue.

    44. Senator McCain. Mr. Bolkcom, the competition between Pratt & 
Whitney and GE to produce F-15 and F-16 engines for the military lasted 
only 10 years. But the competition to support those aircraft engines 
lasted at least another 20 years. What are the pros and cons of holding 
such a competition for the JSF engine?
    Mr. Bolkcom. If DOD were to structure the engine competition as it 
did during the Great Engine War, the annual contract for which the two 
companies would compete would be to produce and support those engines 
over their lifetimes. If there is competition for engine production, 
then there would logically be competition for engine support work as 
part of a single, annual contract. The two companies also competed 
against each other for many years, in fact they still compete today, to 
sell and support engines to those countries that import the F-16 and F-
15. This rivalry likely made the F-15 and F-16 more competitive in the 
international marketplace. The great export success the F-16, in 
particular, has achieved has been valuable in funding continued 
improvement of the aircraft, which might then be applied to U.S. 
aircraft.

    45. Senator McCain. Mr. Bolkcom, does competition provide cost-
savings? Please explain your answer.
    Mr. Bolkcom. Competition during weapon system production can 
provide cost savings over relying on a sole supplier. Competition can 
also lead to more effective weapon systems, more responsiveness from 
the contractors, and better contract terms and conditions for the 
Government. However, competition does not automatically confer these 
benefits. The number of units to be produced must be large enough to 
recoup the initial investment in two producers. Further, the Government 
must plan and actively monitor and manage the competition if it is to 
realize the maximum benefit. In other words, DOD must be a ``smart 
buyer.''

    46. Senator McCain. Mr. Bolkcom, does the use of a sole source 
contractor tend to limit the degree of responsiveness if a problem 
arises? Please explain your answer.
    Mr. Bolkcom. That has been the case in the past. For example, Pratt 
& Whitney was widely excoriated by the Air Force for not satisfactorily 
responding to shortcomings in the F100 engine. But of course, there are 
examples of sole source contractors that are very responsive to their 
DOD customers. I don't believe the issue is one of causality. Relying 
on a sole source supplier does not necessarily lead the supplier to be 
unresponsive. On the other hand, forcing two or more companies to 
compete for business can lead to more responsive suppliers.

    47. Senator McCain. Mr. Bolkcom, how many JSF engines do you think 
will be purchased over the total life of the program and how did you 
come to that conclusion?
    Mr. Bolkcom. Each JSF aircraft is likely to consume 2.5 engines or 
engine equivalents of parts over its lifetime. Representatives of both 
GE and Pratt & Whitney, and many Service members whom I've interviewed 
agree on this planning factor. Considering this ratio of aircraft to 
engines, a conservative estimate of the number of engines to be 
purchased is at least 8,400 engines over the JSF program's lifetime. 
This number does not include the large number of engines that may be 
produced for foreign buyers of the JSF.

    48. Senator McCain. Mr. Bolkcom, why is it important that life 
cycle costs be considered when making a decision of this magnitude?
    Mr. Bolkcom. It can be difficult to think of a multi-million dollar 
aircraft engine as ``cheap.'' But procurement of the engine is cheap 
compared to the cost of supporting and maintaining the engine over its 
lifetime. Operations and support costs range from 50 percent to 70 
percent of the total weapon system life cycle cost. Any analysis of the 
potential cost savings from competition that does not consider the 
engine's operations and support phase is incomplete.

                       joint strike fighter delay
    49. Senator McCain. Mr. Sullivan, in your prepared remarks, you 
state that the JSF program can reduce cost and schedule risks by 
adopting a new, knowledge-based business case, and that the JSF program 
should delay production until the aircraft design has been proven to 
work in flight testing. How long do you propose the JSF program should 
be delayed?
    Mr. Sullivan. A delay should not be based on a particular time but 
on demonstrating certain knowledge has been attained and risks reduced. 
In the case of the JSF, DOD should delay its investment in production 
aircraft until sufficient testing has at least demonstrated the basic 
airframe design of each JSF variant in important parts of the flight 
envelope and limit production quantities until a fully integrated 
aircraft demonstrates through flight testing the required capabilities. 
The program plans to enter production with only 1 percent of its flight 
tests completed and more than 2 years before all three JSF variants 
have completed some flight testing of the aircraft's basic design and 4 
years before a fully configured and integrated aircraft is expected to 
be flight tested. This delay would allow the program time to gain much 
needed knowledge, reducing risks, and providing a greater opportunity 
for a more successful program outcome. The financial risk of moving 
into production for the JSF is significant. DOD plans to increase 
spending from about $100 million a month for production in 2007 to over 
$500 million a month just 2 years later. By the time a fully integrated 
aircraft has flown, DOD will have potentially signed procurement 
contracts for over 190 aircraft valued at $26 billion.
    It is important to note that we are not recommending a delay in 
development. Development work needs to take place to demonstrate that 
the aircraft will work as intended. At this time, the program is less 
than one-half of the way through its development program.

    50. Senator McCain. Mr. Sullivan, do you believe the current 
acquisition strategy of the DOD will allow it to achieve the JSF 
program objectives?
    Mr. Sullivan. We believe there is a high probability that the JSF 
program will not achieve its current cost, schedule, and performance 
objectives. The JSF acquisition strategy currently plans a single-step 
approach to deliver a quantum leap in tactical fighter capability by 
2013 and has already felt the negative cost and schedule impacts from 
executing this approach. The length and scope of the remaining effort 
in the JSF program make it even more difficult to accurately estimate 
cost and delivery schedules. The JSF's approach is a clear departure 
from DOD policy that calls for adopting an evolutionary approach to 
acquisitions. Past single-step programs, such as the F-22A fighter, B-2 
bomber, Crusader artillery vehicle, and Comanche helicopter have 
experienced skyrocketing costs, substantially reduced production 
quantities, or cancellation of the program. The JSF funding profile--
which requires an average of $11 billion annually for the next 2 
decades--is also at risk to increase if costs continue to grow or 
schedules are further delayed to develop the ultimate JSF capabilities.
    With more than 90 percent of the JSF investment remaining, DOD 
officials have an opportunity to adopt an alternative acquisition 
strategy, such as the one used by the F-16 program, that sequences 
capabilities over time based on proven technologies and design. This 
would reduce risk and deliver aircraft sooner. This alternative 
evolutionary approach is actually the preferred approach in DOD's 
acquisition policy for acquiring new systems for more rapid delivery of 
incremental capabilities to the warfighter. An evolutionary strategy 
would reduce risk and deliver aircraft sooner by allowing the program 
to develop and evolve a product through small, time-phased development 
increments based on proven technologies and design. This approach would 
allow aircraft to be delivered in sequence that could first meet DOD's 
need to recapitalize its aging fleet of aircraft and then evolve 
aircraft to eventually achieve improved capabilities in future system 
development increments. In the case of JSF, capabilities that demand as 
yet undemonstrated technologies, such as advanced mission systems, 
prognostics, and advanced software, would be deferred to future 
aircraft increments as technologies are demonstrated and the resources 
become available. Each subsequent increment would be managed as a 
separate development program.

                            fa-18 challenges
    51. Senator McCain. Admiral Kilcline, what are the current FA-18 
maintenance problems with regard to service life and availability of 
the aircraft?
    Admiral Kilcline. Service life issues fall into three categories: 
cat/trap/landing (CTL), flight hours (FH), and unknowns. CTL 
inspections endeavor to extend CTL limits to 12,300 landings and 2,600 
catapults/traps. These inspections revealed unpredicted support 
structure cracks that resulted in numerous air frame bulletins that 
call for regular inspections. We expect this trend to continue as the 
airframes age.
    FH inspections have extended the airframe life from 6,000 to 8,000 
hours and there is currently a service life assessment program (SLAP) 
study underway to further extend the airframe to 10,000 hours. The 
results of the SLAP study will not be known until December 2007 and 
will be followed by engineering change proposals (ECPs) in late 2008.
    Lastly there are the unknowns best exemplified by inner wing spar 
cracks that are induced by stress corrosion regardless of airframe 
hours. All these parameters are being monitored as closely as possible 
in our effort to maximize airframe usage and availability.

    52. Senator McCain. Admiral Kilcline, what is the projected 
shortfall of FA-18s?
    Admiral Kilcline. The current projections predict a 50-plane F/A-
18A+/C shortfall in the 2018 timeframe. These projections are 
predicated on legacy Hornets achieving 10,000 flight hours, 12,300 
landings and 2,600 catapults/traps and assumes Program Objective 
Memorandum (POM) 2006 Program of Record (POR) for the JSF.

    53. Senator McCain. Admiral Kilcline, does the projected shortfall 
assume a service life extension to 10,000 flight hours on the FA-18?
    Admiral Kilcline. Yes, the model assumes the F/A-18 will fly to 
10,000 FHs and JSF acquisition will follow the POM 2006 POR. 
Additionally, the two other parameters used in the model are 12,300 
landings and 2,600 catapults/traps for the F/A-18A+/C.

    54. Senator McCain. Admiral Kilcline, what is the current flight 
hour limit of the FA-18 and what is the proposed extension to the 
flight hour limit?
    Admiral Kilcline. F/A-18A+/C aircraft are currently limited to 
8,000 flight hours. Engineering efforts are currently underway to 
determine if the F/A-18A+/C can fly beyond this current limit with the 
desire to achieve a 10,000-flight hour limit.

    55. Senator McCain. Admiral Kilcline, what studies support 
extending the service life of the FA-18 significantly past its design 
limits?
    Admiral Kilcline. The Navy has contracted with Boeing for a SLAP to 
determine potential service life of the F/A-18A-D. This study has been 
broken up into two phases: SLAP I, focusing on ground events, 
incorporates requirements for CTL extensions. This phase is complete, 
and effort is now underway to develop inspection bulletins and ECPs to 
effect repairs for areas identified. SLAP II focused on flight events, 
and assesses the potential to incorporate requirements for FH 
extensions. The study should be complete in December 2007, until then, 
the service life remains 8,000 flight hours.

    56. Senator McCain. Admiral Kilcline, what is the estimated FA-18 
shortfall if the Navy elects not to extend the flight hour limit of the 
FA-18?
    Admiral Kilcline. Current projections indicate a shortfall of 166 
aircraft in 2018 if the service life of the F/A-18A+/C is not extended 
beyond 8,000 flight hours.

    57. Senator McCain. Admiral Kilcline, what effect would a delay of 
1 year for JSF have on the FA-18 projected shortfall?
    Admiral Kilcline. Current projections indicate the 50-plane 
shortfall in F/A-18A+/C aircraft in 2018 would increase by 28, for a 
total shortfall of 78 aircraft.

                                  t-45
    58. Senator McCain. Admiral Kilcline, how many T-45 Goshawks are 
currently in the Navy inventory?
    Admiral Kilcline. As of March 31, 2006, we have 178 T-45 Goshawks 
in naval inventory. To date, 189 aircraft have been delivered, but 11 
have been stricken. The Navy has procured an additional 22 aircraft 
between fiscal year 2004 and fiscal year 2006 which are still in 
production.

    59. Senator McCain. Admiral Kilcline, what is the total number of 
T-45s required by the Navy?
    Admiral Kilcline. The fiscal year 2007 President's budget T-45 
inventory requirement is 223 aircraft (207 for pilot training and 16 
for undergraduate military flight officer (UMFO) training). An 
inventory objective of 223 enables Chief of Naval Air Training (CNATRA) 
to make pilot and UMFO training requirements with the current syllabi 
through 2028. This date can be achieved if the currently defined pilot 
and UMFO training requirements remain constant and the airframe can 
achieve a 21,600 flight hour service life.
    On the Chief Of Naval Operations (CNO) Unfunded Priority List, the 
Navy has requested an additional six T-45 aircraft. These additional 
aircraft provide for an expansion of both the undergraduate pilot and 
UMFO syllabi while maintaining a T-45 service life to 2028.
    The new UMFO training program will use a combination of the T-6 
aircraft, a high fidelity ground based training system and the T-45 
with Virtual Mission Training System (synthetic radar). This 
revolutionary training system will allow the Navy to retire the T-39 
and T-2 aircraft while capitalizing on advances in simulation. 
Additionally, these aircraft will afford CNATRA the opportunity to 
download training flight hours from higher cost per flight hour 
platforms (F/A-18), save Operation and Maintenance, Navy (O&M,N) 
funding in the out years across the naval aviation continuum and help 
conserve life expectancy on F/A-18 aircraft.

                                 cvn-21
    60. Senator McCain. Admiral Kilcline, what is the Navy's current 
cost projection for acquisition of CVN-21 and how was that estimate 
determined?
    Admiral Kilcline. The nonrecurring investment for design and 
development of the CVN 21-class of aircraft carriers is $5.6 billion. 
This is comprised of $3.2 billion in RDT&E (then-year dollars ($TY)) 
and $2.4 billion ($TY) in shipbuilding and conversion, Navy (SCN). 
RDT&E funds are being used to develop the technologies needed to meet 
program requirements, while the SCN funding is being used to develop 
the detail design for the entire ship class.
    The total cost to construct the lead ship is $8.1 billion SCN 
($TY). Navy expects to award the contract for construction of the lead 
ship of the class, CVN 78, in fiscal year 2008. The President's budget 
for fiscal year 2007 split funds CVN 78 between fiscal year 2008 and 
fiscal year 2009.
    CVN 21 projected costs are based on estimates conducted by the Navy 
and Office of the Secretary of Defense (OSD) cost analysis improvement 
group (CAIG) in support of the Milestone B approval decision reached in 
April 2004. The Navy estimate was updated in 2005 supporting the 
President's budget for fiscal year 2006 decision to delay the CVN 21 
program by 1 year.
                                 ______
                                 
             Questions Submitted by Senator Saxby Chambliss
                  forward boom titanium heat-treating
    61. Senator Chambliss. General Hoffman, the Congressional Budget 
Office (CBO) witness, Donald B. Marron, discusses the justification for 
the F-22A multiyear contract in his written statement and raises a few 
concerns relative to consistency in the budget request for the F-22A as 
well as issues related to the forward-aft boom. Regarding the first 
issue, I believe the Quadrennial Defense Review substantiated the 
requirement for continued F-22A production and funding through at least 
2010, and Program Budget Decision (PBD) 720 enacts this plan in the 
fiscal year 2007 President's budget. Regarding, the second issue, DOD 
recognized the maturity of F-22A production processes a year ago in 
April 2005 when they approved the program for full rate production. I 
know that some have claimed that this forward boom titanium heat-
treating issue indicates a design stability problem. Rather, all the 
facts we have on this situation indicate that the design is completely 
stable. Instead, this is an issue of a contractor--which the prime 
contractor is no longer using--not following the stated design rather 
than there being a problem with the design. It is clear that this is 
not a structural integrity or safety of flight issue. Could you expound 
upon this issue and discuss the extent to which, if any, there are 
safety, design, or performance concerns relative to the forward boom 
titanium heat-treating issue?
    General Hoffman. The Air Force learned in December 2005 that F-22 
forward boom frames might have been improperly heat-treated. Upon 
further investigation, it became clear that this issue was not the 
result of an improper design, but an issue with one supplier's 
manufacturing process. Subsequently, the Air Force tested the 
improperly heat-treated forward boom frames and determined they did not 
affect safety of flight and, consequently, no restrictions have been 
put on F-22 flight operations.
    The heat-treat process enhances the boom frame's structural 
properties by holding the frames at a high temperature long enough to 
achieve the desired grain structure. A section of the forward boom 
frames under investigation may not have been held at this temperature 
long enough to completely achieve the desired grain structure. A series 
of material tests confirm that the atypical grain structure does not 
affect aircraft structural integrity, although, additional tests are 
underway to determine any long-term impact of the affected parts on 
aircraft service life. The Air Force expects the results of these tests 
by the end of May.
    This heat-treat issue potentially affects aircraft 4017 through 
4107 (aircraft through Lot 5 production). The supplier of these frames 
no longer manufactures F-22 forward boom frames, therefore, aircraft 
manufactured after 4107 are not affected by this heat-treat issue.

                        f-18 multiyear contract
    62. Senator Chambliss. Mr. Sullivan, Mr. Bolkcom, General Hoffman, 
and Admiral Kilcline, I think a valid comparison to the F-22A multiyear 
discussion is the F-18 multiyear contract which was first approved in 
fiscal year 2000. The F-18 multiyear decision might pre-date all of us, 
but I understand that the F-18 had a minor technical problem related to 
wing flutter at the time the multiyear contract was being considered. 
Congress determined at that time that, despite this minor technical 
issue, the risk in proceeding with a multiyear contract was small and 
chose to grant multiyear procurement authority to the Navy at that 
time. Can you comment on this issue and whether or not I have stated 
the record correctly?
    Mr. Sullivan. You have stated the issue correctly. The aircraft did 
have a wing flutter problem, and Congress determined that the program 
was ready for multiyear procurement despite the problem. In commenting, 
I would direct you to our answers to questions 4 and 9 above as it 
relates to the F-22A program.
    Mr. Bolkcom. My understanding is that the F/A-18E/F ``wing drop'' 
problem was first experienced in March 1996, and led DOD to delay 
fiscal year 1998 funding for the program pending solution of the 
problem. After a number of modifications to the wing's leading edge, 
fiscal year 1998 funding was approved for the procurement of additional 
aircraft in the spring of 1998. However, the F/A-18 MYP decision may 
not be a valid comparison to the proposed F-22A MYP. The defining 
feature of the F-22A proposal appears to be incremental funding, not 
the MYP alone. Reducing the rate of production to 20 aircraft per year 
is another concern, and, as CBO has testified, so is the potential 
shortfall in the contract's cancellation ceiling. I would expect that 
these considerations would weigh more heavily on the minds of 
decisionmakers than the MYP proposal by itself.
    General Hoffman. The Air Force was not involved in the acquisition 
of the F-18. I will defer to the U.S. Navy for the acquisition details.
    Admiral Kilcline. Wing drop, which we assume is what the request or 
is referring to as wing flutter, was resolved prior to the program 
being allowed to proceed to the full-rate production phase. The 
resolution was the addition of a porous wing fold fairing on the upper 
surface of each wing. The wing drop was not an issue in the final GAO 
report, the operational evaluation report, or the Beyond Low-Rate 
Initial Production report. By the time the FA-18E/F multiyear contract 
was awarded, wing drop was not an issue.
                                 ______
                                 
           Questions Submitted by Senator Joseph I. Lieberman
                              f136 funding
    63. Senator Lieberman. General Hoffman, there has been a lot of 
discussion and debate on the F136 alternate engine program. Is this 
program on the Air Force's unfunded priority list?
    General Hoffman. No, the F136 alternate engine program is not on 
the Air Force's unfunded priority list.

                        f-22a engine performance
    64. Senator Lieberman. General Hoffman, the Air Force laid some 
heavy demands for high performance, super cruise, stealth, vectored 
thrust, as well as reliability and maintenance on the F-22A engine. How 
would you characterize the performance of the F-22A propulsion system 
in its testing and early deployment?
    General Hoffman. The F119 program developed the world's most 
advanced tactical fighter engine and this engine entered service with 
unprecedented performance, reliability, and maintainability. The F119 
engine contributed to the F-22 exceeding the KPPs for supercruise and 
acceleration. It has a better introductory in-flight shutdown record 
than legacy F100-PW-100, -220, and -229 engines (F-15/F-16) with only 
one operational in-flight shutdown event in over 17,000 engine flight 
hours. The engine also displayed unprecedented stall-free operations 
during testing and deployment. Four years prior to maturity, the F119 
has a lower shop visit rate (engine removals for maintenance) than 
currently being demonstrated on the F100-PW-100 and -229.

    65. Senator Lieberman. General Hoffman, would you say that the F-
22A propulsion system has met or exceeded its expectations? Would you 
expect this experience to carry over to the F-35 program?
    General Hoffman. The F119 program developed the world's most 
advanced tactical fighter engine and this engine entered service with 
unprecedented performance, reliability, and maintainability. The F119 
has exceeded both engine related KPPs of supercruise and acceleration 
and is outperforming legacy F-15/F-16 engines in key reliability and 
maintainability metrics. Many F119 manufacturing processes, parts, 
maintenance practices, and lessons learned are being used by the F135 
program. The Air Force anticipates that the success of the F119 program 
will continue with the F135.

                    joint strike fighter engine cost
    66. Senator Lieberman. General Hoffman, the F135 engine for the JSF 
program is a derivative of the F119 engine for the F-22A program. 
Despite the sole-source strategy and the instability of the F-22A 
program, would you please describe the cost history of the F119 engine?
    General Hoffman. The F119 unit price has decreased with each lot 
procurement of F-22s.

                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                       Quantity                                                   Reduction from
           Quantity (FFP)              (Spares)          Contract             F119 Unit Price     PRTV (Percent)
----------------------------------------------------------------------------------------------------------------
   6...............................               PRTV..................  11.442................
  12...............................           4   PRTV 2................  11.420................             0
  20...............................           5   Lot 1.................  10.853................            -5
  26...............................           6   Lot 2.................  10.535................            -8
  42...............................           7   Lot 3.................  10.385................            -9
  44...............................          10   Lot 4.................  9.757.................           -15
  48...............................          10   Lot 5.................  9.174.................           -20
  48...............................          13   Lot 6.................  working proposal......           TBD
----------------------------------------------------------------------------------------------------------------


    67. Senator Lieberman. General Hoffman, if this committee grants 
multiyear authority, as proposed in the fiscal year 2007 President's 
budget, what impact, if any, do you anticipate will occur on costs 
associated with the engine?
    General Hoffman. Assuming this question is concerning the F-22 
fiscal year 2007 President's budget proposed multiyear procurement, the 
preliminary BCA from IDA predicts an F119 engine multiyear cost savings 
of 2.7 percent. The final BCA will be delivered to Congress in mid-May 
2006.

                           ea-6b replacement
    68. Senator Lieberman. General Hoffman, the Navy plans to replace 
the EA-6Bs with the E-18G. It is less clear what the Marine Corps 
intends to do to replace the rest of the current EA-6B fleet. The Air 
Force had been planning to develop a stand-off jamming capability for 
the B-52 to help meet its jamming requirements, but this year, the Air 
Force has canceled the program with no replacement envisioned. What 
does the Air Force intend to do to replace the capability represented 
by the rest of the EA-6B fleet?
    General Hoffman. The Air Force is participating in a joint OSD 
study to help determine the best stand-off jamming solution. We are 
approaching this from a systems-of-systems approach to mitigate risk. 
All options are still open.

    69. Senator Lieberman. General Hoffman, are you counting on the 
Navy to buy more E-18G aircraft to meet your needs?
    General Hoffman. No, the Air Force is not counting on the Navy to 
buy more EA-18G aircraft. Even though the EA-18G is a great electronic 
attack platform, it does not meet the Air Force's need for stand-off 
jamming.

                       alternate engine priority
    70. Senator Lieberman. Admiral Kilcline, again there has been a lot 
of discussion and debate on the F136 alternate engine program. Is this 
program on the Navy's priority list?
    Admiral Kilcline. No. The recommendation to remove the F136 engine 
from the 2007 President's budget was an affordability measure made 
possible by the demonstrated reliability of the F119 engine.

    71. Senator Lieberman. Admiral Kilcline, how many aircraft in the 
Navy's fleet have alternate engines?
    Admiral Kilcline. None in the deployable fleet or training 
squadrons. Very few of the Navy's executive and priority cargo jets can 
utilize alternate engines, i.e. UC-35 aircraft (Pratt & Whitney 535 or 
JT15) which is a military equivalent of the commercial Cessna aircraft.

    72. Senator Lieberman. Admiral Kilcline, it is my understanding 
that the Navy operates the world's largest fleet of aircraft (F-18) 
powered by a single engine supplier. Would you please characterize the 
Navy's experience managing a single engine supplier.
    Admiral Kilcline. The following points are provided, based upon the 
F404-GE-400/402 engine (F/A-18A-D power plant) and the F414-GE-400 
engine (F/A-18E/F and EA-18G power plant) production history.

         The F404 engine, produced by GE, was originally a sole 
        source, new design, based upon the F110 engine. Industrial base 
        concerns and possible cost savings led the Navy to begin 
        production of an identical design by a second source, Pratt & 
        Whitney. Pratt & Whitney made rapid progress on the second 
        source engine. Feeling competitive pressure, GE offered the 
        Navy tremendous savings in return for a sole sourcing 
        agreement. The Navy terminated Pratt & Whitney participation 
        and awarded a sole source agreement to GE for F404 engines. 
        This engine is meeting F/A-18A-D performance requirements and 
        reliability is currently above goal.
         The GE F414 engine was designed using lessons learned 
        from the F404 engine program. From the beginning, GE in concert 
        with the airframe manufacturer Boeing, were focused on lowering 
        costs. Utilizing multiyear procurement and performance-based 
        logistics contracts has allowed the F414 engine to exceed fleet 
        performance and reliability goals.

    73. Senator Lieberman. Admiral Enewold, there has been great debate 
on whether an engine has flown in support of the JSF program. I seem to 
recall an engine was flown as part of the JSF demonstrator joint 
advanced strike technology program. Is this in fact correct, and if so, 
was the flight(s) successful? Additionally, would you please clarify 
what engine was flown?
    Admiral Enewold. Yes. During the JSF concept demonstration phase, 
Lockheed Martin flew two JSF concept demonstrator aircraft 
approximately 200 flight test hours over many sorties to demonstrate 
specified objectives for three JSF variants. A derivative of the Pratt 
& Whitney F119 engine powered the demonstrator aircraft.

                 alternate engine cancellation decision
    74. Senator Lieberman. Admiral Enewold, in the decision to cancel 
the JSF alternate engine, what factors, in addition to the immediate 
recovery of $2 billion, were most compelling?
    Admiral Enewold. The JSF Program Office was not involved in the 
Department's decision to cancel the F136 Program, and also was not 
involved in the related supporting analysis. I, therefore, do not have 
insight on details of the Department's analysis. Department leadership 
have stated that their decision to cancel the F136 alternate engine 
program is based on affordability, providing the Department the best 
balance of risk and cost. I believe the assessment of low operational 
risk was the most compelling additional reason to propose the 
cancellation.

    75. Senator Lieberman. Admiral Enewold, does the decision to move 
out with the Pratt & Whitney F135 as the sole engine for your short-
take-off/vertical-landing (STOVL) airplanes cause you any concern?
    Admiral Enewold. Development concerns with the STOVL are not F135 
(or F136) unique. The integration and performance of fan, structural 
weight, and thermal loading are risks that require balanced technical 
solutions.

                             f-18 shortfall
    76. Senator Lieberman. Admiral Kilcline, I understand that the Navy 
is projecting a shortfall of F-18 aircraft during the next decade. The 
shortfall could be in the range of 40-50 aircraft short of the number 
required to support the 10 aircraft carrier wings. I also understand 
that this shortfall assumes that you will be able to operate F-18s for 
up to 10,000 flight hours. This raises a couple of concerns. Will the 
Navy be able to maintain its fleet response plan of being able to surge 
five or six carriers within 30 days of notification, followed by 
another carrier within 90 days if you are 40-50 aircraft below 
requirements?
    Admiral Kilcline. I am confident that we will continue to be able 
to support the requirements of the Navy's Fleet Response Plan. Aircraft 
carriers and air wings bring a host of capabilities with them when they 
deploy into theater, not just strike fighters. These include airborne 
early warning, airborne electronic attack, anti-surface unit warfare, 
and combat search and rescue capability. Later arriving air wings may 
not look like the first responders, but the combatant commander will 
have different needs 30 or 90 days into the fight. The sixth or seventh 
air wing to surge will be tailored to what is required in theater. 
Additionally, the projected shortfall will be spread across the entire 
fleet of Navy and Marine Corps Hornets, including those surging, those 
remaining in Reserve, and those in the support units.

    77. Senator Lieberman. Admiral Kilcline, how much risk are we 
exposing ourselves to by assuming that the F-18, which was designed for 
8,000 hours, will be able to fly operationally until it reaches 10,000 
hours?
    Admiral Kilcline. The F/A-18 aircraft was designed for a 6,000-hour 
service life and was extended via service life bulletin 08 to an 
interim 8,000 flight hours based upon early fatigue data. Service life 
extensions of the F/A-18 Hornet are being addressed through the SLAP, 
which analyzes the impact of potential service life extensions and 
identifies hot-spots throughout the aircraft. These areas then require 
recurring inspections and/or aircraft modifications to maintain the 
health of the aircraft beyond current service life. SLAP phase I 
analysis, which focused on ground events (CTL) is complete and 
inspection bulletins and aircraft modification plans are in work. SLAP 
phase II analysis, which addresses the flight hour extension, is 
underway with an estimated completion date of December 2007. As the 
analysis is completed, work will begin on high flight hour inspections 
and aircraft modifications. The goal of SLAP phase II is to extend the 
service life to 10,000 flight hours. The current modeling shortfall is 
based using this flight hour limit.

                          technology transfer
    78. Senator Lieberman. Admiral Enewold, we have been hearing 
concerns expressed by a number of the JSF partner countries about the 
sharing of technology as JSF development proceeds. Is there reason for 
concern on this issue?
    Admiral Enewold. The Department is addressing those concerns with 
the respective partner countries and this committee. The pace of 
technical information disclosure, involvement in operational testing, 
and industrial participation have all been raised during negotiations 
for the JSF Production, Sustainment, and Follow-on Development 
Memorandum of Understanding (MOU). The Department is working for 
resolution by mid-summer 2006 so that each country can begin its MOU 
staffing process.

    79. Senator Lieberman. Admiral Enewold, are you sure that the U.S. 
Government is giving fair review to these requests for transferring 
technology to our partners from within the JSF program?
    Admiral Enewold. The DOD and Department of State devote extensive 
attention to this aspect of the JSF program, and are committed to due 
diligence on all releases.
                                 ______
                                 
             Questions Submitted by Senator Daniel K. Akaka
         joint strike fighter engine cancellation justification
    80. Senator Akaka. Admiral Enewold, as you may remember, during the 
1980s, the DOD received many benefits including lower acquisition of 
engines, better responsiveness from the contractors, but most 
importantly better readiness for the warfighter. It is my understanding 
that it was for these reasons that we funded the F136 for the last 10 
years. Recently, Under Secretary of Defense for Acquisition, Ken Krieg, 
has called for more competition in DOD programs. Given this statement, 
what is the justification for eliminating the F136 from the JSF 
program?
    Admiral Enewold. Department leadership have stated that their 
decision to cancel the F136 alternate engine program is based on 
affordability, providing the Department the best balance of risk and 
cost.

                      joint f-22/jsf vulnerability
    81. Senator Akaka. General Hoffman, if there is such a high degree 
of commonality between the F119 engine in the F-22 and the F135 engine 
in the F-35, why wouldn't both aircraft fleets be at risk if a common 
part becomes faulty and why wouldn't that speak to the benefit of 
having a second engine producer for the F-35?
    General Hoffman. The F135 is a derivative of the F119 engine and is 
modified for the F-35 missions and usage. The turbomachinery is 
approximately 70 percent common with the F119 from a parts and 
manufacturing processes perspective. The engine's compressor shares the 
most common parts with F119. The rest of the turbomachinery has 
commonality through design criteria and manufacturing processes. Based 
on the F119 engine's reliable performance after 18,000 flight hours, 
the Department determined the risks of a single engine supplier are 
modest and acceptable.

    [Whereupon, at 3:58 p.m., the subcommittee adjourned.]

    [Annex 1: Subsequent to the hearing, on May 10, 2006, 
Senator McCain submitted the following additional information 
for the record:]
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    [Annex 2: Subsequent to the hearing, on May 26, 2006, 
Senator McCain submitted the following additional information 
for the record:]
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DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR 
                                  2007

                              ----------                              


                         TUESDAY, JULY 25, 2006

                                U.S. Senate
                           Subcommittee on Airland,
                               Committee on Armed Services,
                                                    Washington, DC.

                  F-22A MULTIYEAR PROCUREMENT PROPOSAL

    The subcommittee met, pursuant to notice, at 9:34 a.m. in 
room SR-222, Russell Senate Office Building, Senator John 
McCain (chairman of the subcommittee) presiding.
    Committee members present: Senators McCain, Warner, Inhofe, 
Chambliss, Bill Nelson, and Dayton.
    Committee staff member present: Charles S. Abell, staff 
director.
    Majority staff members present: Ambrose R. Hock, 
professional staff member; Gregory T. Kiley, professional staff 
member; Stanley R. O'Connor, Jr., professional staff member; 
and Scott W. Stucky, general counsel.
    Minority staff members present: Creighton Greene, 
professional staff member; and Peter K. Levine, minority 
counsel.
    Staff assistants present: Micah H. Harris and Benjamin L. 
Rubin.
    Committee members' assistants present: Christopher J. Paul, 
assistant to Senator McCain; John A. Bonsell, assistant to 
Senator Inhofe; Clyde A. Taylor IV, assistant to Senator 
Chambliss; Stuart C. Mallory, assistant to Senator Thune; 
Frederick M. Downey, assistant to Senator Lieberman; William K. 
Sutey, assistant to Senator Bill Nelson; and Luke Ballman, 
assistant to Senator Dayton.

       OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

    Senator McCain. Good morning.
    As we all know, and we should have this hearing in the 
context of the fact that there is increased cost for defense--
projected costs--and, at the same time, there are going to be 
reductions in defense spending which will cause some very 
difficult decisions to be made in the years ahead. I've been 
concerned about multiyear procurement, because it locks in the 
funding for a certain weapons system when we have others which 
obviously have increasing costs. For example, the Army now 
projects $160 billion for its Future Combat Systems (FCS); 
whereas, its original cost was projected to be at $90 billion. 
We have seen, last year, 9 of the 11 major weapons systems 
developed behind schedule, over cost, and yet all received 
incentive bonuses, an incredible and bizarre situation if there 
ever was one.
    So, we meet today to discuss the issue of the multiyear 
procurement for the F-22 aircraft, whether it will result in 
``substantial savings,'' whether the minimum need of the 
aircraft will be expected to remain substantially unchanged 
during the contract period, and why the Air Force would request 
funding at required levels to avoid contract cancellation. As 
we all know, since its inception, this program has been subject 
to two Nunn-McCurdy violations and has been rebaselined 14 
times to avoid additional breaches. The research and 
development cost growth alone over the original baseline is 
$10.2 billion, which is a 43.7-percent increase over the 
original baseline. There's every reason to think that the $225 
million in supposed savings will be swallowed whole the next 
time this program is rebaselined. So, the substantial savings 
estimate the Air Force is hanging its hat on to justify this is 
difficult to justify.
    I want to emphasize that this program began--I have the 
numbers here someplace--but the numbers that were originally 
intended have dramatically shrunk as the cost per aircraft has 
dramatically increased. It's not unusual for an Air Force 
weapons system, but when we lock in a multiyear procurement 
system, I think it's important to examine the history of this 
particular system. I am certainly not convinced that, given the 
increased costs of all weapons systems, as we are seeing, and 
already projected decreases in defense procurement spending, 
that this multiyear procurement is justified.
    [The prepared statement of Senator McCain follows:]
               Prepared Statement by Senator John McCain
    Recently, I read an article that described the Army's $160 billion 
bill for its Future Combat Systems. This article noted that ``combined 
with rising manpower costs and combat operations in Iraq and 
Afghanistan that have consumed lives and equipment, the Service stands 
on the edge of a deep, deep hole. Budget shortfalls for the Service 
could exceed $20 billion annually. The Service had a $56 billion 
shortfall in its equipment accounts when combat in Iraq began in 
2003.'' Lieutenant General Melcher, Director of Army Programs, 
reportedly estimates that after 3 years and a series of extraordinary 
supplemental appropriations bills, the Army has not even cut that 
figure in half.
    The Army is not alone when it comes to budget woes. The Navy has 
similar problems in ship construction and the need to recapitalize 
naval aviation.
    For the Air Force, numerous major programs are experiencing 
technical problems, scheduling delays, and severe cost overruns. 
Service needs are rapidly becoming unaffordable. Indeed, the future is 
not rosy when it comes to budget outlays for defense. In fact, we are 
entering a 10-year cycle where reduced budget outlays for defense are 
expected.
    Weapons procurement for all of the Department of Defense (DOD) is 
expected to cost approximately $1.5 trillion between 2006 and 2009, 
with more than half of these expenditures yet to be made. In addition, 
the Senate unanimously voted, 98-0, that the preponderance of funding 
for conflicts in Afghanistan and Iraq will need to be requested through 
the annual budget, rather than emergency supplemental requests. Such a 
change could lead to dynamics in the budget process that are difficult 
to predict.
    In such trying times, one would like to see procurement proposals 
from the Services that make budgetary sense. For such sense, one should 
not look to the Air Force's current F-22 multiyear procurement (MYP) 
proposal.
    What one will find there is deja vu.
    Just as it did on the Boeing tanker lease proposal, the Air Force 
is once again ignoring the law--and engaging in gimmickry to justify 
its request to purchase 60 additional F-22A Raptors under an MYP.
    Entering into a multiyear defense procurement contract is a serious 
matter. It allows the DOD to commit to spending funds that have not yet 
been appropriated. For this reason, before Congress makes such a 
commitment, Congress (at least ostensibly) evaluates seriously the 
risks arising from such a purchase--in this case, risks attendant to 
the multiyear commitment of about $10 billion over 3 years. This is 
because, in approving an MYP, Congress sacrifices budgetary flexibility 
and control over the contract period. For this reason, Congress enacted 
title 10, section 2306b, of the United States Code.
    This statute sets forth, among other things, six criteria, which 
the agency must satisfy before entering into a multiyear contract for 
any given program. These conditions include substantial savings, stable 
requirement, stable funding, stable design, realistic contract cost and 
cost avoidance estimates, and the promotion of national security. 
Basically, these requirements help Congress evaluate the risks involved 
in allowing the DOD to commit itself to performance under a multiyear 
contract, rather than a series of annual contracts, for the purchase of 
a given asset.
    The Air Force and the Office of the Secretary of Defense have not 
established that all the criteria required under the Federal multiyear 
procurement statute have been satisfied. All of the independent experts 
testifying before the subcommittee today, notably the Comptroller 
General of the United States, will state that at least four of the six 
criteria set forth in section 2306b have not been met by the Air Force:

         The proposed multiyear procurement of F-22s will not 
        result in ``substantial savings'' over a series of annual 
        contracts.
         The minimum need for this aircraft cannot be expected 
        to remain substantially unchanged during the contemplated 
        contract period.
         There can be no reasonable expectation that the Air 
        Force will request funding at required levels to avoid contract 
        cancellation.
         There are serious concerns about whether the design of 
        the aircraft is in fact stable and that its technical risks are 
        excessive.

    Of the Air Force's failed showing in meeting all the criteria, the 
one that concerns me the most is the requirement for the Air Force to 
demonstrate ``substantial savings.'' Several critical points need to be 
addressed.
    First, according to Comptroller General Walker, since its 
inception, this program has been subject to two Nunn-McCurdy violations 
and has been rebaselined 14 times just to avoid additional breaches. 
The research and development cost growth alone (over the original 
baseline) is $10.2 billion (for an increase of 47.3 percent over the 
original baseline). Against this backdrop, there is every reason to 
think that the $225 million in supposed savings will be swallowed whole 
the next time this program is rebaselined. So, the ``substantial 
savings'' estimate the Air Force is hanging its hat on to justify its 
multibillion F-22 MYP proposal is, at best, illusory.
    Similarly, the Institute for Defense Analysis (IDA) savings 
calculation does not account for the $1.7 billion in additional 
procurement dollars needed to implement the Air Force's proposal of 
adding 4 aircraft to the total purchase and slowing the annual 
production rate to 20 aircraft, over a longer schedule. In other words, 
it takes as its starting point the F-22 production profile as given. 
IDA's failure to take into account the $1.7 billion needed to implement 
the Air Force's proposal can be expected to diminish IDA's savings 
number.
    Next, according to a recent Government Accountability Office (GAO) 
report, ``the Air Force's multiyear procurement justification package 
sent to Congress on May 16, 2006, stated that an additional $674 
million is needed to fully fund the multiyear program being proposed.'' 
So I ask: Where is the $225 million in savings if we will already be 
$674 million in the hole with this multiyear proposal?
    Also, even if the IDA's savings estimates are true and attainable, 
they don't constitute ``substantial savings'' within the meaning of the 
Federal multiyear procurement statute. IDA's report states that the 
historical average for cost savings is 8 percent. According to recent 
testimony provided by the Congressional Research Service (CRS), 
contract proposals that are deemed to satisfy this requirement have 
historically seen savings of about 10 percent. This multiyear 
procurement proposal purportedly achieves savings at a new, low rate of 
about 2.2 percent. While $225 million is certainly a great deal of 
money, it is not ``substantial savings'' within the meaning of the 
Federal law that this procurement proposal must comply with before it 
can go forward. If we allow this MYP proposal to go forward so far 
below the bar, we will be on the fast track to rendering the 
``substantial savings'' requirement virtually meaningless.
    Finally, it appears to me that the Air Force has no credibility on 
what true cost savings will be.

         On March 28, 2006, Lieutenant General Hoffman, 
        military deputy to the Air Force acquisition executive, 
        originally said a multiyear contract would save $500 million. 
        But this figure has changed several times and now has been cut 
        in half. Furthermore, independent experts now doubt if there 
        will be any cost savings in an F-22 multiyear procurement.
         A recent DOD Inspector General investigation found 
        that the Air Force apparently presented Congress false 
        information on the C-130J multiyear contract termination costs. 
        An important fact is the F-22A program manager was among those 
        responsible for apparently exaggerating the termination costs--
        the same office that prepared the estimated savings for 
        executing the F-22 multiyear contract.
         Last year, Congress authorized and appropriated enough 
        money for 24 F-22 aircraft; the Air Force can only afford 22 
        aircraft with those funds. Just yesterday, the Air Force 
        submitted a reprogramming request regarding Lot 6 of the F-22 
        that provides for the purchase of an additional aircraft--going 
        from 22 to 23 for fiscal year 2006, when we originally fully 
        funded 24 in the fiscal year National Defense Authorization and 
        Appropriation Acts. Furthermore, the Senate Armed Services 
        Committee has made multiple requests for an explanation of the 
        reduced F-22 buy--and no response has been forthcoming. Perhaps 
        Secretary Wynne can clear this up today.

    The bottom line is this: allowing the proposed MYP here would 
effectively permit the Air Force to be held unaccountable--to end-run 
good government provisions in Federal law that Congress specifically 
designed to ensure accountability in our Government's contracting 
procedures.
    Can the taxpayer afford to place its trust in the Air Force 
acquisition system when stealthy F-22 aircraft disappear before they 
are built, yet after money has been authorized and appropriated? How we 
buy F-22 is not subject to our unfettered discretion. If we choose to 
buy them under a multiyear contract, we must do so in compliance with 
the law and best budgetary practices. This MYP proposal does neither.
    I would hope that the Air Force will rethink its position and 
collaborate with the committee in developing a procurement approach 
that is both lawful and fiscally sound.

    Senator McCain. Senator Nelson?

                STATEMENT OF SENATOR BILL NELSON

    Senator Bill Nelson. Thank you, Mr. Chairman. It's a 
privilege for me to fill in as the ranking member today for 
Senator Lieberman.
    We have the situation, as you've stated, that the original 
Air Force proposal was to buy the final 60 F-22 aircraft under 
a 3-year multiyear contract, but using an incremental funding 
approach in structuring that contract. All four defense 
committees have now rejected that proposal. But then, they go 
to the floor, and both defense authorization bills now include 
the approval of the Air Force to enter into the multiyear 
contract. I did not vote to support Senator Chambliss and his 
amendment on the floor when the Senate considered the Defense 
Authorization Act, but the Senate approved Senator Chambliss's 
amendment, 70 to 28. I still have some concerns about it and I 
hope that we're going to talk about it today.
    While the estimate of some $235 million in savings is 
certainly a nontrivial sum of money, it represents a small 
portion of the resources of the Government that it will be 
committing for the next 3 years to the program. So, there are 
some other concerns.
    In this morning's Washington Post, ``A think tank that 
endorsed a 3-year contract for a troubled jet fighter program 
is run by a former military officer with extensive ties to one 
of the program's subcontractors. The Institute for Defense 
Analyses' (IDA) President, Dennis Blair, is a member of the 
board of a subcontractor for the F-22 Raptor. Mr. Blair holds 
options to buy tens of thousands of shares of the company's 
stock, EDO Corporation.''
    It's my understanding that IDA has no policy on conflicts 
of interest by its officers.
    So, we need to dig into this, Mr. Chairman, and I'm looking 
forward to it.
    Senator McCain. Thank you very much.
    Senator Inhofe.
    Senator Inhofe. Thank you, Mr. Chairman, and thank you, 
Secretary Wynne, Secretary Finley, and Mr. Walker.
    Secretary Wynne, I especially appreciate your comments that 
were in your written statement, when you said that our joint 
warriors are the best in the world, but they can only be as 
good as the tools we give them. As I stated last month, my goal 
on this committee in the future is to try to get us in a 
position where our kids--and I don't care if it's on the 
ground, in the air, in the sea--have the best equipment when 
they go out and, keeping in mind that we are the best, we 
should be the best possible stewards of the taxpayers' money. 
But, right now, they don't have the best.
    It's so frustrating to me--I know members of this committee 
are tired of hearing me say this--that over and over and over 
again we have stated that there are some countries who go to 
battle with better equipment than we have. The chairman just 
mentioned the FCS. The reason for the FCS is to try to bring us 
up so that we do have the best.
    Right now, our cannon on the ground is not as good as some 
five other countries are making, including South Africa. 
General Jumper--I've said this several times--when he was a 
two-star, back in 1998, when we had been downgrading the 
military during the 1990s, we dropped our procurement and our 
modernization programs down. At the same time, the Chinese were 
increasing their procurement by 1,000 percent in the same 
decade--General Jumper stood up and had the courage to say that 
the best strike vehicles we had, the F-15 and the F-16, are not 
as good as some that our prospective opponents could have.
    At that time we were talking about the SU-27. It was 
deployed and working. The SU-30 was not yet in the air and 
working, but contracts were being made. The Chinese bought 
several of these.
    I say that because one of the six criterias that we're 
talking about is national defense. We're not debating that. I 
don't think Mr. Walker or any of the rest of them are debating 
that particular criteria as one that is in contention. But the 
bottom line is, we have a desperate need to get this thing 
fielded in the numbers that can give our fighters the best 
opportunities.
    Secretary Wynne, I want to read a quote you had that I 
appreciate very much, ``The F-22's dominant combat capabilities 
will provide the U.S. forces with overwhelming air superiority 
in any scenario, and its robust employment capabilities, both 
air-to-air and air-to-ground, will afford joint combatant 
commanders with options for asymmetric engagement that do not 
exist with legacy fighters.''
    So, we're not debating, today, whether we need it, and 
whether we're going to buy it, it's just the system that we're 
using and what kind of savings we can have. Some of us on this 
panel believe that if it's $225 million or it's $325 million, 
that is something that is substantial. We'll have a chance to 
talk about that in a little more detail. I think the vote on 
the Senate floor of 70 to 28 was in favor of the American 
taxpayer.
    So, the debate is not about design issues, which have 
already been corrected and don't even need to affect the lots 
under consideration in the multiyear. The debate is not about 
previous plans to buy 56 F-22s over 2 years, or 60 aircraft 
over 3 years, utilizing split funding. The Senate Armed 
Services Committee (SASC), the Senate Appropriations Committee, 
the House Armed Services Committee, and the House 
Appropriations Committee all agreed to purchase the F-22 in 
three lots over 3 years. So, we keep talking about this thing. 
It's 56 in 2 years, and that's already settled, as I understand 
it.
    So, the only real question is whether we allow ourselves 
the savings achieved through a multiyear purchase. Again, I 
think that we should.
    But one thing I do want to say, and I respect all my fellow 
Senators, but to bring up this article that comes out the night 
before a hearing in the Washington Post--and it's filled with 
lies--that's one more thing that this is not about. It's not 
about waiting until the day before a hearing and then coming 
out with something as they came out with this morning. The 
article in the Washington Post this morning is nothing but 
smoke and is filled with lies. For example, it states, ``After 
receiving the IDA's endorsement, the Air Force decided to lock 
itself into a new 3-year contract for the jet.'' That's simply 
not true. We know it's not true. Both the Quadrennial Defense 
Review (QDR) and the President's budget recommended the 
multiyear contract. Additionally, it states, ``Largely on the 
strength of IDA's conclusions about future cost savings from 
the multiyear procurement, the Air Force decided to buy 60 more 
planes than the previous contract demanded.'' That's a lie. 
It's four more planes. The Office of the Secretary of Defense 
(OSD) increased the number of planes by four over fiscal year 
2006, as a part of their QDR plan to help the Department 
stabilize the fifth-generation fighter industrial base and 
smooth the transition to the F-35.
    So, I'm sure that there are a lot of people who are 
rejoicing in the fact that some things were leaked to the 
Washington Post so that it allowed them to come out with a 
bunch of lies right before this hearing.
    [The information referred to follows:]
      
    
    
      
    Senator Inhofe. Thank you, Mr. Chairman.
    Senator McCain. Senator Chambliss.
    Senator Chambliss. Thank you, Mr. Chairman, and thank you 
for holding this hearing. You and I talked about this both on 
the floor during debate, before and after, and I appreciate the 
opportunity to once again talk about the merits of the most 
sophisticated weapons system that we have ever seen 
manufactured anywhere in the world.
    Having been a fan of this weapons system since long before 
any nut or bolt of the F-22 was made in my State, I am now 
enjoying the pleasure of representing the plant in which this 
great weapons system is assembled. We're very proud, at 
Marietta, of the job the folks have done over a long period of 
time, from the stage of initial discussion of this 
sophisticated weapons system to the point now to where we are 
seeing it flown over the skies of Washington, DC, and over any 
number of other areas where we have some sophisticated 
operations going on.
    We've also been through a number of stages. Mr. Chairman, 
you mentioned that there have been problems, and certainly 
there have been with this weapons system. It's because of the 
sophistication of it and because of the assets that have been 
required to be put on this airplane. We had an original idea 
back in the 1980s of what this airplane ought to look like, and 
gradually that goalpost has been moved, and probably for the 
right reason, because we all know that buying additional attack 
aircraft, buying additional bombers, is going to be very 
difficult. Now we have a weapons system that allows us to 
penetrate enemy territory, not to fire once, not to fire twice, 
but to fire three times before the enemy ever knows we're 
there. That's one of the reasons that the pilots that I have 
talked to love this airplane. It's a great flying machine, in 
addition to that. Now, with its added capability of being able 
to carry additional weapons that can penetrate enemy lines and 
save the lives of Americans, it certainly is one of the 
greatest weapons systems that we will ever see in our 
inventory. I look forward to the witnesses talking about that.
    As I said on the floor, I hate to go against my chairman, 
who I respect so much, as well as the chairman of the full 
committee, relative to an amendment that, frankly, the 
contractor was not sure ought to be introduced. I just couldn't 
let this opportunity go by to save a minimum of $235 million 
and secure this asset that is so desperately needed by the Air 
Force, as I fully expect our witnesses to talk about, and to 
give us an asset that will allow us to take out, air-to-air, 
any adversary that is on the horizon.
    So, as we are here today talking about this, I share the 
thoughts of Senator Inhofe. I think it's rather ironic that in 
today's paper we see an article that's critical of this, and it 
talks about this hearing today. I suspect we all know where 
that came from.
    Senator McCain. Where would that be?
    Senator Chambliss. I'll be interested to see what that 
reporter says, because I intend to ask him about it. But, 
obviously, I think staff that doesn't appreciate this contract 
is probably where it came from, Senator. We look forward to 
maybe finding that out.
    Senator McCain. Which staff would you be referring to?
    Senator Chambliss. I have no idea, but I'm going to ask.
    Senator McCain. You just said you have a pretty good idea.
    Senator Chambliss. Yes, sir, I think it came from staff, 
that it was probably leaked to the press.
    Senator McCain. Which staff?
    Senator Chambliss. I have no idea, but I intend to ask, 
Senator, as to where it came from, because, frankly, the 
information in that article is not just incorrect, but it's 
immaterial. It has nothing to do with the weapons system, it 
has nothing to do with the Air Force going through a QDR 
justifying, from a business perspective, the requirements of a 
multiyear contract. I hope that we can find out exactly where 
it came from, Senator, and be assured that I will share with 
you any information I find out about that.
    But I look forward to our witnesses being here this morning 
to talk about not only the weapons system itself, but the fact 
that it does meet all the criteria for a multiyear. Obviously, 
a strong voice coming out of the House and a strong voice out 
of the Senate has indicated that this multiyear is not only 
appropriate, but it's needed, and it does save the taxpayers 
money.
    So, Mr. Chairman, thank you for holding this hearing this 
morning. I look forward to the testimony of the witnesses.
    Senator McCain. Thank you.
    Senator Dayton, do you have----
    Senator Dayton. Nothing, Mr. Chairman, thank you.
    Senator McCain. I welcome the witnesses: Secretary Wynne, 
Comptroller General Walker, and Secretary Finley.
    We'll begin with you, Secretary Wynne.

 STATEMENT OF HON. MICHAEL E. WYNNE, SECRETARY OF THE AIR FORCE

    Secretary Wynne. Thank you very much, Mr. Chairman.
    Mr. Chairman, members of the committee, thank you for the 
opportunity to discuss the F-22 multiyear proposal, as 
contained in the President's budget, currently in review by 
Congress.
    As I testified previously, the budget, as presented, 
represented a series of settlements and proposals to connect 
desires with budget realities. One of the settlements reflected 
the Air Force's desire to preserve a warm fifth-generation 
fighter line, the F-22, until a second fifth-generation fighter 
line, the Joint Strike Fighter (JSF), or F-35, became active. 
We believe this to be a prudent course in this uncertain world. 
We mightily strive to be convincing to extend the F-22 at the 
then-planned rate of 28 aircraft per year. This was rebutted as 
to quantity required, primarily because of the increase in 
warfighting capability that each F-22 brings to the battle 
models. Thus, the quantity that the Department would authorize 
is 183 aircraft. The Air Force goal of bridging was met by 
buying the remaining units at a reduced rate of 20 per year. 
The Air Force appreciated the bridge between fighter lines but 
we lamented the increase in cost per unit that this 
represented. The purpose, then, of this multiyear request is to 
offset a portion of this increase. The Department appreciated 
the reduced rate of production, as it freed up instant 
resources in fiscal year 2007 to apply to higher priorities.
    This led to a second dilemma which was split funding, a 
funding technique that further reduced the 2007 obligations, 
which were again applied elsewhere in the budget.
    As the deliberations continue here in Congress, the funding 
is currently restored to eliminate the concept of split 
funding, which I used in this chart, by the way, when I 
testified before the SASC in November.
    This adjustment, if sustained, will require rephasing of 
the F-22 funding that was in the fiscal year 2007 Program 
Objective Memorandum (POM), during the fiscal year 2008 POM, to 
fully fund the F-22 program to 183 units. This is our plan.
    The bottom line of this discussion is that this is a 
stretch-out of the F-22A in order to attempt to maintain a 
fifth-generation fighter-line availability in a very uncertain 
environment, requesting a multiyear authorization to reduce the 
acquisition cost to the maximum extent possible to offset the 
cost of this slowdown. A side benefit will be to stabilize the 
end of life for this program.
    Multiyear authorizations stem from, number one, a stable 
product. In our back-to-basics approach, we have stabilized the 
configuration of the F-22A. I have inquired, as well, to the 
contractor who verified a stable product. This supports the 
firm fixed-price approach that we have taken.
    Number two, adequate market. The Air Force is fully 
committed to the 60 F-22As in consideration. As I mentioned, we 
actually seek more, but have been told to suppress our 
appetite.
    Seventy-four F-22As have been delivered to Tyndall, in 
Florida; Langley, in Virginia; and Edwards and Nellis Air Force 
Bases across the Air Force, and the first aircraft for the 
fifth base, Elmendorf, is rolling off the assembly line next 
week. The F-22A has performed magnificently during exercise, 
both in and out of the continental United States, dominating 
the current-generation fighters, yet integrating seamlessly 
with groundbased special operations. This underscores our 
excitement and why we desire more.
    Some have said, ``Delay the multiyear buy until next 
year.'' But with 183 as the total program cap, there is, 
frankly, no next year, at 20 per year.
    Adequate funding. We intend to rephase the funding to fully 
fund these 60 aircraft in the fiscal year 2008 submittal.
    Substantial savings. The Air Force seeks to maximize the 
savings, and is incentivized by the need to offset, to the 
maximum extent possible, to stretch out costs.
    At present levels, the estimate for savings ranges around a 
quarter-billion dollars. This is good news, in that on a per-
unit basis this is, in fact, in the range of the F-18 
multiyear. The Air Force would, of course, like greater 
savings, and will negotiate hard to achieve greater savings 
than this.
    I thank you for your interest in our Air Force and 
appreciate your continued push for us to get the best deal for 
the taxpayer across the board. I stand ready to respond to your 
questions.
    [The prepared statement of Secretary Wynne follows:]
              Prepared Statement by Hon. Michael W. Wynne
    Mr. Chairman and distinguished members of the committee, thank you 
for the opportunity to appear before you today to reiterate the 
benefits of the F-22A and the multiyear procurement (MYP) strategy. Our 
joint warriors are the best in the world. However, they can only be as 
effective as the tools we give them. Within today's fiscal constraints, 
we must fight the global war on terror and protect the homeland while 
transforming the force and maintaining an appropriate level of risk. 
The Air Force is committed to balancing the health of today's force 
with the modernization and recapitalization necessary for the 
capabilities of the future. The Air Force appreciates all the support 
this committee has provided to the warfighter and the ongoing 
operations around the world.
    Our primary fighter modernization and recapitalization program is 
the F-22A Raptor. The F-22A is operational today and ready for combat. 
The F-22A is a fifth-generation fighter aircraft that delivers joint 
air dominance (JAD) to counter persistent and emerging national 
security challenges. Given its vast improvements in every aspect--
speed, all-aspect stealth, integrated avionics, maneuverability, 
supercruise, and an adaptable architecture--the F-22A is America's 
insurance policy against future threats to joint air dominance and 
represents a best value capability for the American taxpayer. The F-22A 
is the only aircraft in the world that ensures air dominance and 
operational access for the entire joint force. It guarantees an 
asymmetric advantage the U.S. surface forces have enjoyed for over 50 
years--freedom from attack, freedom to maneuver, freedom to attack.
    Fourth generation fighters (F-15, F/A-18) are able to survive and 
operate against legacy threats, such as SA-3s, SA-6s, but are 
overmatched against newer, currently fielded surface-to-air systems 
such as the SA-10, SA-20, and aircraft such as the F-10, as well as 
potential future threats such as the SA-21. The F-22A can autonomously 
complete the kill chain against all current and projected threats. The 
F-22A delivers unmatched lethality and survivability for gaining and 
maintaining air dominance--the number one, must have requirement to 
successfully conduct joint and coalition operations across the spectrum 
of conflict. The F-22A achieved an 80:1 kill ratio against legacy 
fourth generation fighters in joint exercise Northern Edge 2006 (NE06) 
in Alaska. F-15s and F-18s had an 8:1 ratio. The F-22A joint 
integration and multi-role capability was demonstrated in NE06 as it 
seamlessly integrated with joint Special Operations Forces. In 
addition, F-22A maintenance reliability during NE06 was 97 percent, 
flying 102 of 105 sorties. The F-22A is the only weapons system with 
the unique combination of air, ground, and nontraditional intelligence, 
surveillance, and reconnaissance (ISR) capabilities that enable 
operations across the full spectrum of conflict, including homeland 
defense and irregular and unconventional warfare.
    The F-22A program emerged from early development challenges to 
demonstrate success after success. Based upon the F-22A's demonstrated 
design stability, the Office of the Secretary of Defense (OSD) granted 
approval for the F-22A to enter full rate production in April 2005. In 
December 2005, the F-22A achieved initial operational capability (IOC) 
having successfully completed all developmental testing, and initial 
and follow-on operational test and evaluation. The Air Force 
Operational Test and Evaluation Center report stated, ``F-22 is mission 
capable in the air-to-ground role.'' Currently, there are 74 F-22As 
delivered, operating from 4 Air Force bases (AFBs) to include 34 
combat-coded aircraft at Langley AFB VA. The F-22A on-schedule 
deliveries continue at a rate of approximately two per month. Its 
performance continues to meet or exceed key performance parameters and 
spiral modernization will further enhance its air-to-air and air-to-
ground target engagement capability.
    To support the Quadrennial Defense Review (QDR) and preparation of 
the fiscal year 2007 President's budget (PB), the Department performed 
a JAD study. The JAD study examined options for varying levels within 
the strike fighter mix. The Department looked at the war scenarios and 
cost implications of buying fewer variants of F-35s, increasing and 
decreasing the number of F-22As, and buying more legacy aircraft at the 
expense of fewer fifth-generation platforms. The results of these 
analyses directed the Air Force to ``restructure the F-22A program and 
extend production through fiscal year 2010 with a multiyear acquisition 
contract to ensure the Department does not have a gap in the fifth-
generation stealth capabilities.'' As a result, the fiscal year 2007 PB 
added $1.05 billion to the Future Years Defense Plan (FYDP) to procure 
a total of 183 F-22A aircraft and requested congressional authority for 
an MYP for up to 60 F-22A aircraft (20 per year in Lots 7, 8, and 9) 
and a companion MYP for the F119 engines. The Air Force has long 
maintained that 381 Raptors will ultimately be required to meet the 
needs of the warfighter. This number of F-22As provides adequate 
capability to meet national security requirements to defend the 
homeland and support two near-simultaneous major combat operations, or 
their equivalent, with acceptable risk and a sustainable operations 
tempo. However, the QDR analysis reflected the need to address 
competing defense priorities and fiscal realities. As a result, 183 F-
22As is the current program of record.
    On May 16, 2006, the Air Force submitted the MYP justification 
package to the congressional defense committees. Based on independent 
analysis, the Air Force justification shows that the proposed F-22A MYP 
meets all requirements of subsections (a) (1) through (6) of section 
2306b of title 10, U.S.C., including a substantial savings of 
approximately $225 million. The Air Force has demonstrated readiness to 
enter into the MYP by successfully accelerating production deliveries 
of 37 F-22A aircraft between 2004 and 2006 to return the program to the 
original contract schedule while achieving an overall reduction in the 
unit flyaway costs of over 23 percent over the same time period (Lots 
3-5).
    Recently the Government Accountability Office (GAO) released a 
report that raises questions about whether the proposed F-22A MYP meets 
the six criteria required by 10 U.S.C. 2306b. The GAO expresses 
particular concern over three criteria relating to the existence of 
substantial savings, the expectation of future funding requests as 
required to avoid contract cancellation, and the presence of a stable 
design without excessive technical risks.
    The proposed F-22A MYP meets all three of these criteria:

          1. Substantial savings: An MYP over three production lots 
        offsets cost increases resulting from reductions in the 
        previously planned annual production rate. Implementation of 
        the proposed MYP contract will yield significant cost savings/
        cost avoidance over a series of successive single year 
        procurements. The Institute of Defense Analyses' (IDA) 
        independent business case analysis (BCA) estimated the cost to 
        purchase 60 F-22A aircraft and associated engines in three lots 
        under an MYP contract, and the cost to purchase 60 F-22A 
        aircraft and associated engines in three annually procured 
        lots. The BCA also described the benefit of MYP to the defense 
        industrial base, allowing prime contractors to enter into 
        longer-term agreements with suppliers, with resulting 
        improvements in efficiency, training, and tooling. The Air 
        Force and DOD consider the independently verified savings 
        estimate of $225 million or $3.75 million per aircraft over 3 
        years to be substantial. This cost savings per aircraft is 
        comparable to the $3.82 million per aircraft for the F/A-18 E/F 
        MYP.
          The Department's decision to extend the F-22A production line 
        1 year by adding Lot 9 without substantially increasing the 
        total program quantity reduced the previously planned 
        quantities of Lots 7 and 8. While this did affect previous 
        estimates of the unit cost for Lots 7 and 8, this decision was 
        necessary to stabilize the fifth-generation fighter industrial 
        base, smooth the transition to F-35 production, and preserve 
        future investment options. This decision is unrelated to the 
        proposed MYP contract and does not affect compliance with the 
        title 10 requirements for substantial savings as compared to 
        annual contracts for the same quantities.
          2. Stability of funding requested: The Air Force is committed 
        to fully fund and procure all 60 aircraft through the proposed 
        MYP. This commitment was reaffirmed by the DOD in the QDR 
        decision to continue the F-22A program and emphasizes the 
        criticality of the F-22A to overall DOD planning.
          3. Design stability: The development program for the F-22A is 
        complete and the design is stable. F-22A IOC was declared on 
        December 15, 2005. The F-22A has demonstrated over 14,000 
        developmental test, training, and operational flight hours. The 
        existence of a separate and ongoing modernization program does 
        not affect this demonstrated design stability. Like all weapon 
        systems, the F-22A will continue to undergo a modernization 
        program as long as it is in the Air Force inventory. MYP has 
        been approved under similar circumstances for candidate 
        programs with anticipated upgrades, including the F/A-18E/F and 
        UH-60 programs. The F-22A has already proven its air-to-ground 
        capabilities and as recently as June 2006, the F-22A 
        demonstrated a 34 of 34 success rate while dropping precision 
        munitions.

    In addition to the criteria above, the proposed F-22A MYP meets the 
remaining three criteria as well:

          4. Stable Requirement: The F-22A requirement has been 
        consistently validated and remains a top Air Force priority. 
        The F-22A operational requirements document, 304-83-I/II/IIIA, 
        dated February 17, 2004, was approved by the Joint Requirements 
        Oversight Council and signed by the Chief of Staff of the Air 
        Force. The QDR supports restructuring the F-22A program and 
        extending production through calendar year 2011 with a 
        multiyear acquisition contract to ensure the Department does 
        not have a gap in the production of its fifth-generation 
        tactical fighter aircraft. The fiscal year 2007 PB documents 
        this decision and requests funding to support the planned fleet 
        size of 183 aircraft. The F-22A MYP proposes a constant 
        production rate of 20 aircraft per year for 3 years. This 
        requirement will remain unchanged. Procuring an aircraft with a 
        stable requirement under an MYP enables better use of limited 
        taxpayer resources.
          5. Realistic Cost Estimate: The Fiscal Year 2005 Defense 
        Appropriations Conference Report directed that a federally-
        funded research and development center be tasked to conduct an 
        independent cost estimate (ICE) of the F-22A aircraft 
        production program to recalibrate F-22A cost models. IDA 
        completed the ICE and provided a better understanding of F-22A 
        procurement costs. The program's cost estimates have also been 
        closely scrutinized by the OSD Cost Analysis Improvement Group 
        and the Air Force Cost Analysis Agency. The estimated cost of 
        the F-22A MYP and the associated savings were independently 
        verified by the DOD chartered IDA BCA study. While most MYP 
        estimates are conducted as internal Service estimates, the F-
        22A MYP estimate was independently verified.
          6. Promotes National Security: The F-22A is the Air Force's 
        highest priority acquisition program. There is no alternative 
        aircraft in production offering comparable capabilities to the 
        F-22A. The F-22A is a complex weapon system with over a decade 
        of development, and represents the best option to replace 
        legacy fighters dedicated to air-to-air, suppression of enemy 
        air defenses, destruction of enemy air defenses, and homeland 
        defense. With its unmatched combination of stealth, integrated 
        avionics, and supercruise, the F-22A is the keystone of the Air 
        Force's Global Strike concept of operations. The F-22A's 
        dominant combat capabilities will provide U.S. forces with 
        overwhelming air superiority in any scenario, and its robust 
        employment capabilities (both air-to-air and air-to-ground) 
        will afford joint combatant commanders with options for 
        asymmetric engagement that do not exist with legacy fighters. 
        Procurement of the F-22A through the proposed MYP supports the 
        objectives of the National Security Strategy and greatly 
        enhances the effectiveness of the joint force.

    The F-22A is ready to defend America's global interests with its 
formidable capabilities and is critical for national security as 
indicated from recent studies. Congressional approval of the proposed 
MYP for the F-22A to begin in Lot 7 is essential not only to achieve 
the substantial savings of $225 million over the next 3 years, but also 
to stabilize America's fifth-generation fighter production supplier 
base to provide a smooth transition to the production of the F-35. I 
look forward to working with this committee to best satisfy our 
warfighter needs in the future.

    Senator McCain. Thank you very much.
    Mr. Walker, welcome.

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
                         UNITED STATES

    Mr. Walker. Thank you, Mr. Chairman and members of the 
subcommittee. I appreciate the opportunity to be here today to 
discuss the Department of Defense's (DOD) proposal to buy 60 F-
22s under a multiyear contract.
    I'll note for the record at the outset, we've already 
contracted to purchase 122, so this is not an issue of whether 
or not we're going to buy F-22As, it's a matter of how many and 
on what basis.
    Our review indicates that DOD's proposal to add 2 years to 
the production period of the remaining F-22As, and to procure 
the planes under a 3-year multiyear contract, will cost the 
taxpayers $1.7 billion more than called for to procure the last 
two annual lots, as compared with the amount previously 
provided in the fiscal 2006 budget.
    The Air Force has reported to Congress that it believes 
that the F-22A program meets the criteria set forth in section 
2306(b) of title 10 of the U.S. Code, for a multiyear contract. 
We have serious concerns regarding whether all the criteria 
have been satisfied; in particular, the substantial savings 
criteria, but also two others.
    First, the timing of the proposal, near the end of the F-
22A's acquisition period, reduces the ability of the program to 
achieve substantial savings. Savings are currently estimated to 
be about $225 million, or 2.7 percent of the remaining 
procurement cost, if 56 additional aircraft are purchased, a 
savings that, in terms of the percentage of cost, is far below 
historic estimates of savings for other multiyear contracts.
    Second, the Air Force is proposing to buy 4 additional 
aircraft, for 60 in total, at an added cost of $674 million to 
the taxpayers in order to save an additional $10 million under 
the multiyear contract; however, it has not fully funded the 
proposal.
    In addition, to satisfy other needs in DOD, F-22A 
quantities have been unstable for the last 2 years, reducing 
quantities from 279 aircraft to 179 in fiscal year 2006, and 
now proposing to increase quantities to 183 in the fiscal year 
2007 budget. If quantities continue to fluctuate downward, it 
could result in additional cost. For example, according to the 
Air Force, cancellation costs alone could be as much as $201 
million, a sum currently unfunded in the multiyear proposal. 
This does not count additional termination charges that could 
be incurred if there's a premature termination of the contract. 
This financial risk, when compared to the savings projected 
from a multiyear contract, raises additional questions and 
serious concerns about the prudence of a multiyear contract.
    Furthermore, I have no idea where the information came from 
that resulted in the article this morning, and I don't know 
whether or not the assertions in the article are true. However, 
if they are true, there is no question that the independence of 
the study would be highly questionable. Therefore, in my view, 
I think it's important to understand whether or not they are 
true, because, if they are true, I do not believe it's a study 
that either DOD or Congress should rely upon.
    This raises a larger question. What are the independent 
standards that so-called independent think tanks and 
contractors have to meet in order to be able to be deemed to be 
independent? In my view, Mr. Chairman, they should have to meet 
generally accepted governmental auditing standards for 
independent standards or some other generally accepted 
standard, or else we don't know what we're getting for taxpayer 
dollars.
    Candidly, Mr. Chairman, from a broad perspective, the F-22A 
program is illustrative of a number of systemic problems in 
DOD's acquisition system. First, the F-22A was approved in an 
environment with no clear agreement on enterprisewise 
priorities and without adequate consideration of current and 
likely future threats and resource constraints. Second, the 
requirements and key program specifications were not fixed when 
the program began and have changed numerous times over its 
decade-long development. Third, key procurement decisions were 
made without adequate consideration of technology and other 
program risks, with costly consequences. Finally, in this 
program, as, unfortunately, with many others in DOD, there have 
been significant incentive and award-fees paid, as you 
mentioned, despite the fact that we have large cost overruns 
and huge schedule delays. This program, no matter how positive 
the weapon system is--and it is truly impressive--is a case 
study in what's wrong with DOD's acquisition system. One must 
ask who's looking out for the taxpayers.
    In conclusion, the Air Force's decision to extend 
production for 2 years for industrial-based purposes has 
further increased the length and cost of the F-22A program. We 
are not sure what the Air Force's rationale was for extending 
production, and how it specifically relates to maintaining the 
industrial base so as to warrant an increased cost to the 
taxpayer of at least $1.7 billion. At the same time, our 
Nation's large and growing long-term fiscal imbalance requires 
the Federal Government, including DOD, to begin to make hard 
choices between its unlimited wants and its true needs. In this 
context, we continue to believe that Congress needs to 
reevaluate a range of existing Federal programs and policies, 
including the F-22A program, based on current and credible 
future threats, current and expected future national budget 
levels and priorities, and the warfighter's many true needs. As 
it stands now, the restructured F-22A program would increase 
cost if you end up going with this new schedule. The time to 
make tough choices between the DOD's program wants and expected 
resources is now.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Walker follows:]
                 Prepared Statement by David M. Walker
    Mr. Chairman and members of the subcommittee: I am pleased to be 
here today to discuss the Department of Defense's (DOD) proposal to buy 
60 F-22As under a multiyear contract. GAO has recommended that the Air 
Force prepare a new business case for the F-22A program to justify the 
substantial changes planned in the mission roles and the quantities to 
be acquired--a recommendation that has yet to be implemented. 
Additionally, we share Congress's concerns over DOD's wherewithal to 
acquire the F-22A and other key assets in light of current and expected 
resource constraints. Over the past several years, it has become 
increasingly clear that DOD must reassess what is affordable and 
separate its many wants from its real needs. DOD must make tough 
acquisition choices in order for the country to begin to address the 
large and growing fiscal imbalance it faces.
    My statement today--which is based on our recent report on the F-
22A program \1\--will highlight our key concerns with moving forward 
with F-22A procurement, as DOD proposes. Our work was performed in 
accordance with generally accepted Government auditing standards.
---------------------------------------------------------------------------
    \1\ GAO, Tactical Aircraft: DOD Should Present a New F-22A Business 
Case before Making Further Investments, GAO-06-455R (Washington, DC: 
June 20, 2006).
---------------------------------------------------------------------------
                                summary
    Our review indicates that DOD's proposal to add 2 years to the 
production period of the remaining F-22As and to procure the planes 
under a 3-year multiyear contract will cost about $1.7 billion more 
than called for to procure the last two annual lots as compared to the 
amount previously provided in the fiscal year 2006 budget. The primary 
reasons cited for this change to the program are industrial base health 
and the need to preserve the F-22A production line until production of 
the Joint Strike Fighter (JSF) begins. The Air Force has reported to 
Congress that the F-22A program meets the criteria set forth in section 
2306b of title 10, U.S.C., for a multiyear contract. We have serious 
concerns regarding whether all of the criteria have been satisfied 
(i.e. substantial savings, sufficient funding, and stable quantities).
    First, the timing of the proposal--near the end of the F-22A's 
acquisition--reduces the ability of the program to achieve substantial 
savings. Savings are currently estimated to be about $225 million or 
2.7 percent of remaining procurement cost if 56 additional aircraft are 
purchased--a savings that, in terms of percentage of costs, is far 
below historic estimates of savings for other multiyear contracts. 
Second, the Air Force is proposing to buy 4 additional aircraft--60 in 
total--at an added cost of $674 million in order to save an additional 
$10 million under the multiyear contract; however, it has not funded 
the proposal. Finally, to satisfy other needs in DOD, F-22A quantities 
have been unstable over the last 2 years reducing quantities from 279 
aircraft to 179 in the fiscal year 2006 budget and increasing 
quantities to 183 aircraft in the fiscal year 2007 budget. If 
quantities continue to fluctuate downward it could result in additional 
costs. For example, according to the Air Force, cancellation costs 
alone could be as much as $201 million--a sum currently unfunded in the 
multiyear proposal. This financial risk, when compared to the savings 
projected from a multiyear contract, raises additional questions about 
the proposal and limits flexibility for future decisionmaking.
                               background
    The F-22A program is illustrative of a number of systemic problems 
in DOD's acquisition system. First, the F-22A was approved in an 
environment with no clear agreement on enterprise-wide priorities and 
without due consideration of current and likely future threats and 
resource constraints. Second, the requirements and key program 
specifications were not fixed when the program began and have changed 
over its decades-long development. Third, key procurement decisions 
were made without adequate consideration of technology and other 
program risks, with costly consequences. Finally, in this program as in 
many others, DOD has paid out significant incentive and award fees to 
its contractors despite large cost overruns and schedule delays.
    The program has been a case study in cost increases and schedule 
inefficiency in major weapon system acquisitions. We have issued 
numerous reports over the years on the problems and issues associated 
with the F-22A development program. Beginning in 1986 the program was 
expected to complete development in 9 years for an estimated cost of 
$12.6 billion. After taking 19 years to complete development in 
December 2005, development costs were reported at $26.3 billion--109 
percent more than expected. The end result of these inefficiencies in 
the acquisition program has been a loss of buying power as the reduced 
quantity of aircraft will require a significantly higher unit cost than 
expected. Figure 1 shows the changes in procurement quantities over 
time and allocates both development and procurement costs to those 
changing procurement quantities to show the trend of average total 
acquisition unit costs and procurement unit costs.
      
    
    
      
    While the F-22A program has completed development and testing of 
its initially planned air-to-air capability, the Air Force now sees a 
need to develop more robust air-to-ground attack and intelligence-
gathering capabilities. Therefore, it has started a multibillion dollar 
development program for these additional capabilities. These 
capabilities were not previously considered a primary role for the F-
22A as it was intended to be primarily an air-to-air fighter to replace 
the F-15. From the outset the F-22A was built to counter expected large 
numbers of new advanced Soviet fighter aircraft but this threat never 
materialized. The expanded air-to-ground attack capability is intended 
to allow the F-22A to engage a greater variety of ground targets, such 
as surface-to-air missile systems, that have posed a significant threat 
to U.S. aircraft in recent years.
dod's latest restructuring is more expensive and slows f-22a deliveries
    Amidst changes to expand F-22A missions and roles, the procurement 
quantities and acquisition strategy have also been in flux in recent 
years. In December 2004, the Office of the Secretary of Defense (OSD) 
reduced planned quantities to a total of 179 F-22A aircraft. At the 
same time, it decided to terminate the procurement program at the end 
of 2008 in order to free up about $10 billion for other priorities. 
Then, the fiscal year 2007 budget extended the procurement program 2 
years, to 2010. The department cited the health of the industrial 
base--the need for maintaining a fifth-generation fighter \2\ 
production line--as its rationale for this added expense and delay. DOD 
also proposed buying 4 additional aircraft and using a 3-year multiyear 
contract to procure the remaining 60 F-22As to mitigate some of the 
costs of extending procurement for at least 2 years.
---------------------------------------------------------------------------
    \2\ F-22A and F-35 are considered fifth-generation fighter aircraft 
as compared to the F-15, F16, F/A-18, and F-117. The primary 
characteristics are Very Low Observable (VLO) stealth and information 
fusion capabilities that make fifth-generation aircraft more survivable 
and lethal.
---------------------------------------------------------------------------
    To identify savings that might reduce the cost impact of the 
restructured acquisition strategy, the Air Force is proposing a 
multiyear contract to buy the remaining F-22A aircraft. The Air Force 
formulated an estimate for three annual contracts to compare to a 
single multiyear contract to buy 56 aircraft. While this comparison can 
provide a basis for determining potential savings, the Air Force had 
not previously planned to buy the remaining aircraft over 3 years. 
Instead, the fiscal year 2006 President's budget included procurement 
costs to buy 56 F-22As in two annual lots--29 F-22As in 2007 and 27 F-
22As in 2008. Therefore, even utilizing the multiyear contract 
authority, the restructuring will add $1.7 billion in cost to the 
procurement program and slow deliveries of the final aircraft when 
compared to the plan previously provided for in DOD's fiscal year 2006 
budget. The final 60 aircraft will each cost 10 percent more on average 
(unit procurement costs increase from $166 million per aircraft to $183 
million per aircraft) under the restructured plan, even taking into 
account expected savings from the multiyear procurement.
   concerns whether dod satisfies all multiyear procurement criteria
    The Air Force submitted its justification to Congress on May 16, 
2006, to buy the remaining 56 to 60 F-22A aircraft over a 3-year period 
with a multiyear contract. To enter into a multiyear contract for the 
F-22A, the Air Force must first obtain specific legislative 
authorization in both the annual DOD appropriations act and in an 
authorization act. If authorization is obtained from Congress, the Air 
Force must also meet the statutory criteria listed in 10 U.S.C. 
Sec. 2306b(a) for entering into a multiyear contract. The justification 
package the Air Force submitted to Congress in support of its request 
for authority to enter into a multiyear contract for the F-22A 
concludes that the statutory criteria for multiyear procurement have 
been met and that such a multiyear contract would provide substantial 
cost savings or avoidance over three annual lot buys. In reviewing 
these criteria and the Air Force's position, we have serious concerns 
regarding whether all of the criteria have been satisfied (i.e. 
substantial savings, sufficient funding, and stable quantities). Table 
1 lists the six criteria and our observations (we did not assess two of 
the criteria).

       TABLE 1: OBSERVATIONS OF F-22A MULTIYEAR CONTRACT CRITERIA
------------------------------------------------------------------------
            Multiyear criteria                    GAO observations
------------------------------------------------------------------------
Contract will result in substantial         Substantial savings are not
 savings..                                   defined in the statute, but
                                             the 2005 F-22A Independent
                                             Cost Estimate states that
                                             between 1982 and 1989
                                             estimates for multiyear
                                             savings for proposed weapon
                                             systems averaged 13
                                             percent. The Air Force
                                             justification package shows
                                             only 2.7 percent cost
                                             avoidance ($225 million)
                                             for 56 aircraft.
Reasonable expectation agency head will     The Air Force has indicated
 request funding at required level to        that its multiyear budget
 avoid contract cancellation.                is currently underfunded by
                                             $674 million and is seeking
                                             authorization to use
                                             incremental funding rather
                                             than fully funding each
                                             aircraft lot.
Minimum need expected to remain             F-22A quantities have
 substantially unchanged during contract     changed in the last 2
 period in terms of production rates and     fiscal years to accommodate
 total quantities.                           the need to fund other
                                             annual priorities. Given
                                             the potential for other
                                             priorities in the future--
                                             military presence overseas,
                                             global war on terrorism,
                                             and response to natural
                                             disasters--there is a risk
                                             that F-22A quantities would
                                             need to be adjusted again.
                                             Quantity reductions could
                                             result in cancellation
                                             costs of as much as $201
                                             million, an amount that is
                                             currently unfunded.
There is stable design, and technical       The baseline F-22A aircraft
 risks are not excessive.                    design is stable (the
                                             proposed multiyear contract
                                             is for the baseline
                                             aircraft). While not the
                                             subject of the proposed
                                             multiyear contract because
                                             it is a separate effort,
                                             the design for adding new
                                             ground attack and ISR
                                             capabilities has not been
                                             demonstrated through
                                             development or operational
                                             testing and cannot be
                                             considered ``stable'' at
                                             this time.
Estimates of contract cost and cost         Not assessed.
 avoidance are realistic.
Use of the multiyear contract will promote  Not assessed.
 national security of the United States.
------------------------------------------------------------------------
Source: GAO Analysis and 10 U.S.C. 2306b.

Substantial Savings Criterion
    To identify potential savings, the Air Force formulated an estimate 
for three annual contracts to compare to a single multiyear contract 
with buys of 56 and 60 aircraft. Section 2306b of title 10 of the U.S. 
Code does not define what constitutes substantial savings, but the 2005 
F-22A Independent Cost Estimate \3\ indicates that from 1982 to 1989, 
DOD proposed at least 60 multiyear procurement programs for 
congressional approval, with estimated savings averaging 13 percent. 
The Air Force estimates F-22A multiyear procurement savings to be 2.7 
percent if 56 aircraft are procured, approximately $225 million. The 
justification package also shows that an additional $10 million could 
be saved by buying 60 aircraft as stated in the fiscal year 2007 
President's budget, but it would require an additional $674 million not 
included in the fiscal year 2007 future year defense plan.
---------------------------------------------------------------------------
    \3\ F/A-22 Independent Cost Estimate, Institute for Defense 
Analyses, August 2005.
---------------------------------------------------------------------------
Funds Have Not Been Budgeted
    The proposed multiyear contract for 60 F-22As submitted with the 
fiscal year 2007 budget is underfunded by about $674 million--funds the 
Air Force believes it will need in fiscal years 2008 through 2010 to 
complete these buys. Additionally, the Air Force has proposed using 
incremental funding to pay for the multiyear contract. Instead of fully 
funding the buy for each fiscal year, this proposal plans four funding 
increments--economic order quantity, advanced buy, subsystem, and final 
assembly. Incremental funding for multiyear procurement is neither 
permitted by the annual DOD appropriations act \4\ nor the multiyear 
authorizing statute, which requires that funds only be obligated under 
a multiyear contract ``for procurement of a complete and usable end 
item.'' \5\ The Air Force is seeking an exception to these requirements 
in its request to Congress for statutory authorization for the 
multiyear contract. The congressional defense committees are aware of 
the concerns with incremental funding, and those committees that have 
completed a defense bill have provided full funding for the initial 
year of the proposed multiyear contract. However, the congressional 
authorization and appropriations processes are ongoing.
---------------------------------------------------------------------------
    \4\ Section 8008 of the fiscal years 2005 and 2006 Department of 
Defense Appropriations Acts (Public Laws 108-287 and 109-148, 
respectively) require full funding of units to be procured.
    \5\ 10 U.S.C. Sec. 2306b(i)(4)(A). This restriction was added by 
section 820 of the Bob Stump National Defense Authorization Act for 
Fiscal Year 2003 (Public Law 107-314).
---------------------------------------------------------------------------
Multiyear Contract Quantities Could Be Changed in the Future
    OSD has restructured the F-22A acquisition program twice in the 
last 2 years in order to allocate funds to other priorities. In 
December 2004, OSD reduced the program from 279 to 179 F-22As to save 
$10.5 billion. Then in December 2005, OSD changed the F-22A program 
again, adding $1 billion to extend the production line for 2 years to 
ensure a fifth-generation fighter aircraft production line would remain 
in operation in case the JSF experiences delays or problems. So far we 
have not seen detailed rationale concerning the impact to the health of 
the industrial base. OSD also added 4 aircraft at this time for a total 
of 183 F-22As. We have also not seen the threat based justification for 
buying these additional aircraft at an estimated cost of $674 million. 
Given the potential for priorities to change again in the future to 
fund the military presence in Iraq and Afghanistan, fight terrorism 
around the globe, fund the response to natural disasters, or for other 
reasons, there is risk that F-22A quantities under the proposed 
multiyear contract would need to be adjusted again. According to the 
Air Force's multiyear proposal, if a reduction in quantity were to 
happen, it could result in cancellation costs of as much as $201 
million in fiscal year 2007, the first year of the multiyear contract. 
The current Air Force acquisition strategy does not fund these 
potential cancellation costs. Therefore, the Air Force would have to 
find funds from other sources to pay these costs in the event 
quantities are reduced. This is therefore a risk that must be weighed 
in approving a multiyear contract for the F-22A, particularly at this 
late stage of its procurement program as it could limit the flexibility 
of decisionmakers in the future.
 other factors influence the practicality of using multiyear contracts 
                   at this stage in the f22a program
    Other circumstances argue against using a multiyear contract. 
Multiyear contracts are typically used earlier in an acquisition 
program when greater efficiencies in buying materials and subsystems 
can be achieved and thereby provide more substantial savings at both 
the prime contractor and subcontractor levels. In the case of the F-
22A, the multiyear proposal comes at the end of production. At the same 
time, the F-22A program plans to reduce the annual buying rate, 
providing less opportunity to incur savings. Previously, the Air Force 
had planned to purchase 29 and 27 aircraft in fiscal years 2007 and 
2008, respectively. The multiyear plan calls for 20 aircraft a year in 
2008, 2009, and 2010--7 to 9 aircraft fewer in each of the 2 years 
under the previous plan. Additionally, it appears the primary purpose 
for proposing a multiyear contract was to mitigate the additional cost 
of extending procurement for an additional 2 years; even with the 
proposed multiyear contract, procurement costs will be $1.7 billion 
higher than costs proposed under the previous program structure.
    The length of the proposed multiyear contract and the lower 
quantity of aircraft planned for multiyear are concerns identified in 
the May 2006 Air Force business case analysis for F-22A multiyear 
procurement. For example, the business case analysis states that the 
average number of air vehicles procured under a multiyear contract was 
308 \6\--more than five times the number of aircraft the F-22A program 
is proposing to buy under its 3-year contract. The analysis also 
acknowledges that there is limited opportunity to obtain additional 
savings from the previously planned initiatives to improve the F-22A 
production efficiency as these savings were obtained earlier in the 
acquisition cycle.
---------------------------------------------------------------------------
    \6\ The Institute for Defense Analysis analyzed the multiyear 
procurement programs for the F/18, C-17, C-130J/KC-130, and F-16. 
Institute for Defense Analysis, F-22A Multiyear Procurement Business 
Case Analysis (May 2006).
---------------------------------------------------------------------------
    In conclusion, the Air Force's decision to extend production for 2 
years for industrial base purposes has increased the length and cost of 
the F-22A program. We are not sure what the Air Force's rationale was 
for extending production and how it specifically relates to maintaining 
the industrial base so as to warrant an increased cost of at least $1.7 
billion. At the same time, our Nation's large and growing long-term 
fiscal imbalance requires the Federal Government--especially DOD--to 
begin making hard choices between its many wants and real needs. In 
this context, we continue to believe that Congress needs to reevaluate 
a range of existing Federal programs and policies, including the F-22A 
program, based on credible current and future threats, current and 
expected future national budget levels and priorities, and the 
warfighter's many true needs. As it stands, the restructured F-22A 
program's increased cost to complete the procurement program--$1.7 
billion--will eventually serve to reduce the Department's options in 
fulfilling other important national security priorities. This at a time 
when the difference between DOD's program wants and its expected 
resource levels is growing.

    Senator McCain. Thank you.
    Secretary Finley, welcome.

 STATEMENT OF HON. JAMES I. FINLEY, DEPUTY UNDER SECRETARY OF 
             DEFENSE FOR ACQUISITION AND TECHNOLOGY

    Mr. Finley. Thank you.
    Good morning, Chairman McCain and members of the 
subcommittee. I am pleased to come before you today to talk 
about the multiyear procurement of the F-22 Raptor.
    Copies of my written testimony have been provided. My 
opening oral statement will address some of the key points from 
that testimony.
    I am pleased that Congress has raised the focus on 
acquisition excellence. I am fully committed to acquisition 
excellence and the restoration of the confidence in our 
leadership and our acquisition systems. I pledge to work with 
you and Congress as stewards of our taxpayer dollars to provide 
our warfighters the capability needed to perform their mission 
with a decisive advantage.
    Multiyear procurement is an acquisition strategy that 
supports that goal. Multiyear procurement will allow the DOD to 
be better buyers and save taxpayer's money while providing the 
tools to protect our national security. Multiyear procurement 
has saved the taxpayer an estimated $5 billion over the past 7 
years. The President's budget provided for this acquisition 
strategy for the F-22 aircraft.
    Title 10 of the United States Code, section 2306(b), 
subparagraph (A) sets forth six criteria to be satisfied to 
authorize multiyear procurement. In my judgment, the multiyear 
procurement acquisition strategy for F-22 and its F-119 engine 
satisfies those criteria, summarized as follows: substantial 
savings, stable requirement, stable funding, stable design, 
realistic cost estimates, and national security.
    I based my judgment that these six criteria are satisfied 
on the business case analysis conducted by IDA, as well as 
listening and learning about the various perspectives of the F-
22 multiyear procurement during numerous meetings, including 
ones in Congress, OSD, and the Air Force.
    The business case analysis by IDA provides for comparison 
of a multiyear procurement to a single-year procurement 
strategy of the F-22 for three production lots over a 3-year 
period. The business case analysis estimated savings of $225 
million, approximately $3.7 million per aircraft, based on 60 
aircraft. I consider these estimated savings of $225 million 
and $3.7 million per aircraft substantial. I believe there's 
opportunity for more savings. I view the estimate from the 
business case analysis as a starting point to further improve 
the benefits of the multiyear procurement for the F-22. I have 
initiated ideas and will press for additional savings in the F-
22 multiyear procurement acquisition strategy.
    The Secretary of the Air Force, the Honorable Michael 
Wynne, has made the commitment to request funding for the 
multiyear procurement at the level required to avoid contract 
cancellation. I support Secretary Wynne's commitment.
    I think we all believe the F-22 is a superior aircraft that 
is needed for our national security. The F-22 is in full-rate 
production and is ready for combat. It is the world's only 
fifth-generation fighter, and provides a unique combination of 
warfighting capabilities that are critical to the United 
States.
    In summary, multiyear procurement for F-22 is a good 
acquisition strategy to provide us the opportunity to save $225 
million for the taxpayer. We will press for more savings. I 
believe we should strive to save every penny possible, and 
multiyear procurement provides us that acquisition strategy for 
buying these F-22 aircraft.
    I reinforce my pledge to work together with you, Mr. 
Chairman and Congress, in an open and transparent manner on 
multiyear procurement, as well as acquisition excellence.
    Mr. Chairman, subcommittee members, thank you for the 
opportunity to come here today. I stand ready to answer your 
questions. May God continue to bless America.
    [The prepared statement of Mr. Finley follows:]
                 Prepared Statement by James I. Finley
    Chairman McCain, Senator Lieberman, and members of the 
subcommittee: I am pleased to come before you today to talk about 
multiyear procurement (MYP) of the F-22 Raptor.
    MYP is a valuable acquisition strategy by which the Department of 
Defense (DOD) can buy weapon systems more efficiently and provide 
benefits to the taxpayer. MYP also enables broader planning and control 
for labor and the associated resource needs. MYP has been successfully 
utilized for a variety of weapon systems.
    In my judgment the F-22 and its F119 engine MYP acquisition 
strategies meet each of the six statutory criteria established by 10 
U.S.C. 2306b(a), which are summarized as follows:
    Criterion 1: The first criterion is that the 3-year MYP will result 
in substantial savings when compared to three, single year procurements 
(SYP).
    Response 1: The Institute for Defense Analyses (IDA) conducted a 
Business Case Analysis (BCA) of an MYP vs. SYP acquisition strategy. 
The basis for the BCA was the President's fiscal year 2007 budget 
(PB07). IDA utilized its integrated aircraft cost model that was used 
for the 2005 F-22 Independent Estimate for the F-22. The model was 
updated to reflect recent production cost, negotiated Forward Pricing 
Rate Agreement wage rates and inflation rates that correspond to the 
Bureau of Labor Statistics. Production rates of 20 aircraft per year 
were utilized in the model.
    The savings of MYP vs. SYP is estimated to be $225 million ($3.7 
million per aircraft). This is for both the air vehicle and F-119 
engines. This savings is considered substantial in terms of absolute 
savings and therefore, criterion 1 is considered to be satisfied.
    Criterion 2: The second criterion is that the minimum need is 
expected to remain substantially unchanged in terms of production rate, 
procurement rate, and total quantities, providing for stability of the 
requirement.
    Response 2: The PB07 MYP provides for a production rate of 20 
aircraft per year for 3 years. This reflects a steady production rate 
that will enable stable procurement planning for a total quantity buy 
of 60 aircraft. In addition, the MYP supports the Quadrennial Defense 
Review (QDR) and sets forth a balanced portfolio of tactical aircraft 
assets as described in the Joint Air Dominance (JAD) Study, performed 
to support the QDR.
    One of the QDR recommendations was to support the tactical aircraft 
industrial base by stretching out F-22 production until we gain 
confidence in Joint Strike Fighter (JSF) production, in order to 
maintain an active production capacity and sustain aircraft vendors and 
suppliers until we ramp up JSF production. The MYP strategy achieves 
that recommendation. The JAD Study showed that a balanced force 
structure mix of fifth-generation fighters, with legacy F/A18-E/Fs, F-
15Es, and conventionally armed bombers, best met our requirements. 
Buying fifth-generation tactical aircraft assets (F-22 and JSF), for 
both the Air Force and the Navy, optimized capability, affordability, 
and mitigated risk better than other options. Therefore, criterion 2 is 
considered to be satisfied.
    Criterion 3: The third criterion is that there is a reasonable 
expectation that, throughout the contemplated contract period, the head 
of the agency will request funding for the contract at the level 
required to avoid contract cancellation.
    Response 3: The Secretary of the Air Force, the Honorable Michael 
Wynne, in his May 16, 2006, letter addressed to the chairman of the 
Senate Armed Services Committee, said that the Air Force intends to 
fund and procure 60 aircraft to the level to avoid contract 
cancellation costs. I support Secretary Wynne's commitment. If an MYP 
of the F-22 is approved by Congress, the Department expects that 
sufficient funding will be requested to avoid contract cancellation, 
and therefore criterion 3 is considered to be satisfied.
    Criterion 4: The fourth criterion requires a stable design for the 
F-22 and that the technical risks associated with such property are not 
excessive.
    Response 4: The F-22 has significant production maturity, 
consisting of two pre-production and six production lots prior to the 
first MYP. The aircraft design and manufacturing processes have been 
proven and are considered stable. The F-22 successfully completed 
initial operational test and evaluation (IOT&E), which was focused on 
the air superiority mission. The first phase of follow-on operational 
test and evaluation, which was focused on air-to-ground mission testing 
using the Joint Direct Attack Munition (JDAM) has also been completed. 
The Department is working on modernization improvements to the F-22. 
Examples of modernization changes are software, electronics, 
processors, and subsystem components to address parts obsolescence. 
Such changes are not unusual during multiyear procurements. Therefore, 
criterion 4 is considered satisfied.
    Criterion 5: The fifth criterion for MYP require that the estimates 
of both the cost of the contract and the anticipated cost avoidance 
through the use of a multiyear contract are realistic.
    Response 5: The BCA from IDA provided an independent analysis of 
the F-22 MYP. The basis of the BCA was derived from an extensive 
independent estimate of F-22 acquisition costs for Congress in August 
2005. Both the BCA and independent estimate are considered realistic, 
and therefore criterion 5 is considered satisfied.
    Criterion 6: The sixth criterion for MYP is that the use of such a 
contract will promote the national security of the United States.
    Response 6: The F-22 is in full rate production, flying today, and 
is ready for combat. It is the world's first fifth-generation fighter--
an aircraft with superior survivability, lethality, and 
maintainability. It provides a unique combination of warfighting 
capabilities that are critical to ensure United States air dominance 
and promote the national security of the United States. Therefore, 
criterion 6 is considered satisfied.
    In closing, Mr. Chairman, thank you for the opportunity to provide 
my views concerning the F-22 MYP. I am fully committed to working 
together with you and Congress to address the F-22 MYP and provide 
responsible stewardship of taxpayer resources. I am ready to answer any 
questions you and the members of the subcommittee may have.

    Senator McCain. Thank you very much, sir.
    Secretary Wynne, yesterday you submitted to the SASC a 
reprogramming request seeking to buy a 23rd F-22 Raptor. Is 
that correct?
    Secretary Wynne. Yes, we did, Senator.
    [The information referred to follows:]
      
    
    
      
    
    
      
    Senator McCain. That brings the total for Lot 6 from 22 to 
23 for fiscal year 2006, is that correct?
    Secretary Wynne. That is correct.
    Senator McCain. Congress originally fully funded 24 in the 
National Defense Authorization and Appropriations Acts for 
Fiscal Year 2006. What's wrong with the math there, Secretary 
Wynne?
    Secretary Wynne. The quantity of aircraft and the funding 
did not match up to the PBD-753 impact, sir, which reduced 
dramatically the quantity of units that I was able to buy, and 
caused all of my suppliers to, in fact, reprice some of their 
costs. So, we did, in fact, accurately predict to the Senate 
and to the House that we thought that the resulting funding 
would only get 22 aircraft. In fact, we were correct.
    The 23rd aircraft, we find, as a result of the next change, 
which was out of advanced procurement that has now been reduced 
from 29 airplanes to 20, in fact, left over enough funds that 
we felt like those funds could better be applied to buying 
additional aircraft capability for our warfighter.
    Senator McCain. Let me get this straight. The defense 
appropriations and authorization committees plucked a number 
out of the air and said that this is enough for 24 aircraft, 
and, indeed, it was only enough for 22. Is that correct?
    Secretary Wynne. Sir, when the program decisions were made, 
it did not go back and adjust the figures that the President's 
budget submitted to you. But we did try to advise that this 
would only buy 22 aircraft instead of the 24 that were 
stipulated in the budget. That advice was essentially not taken 
into account.
    Senator McCain. The President's budget was 24, Secretary 
Wynne.
    Secretary Wynne. Yes sir, it was.
    Senator McCain. So what happened? The President's budget 
called for 24. We were operating under the assumption that that 
would fund 24 aircraft. In fact, we only funded 22.
    Secretary Wynne. What happened was PBD-753 truncated the 
program, as Mr. Walker said. I think this program has been 
faced, since its inception, fiscal realities that have 
stretched it out, that have caused cost increases, dominantly 
as a result of other priorities coming in and encroaching upon 
it. It has, in fact, I think, done a superior job of completing 
the initial operational test and evaluation (IOT&E) and now 
entering production, and actually proving itself to be worth 
all of the concerns and the commitments that have been made 
across the board to get this ready for our warfighters.
    Senator McCain. After 19 years, the quantities have gone 
from 750 to 648 to 442 to 440 to 342 to 341 to 278 to 181 to 
183. So you wonder why there's some skepticism at least on the 
part of some of us on this committee, Mr. Secretary?
    Secretary Wynne. No, sir, I have no doubt that this is a 
source of skepticism. In fact, as Mr. Walker pointed out, this 
is not a very good way to enter into an acquisition program 
from its inception in 1991, to promise, if you will, a little 
bit more, in fact, a lot more than you ever intend to buy. I do 
think that there was a substantive look at what capabilities 
were forecast, and maybe some discounting going on. Now that 
the warfighter realizes what capabilities this aircraft brings, 
not only do they want a little bit more, pushing against the 
secretariat, but I think they may have stabilized the program 
at a different number.
    Senator McCain. Was the request for multiyear procurement 
of the F-22 in the Future Years Defense Program (FYDP)?
    Secretary Wynne. The request came about in the QDR.
    Senator McCain. Yes. My question was, was it in the FYDP?
    Secretary Wynne. I don't believe it was fully accounted for 
in the out-year program of the FYDP.
    Senator McCain. Was it accounted for at all?
    Secretary Wynne. There were, I believe, 20, 20, and 16 that 
were in the FYDP.
    Senator McCain. Was the multiyear procurement in the FYDP?
    Secretary Wynne. It was recommended in the QDR, sir.
    Senator McCain. I, again, asked you whether it was in the 
FYDP. I understand that it was in the QDR.
    Secretary Wynne. Then, sir, you also know that it was not 
in the FYDP.
    Senator McCain. Have you ever heard, in all your 
involvement, of a request of this nature for a multiyear 
defense procurement that was not in the FYDP?
    Secretary Wynne. I have not heard of one that wasn't in the 
President's budget, and this one was in the President's budget. 
The FYDP----
    Senator McCain. Again, I really would like an answer to the 
question. My question was, have you ever heard of a request for 
a multiyear procurement that was not in the FYDP? Now, I mean, 
that's a pretty straightforward question, Mr. Secretary. I 
don't mean to be combative here, but I think I deserve a 
straightforward answer.
    Secretary Wynne. Sir, you do. I do not know, in my history, 
of one that was. This is out-of-cycle, definitely.
    Senator McCain. Thank you very much.
    Let's talk about this $1.7 billion additional cost here. 
Mr. Walker, explain that a bit more, would you, please? Because 
we are touting $225 million savings, and yet there appears to 
be an addition of $1.7 billion here.
    Mr. Walker. Mr. Chairman, it depends upon what you use as 
the baseline. You can make numbers do a lot of different 
things, depending upon what the baseline is. The baseline for 
the $1.7 billion is, if you look at the 2006 budget with regard 
to the quantities that the DOD had proposed to buy--namely, 
56--and the period of time that they proposed to buy it over, 
then when you compare that to what they're proposing to buy 
now, which is 4 more, over 2-plus years additional time, then, 
when you look at total cost, this is $1.7 billion more than 
they expected. Of that $1.7 billion, about $0.7 billion is for 
the four additional aircraft, and about $1 billion is because 
we're stretching this out. This program, depending upon how you 
want to calculate it, is anywhere from 2 to 15 years late, and 
now we're making it later.
    Senator McCain. Mr. Secretary, do you want to respond to 
that?
    Secretary Wynne. Yes, sir, very easily. The first thing you 
have to decide is whether you want a fifth-generation fighter 
to span and be available to you and to the President of the 
United States in case of a contingency. Once you determine that 
that is, in fact, something that you do want to do, then you 
have to determine how to best do it. The Department figured the 
best way to do it was, in fact, not to change the total 
quantity and cap the program at 183, but to satisfy the Air 
Force's desire to make sure that the President had available to 
him a fifth-generation fighter line. They agreed to stretch the 
program out--20, 20, and 20. I would say to you, sir, that 
David is right, in the sense that this program has not been 
treated well, due to Government decisions, and many of the cost 
increases that you have talked about were, in fact, due to 
Government decisions, although the contractor has had a share.
    Senator McCain. Mr. Secretary, before you can procure an 
aircraft under a multiyear contract, you must make various 
showings under the Federal procurement statutes, and, 
particularly, you must make six showings under various 
provisions of the law. Can you state that all of those 
requirements have been met?
    Secretary Wynne. Sir, the one I lack, really, is the 
authorization from Congress, because the fact is that all the 
rest have to be satisfied prior to entry into a multiyear, and 
we intend to satisfy every one of those statutory restrictions 
prior to entry into a multiyear.
    Senator McCain. Have they been satisfied yet?
    Secretary Wynne. They are underway of being satisfied, but, 
sir, as you point out, until I essentially submit the 
President's budget in fiscal year 2008, I don't meet one of 
them, which is the full funding criterion, but I do intend to 
meet that prior to entry into the multiyear contract.
    Senator McCain. I understand there were six criteria. How 
many of them have you met, and how many haven't you met?
    Secretary Wynne. From what I can gather, there's a national 
security requirement. We have met that. There is that you're 
going to intend to buy the quantity. I have met that. The 
stability of design, we believe we have come to a configuration 
that we can contract for. I have met that. The substantial 
savings rests on the models that IDA has provided, and we 
believe those savings are, in fact, in the area of other 
multiyears, so I believe we have met that. So, sir, I believe 
we have met five out of the six, the sixth being the funding 
stability--funding, which I intend to meet in the fiscal year 
2008 POM.
    Senator McCain. Mr. Walker, do you believe that they've met 
the stable-design requirement?
    Mr. Walker. Just the design requirement? Is that what 
you're saying, Mr. Chairman?
    Senator McCain. The overall standard.
    Mr. Walker. Oh, the overall standard.
    Senator McCain. Yes.
    Mr. Walker. The overall standards. We have concerns about 
three.
    Number one, substantial savings. Unfortunately, Mr. 
Chairman and the other members, that's not clearly defined. 
What is ``substantial''? Obviously $225 million is a lot of 
money, to us, as individuals. In the scheme of things, it's 2.7 
percent of the projected procurement cost involved here, which 
is much, much less than historically has been the case. 
Historically, when you do multiyear contracts, it's typically 
at least 10-percent-plus savings, as compared to single-year 
contracts.
    Number two, when you look at the risk associated with 
entering into a multiyear contract, that has to be adequately 
considered, because, as you properly pointed out, this is 
binding the Government to be able to purchase a larger 
quantity, and there are termination costs as well as 
cancellation fees that are associated if we don't go through.
    With regard to whether it's adequately funded, that's 
already been addressed by the Secretary. He intends to request 
funding, but a request doesn't mean that you'll get the 
funding.
    Number three, the other concern that we have here is, as 
you properly pointed out, the Air Force is one Service. This is 
one platform within one Service. The Air Force has challenges 
with regard to JSF and other platforms. Furthermore, the DOD 
has huge challenges with regard to FCS and many other 
platforms; and so, even if the Air Force ends up requesting, 
it's unclear as to whether or not, in the aggregate, it'll be 
available.
    Then, last, with regard to the need remaining the same and 
the quantities remaining the same, I mean, the real question 
is, why do we need four more? What is the comprehensive threat 
and risk that causes the need for four more? Even if you want 
to go with a multiyear procurement, that's about $700 million 
just by itself.
    Second, given the budget pressures and the ripple effect, 
are we certain that we're going to be able to come up with the 
money to fund all of these? History has not had a very positive 
track record in that regard.
    Senator McCain. Secretary Finley, as a DOD directive said, 
the acquisition and procurement of DOD weapons and weapons 
systems should be consistent with all applicable domestic laws, 
and, further, ``an attorney authorized to conduct such legal 
reviews in the Department shall conduct a legal review of the 
intended acquisition of weapons and weapons systems.'' When you 
signed the July 13 letter, did you follow DOD's own directive?
    Mr. Finley. Yes, sir.
    Senator McCain. You did get legal review?
    Mr. Finley. I did have legal review of my reply to you, 
sir, yes.
    Senator McCain. From who?
    Mr. Finley. From Doug Larsen and the legal staff there in 
Acquisition, Technology, and Logistics (AT&L).
    Senator McCain. Mr. Secretary, on the stable funding issue, 
again, what is your response to Mr. Walker's statement?
    Secretary Wynne. Sir, I have already committed, and intend 
to follow through on submitting enough money to avoid a 
cancellation ceiling over the course of this contract. I 
believe that is the requirement. I will, at the end, prior to 
the multiyear, offer that as part of the fiscal year 2008 POM.
    Senator McCain. We continue to tout the $225 million 
savings, but isn't it true that cancellation liability for this 
program is $201 million for the first year?
    Secretary Wynne. Only for the first year, sir. We have 
already committed to buy, fully, 56. Mr. Walker has brought up 
the other four, which were necessary to fill out seven 
squadrons, which gave us the total military utility and the 
right command structure to really integrate this into the 
warfight around the world. I think it was a necessary add. I 
would subscribe that there was a military need for it.
    Senator McCain. So, you obtained a waiver that allows you 
not to fund the cancellation liability.
    Secretary Wynne. We have, in fact, as many programs do, 
obtained a waiver for that cancellation, which is, if there is 
not a military need for the weapons system, it would be 
questionable and risky, but, since there is, and it's proven, 
and it's a proven commodity that will add to our system, 
because it's a bridge over to the JSF and it's clear that we do 
not want to leave America without a fifth-generation fighter 
line, I believe, sir, that that risk is minimal.
    Senator McCain. What do you do in order to get a waiver? 
What's the process?
    Secretary Wynne. You request, of the AT&L, and AT&L advises 
the Office of Management and Budget (OMB). OMB assesses the 
risk based on the inputs from the military departments, as well 
as from the AT&L folks, and makes the determination.
    Senator McCain. Are you confident there will be no 
additional cost overruns associated with this system?
    Secretary Wynne. What I am confident of, sir, is that we 
are entering into a firm fixed-price contract for this 
multiyear, and, under the terms of a firm fixed-price contract, 
all cost growth is associated with the contractor. I am very 
confident, because we've reduced the cost of the F-22 by 35 
percent from Lot 1 to Lot 5. We see that we continue to have 
good progress on the total cost recognized by the contractor 
and the Government on Lot 6. We believe we have a very firm 
handle on what savings we can get out of Lots 7, 8, and 9, and 
the contractor agrees.
    Senator McCain. So, you're answer is you are confident 
there will be no additional cost overruns.
    Secretary Wynne. I am, to date, sir.
    Senator McCain. That's not a very comforting answer, to be 
confident ``to date.''
    Mr. Walker, it's my understanding the Air Force has 
provided Lockheed Martin with 89.5 percent of the award fee for 
the F-22 engineering, manufacturing, development phase, or 
about $838 million. What's your reaction to that, Mr. Walker?
    Mr. Walker. Mr. Chairman, one of the problems that exists 
with regard to the acquisition system in the DOD is that we are 
paying billions of dollars in incentive and award fees in 
circumstances where there are significant cost overruns and 
significant schedule delays. This is just one example of a 
systemic problem.
    Evidently, we have a difficult time in government defining 
performance. It means positive outcomes. Effort is important, 
attitude is important, but outcome is what it's all about.
    Senator McCain. Senator Nelson?
    Secretary Wynne. Sir, if I could break in and correct the 
record, it's the OSD Comptroller that actually approves the--in 
consultation with OMB and the rest of the secretariat. I 
apologize for missing that.
    Senator McCain. Thank you, Mr. Secretary.
    Senator Nelson.
    Senator Bill Nelson. Thank you, Mr. Chairman.
    Mr. Chairman, I know both of these men personally. They are 
good men. I've known their families, and they are good 
families. We have two diametrically opposed positions here that 
we need to sort out.
    Now, it seems to me that the essential question is that if 
this outside committee came up with the idea that you can save 
something like $225 million over this multiyear contract, how 
can they determine, and how can you, Mr. Secretary, determine 
that if you don't have a price that you've already determined 
for the airplane in this 2006 contract for the F-22 
procurement?
    Secretary Wynne. The way you do that, Senator, is that you 
actually construct two budgets, and you almost have two 
negotiations with the contractor. The contractor does not know 
which you're going to enter into until the multiyear savings 
are, in fact, achievable, based on predictions and projections.
    You are right about one thing, it is all an estimate. Even 
the models, as validated by some really smart people, are all 
estimates. Because the proof of the pudding is in, actually, 
the settlement of the negotiations. So, the way you do this is 
you actually construct two proposals and you suggest two 
outcomes, and you must then compare those two outcomes prior to 
entry into a multiyear. That's the way you secure yourself, if 
you will, in some reasonable expectation of achieving your 
goal.
    Senator Bill Nelson. Mr. Walker?
    Mr. Walker. It is based on an estimate. As I said before, 
the primary support for entering into a multiyear contract, as 
it relates to substantial savings, was this IDA study and, if 
the assertions are true in the article this morning, that study 
cannot be viewed as independent and should not be relied upon.
    Candidly, I have tremendous respect for Secretary Wynne, 
tremendous respect for all my colleagues here on the panel. But 
there are a couple of very fundamental differences. Number one, 
I'm independent of the Air Force and the DOD. Number two, I'm 
looking at a broader perspective of DOD overall and the United 
States budget overall. Those are two fundamental differences. 
Reasonable people can, and will, differ.
    I think part of the problem here is, there's a difference 
between what people want and what we need and what we can 
afford and what we can sustain. As the chairman said before, we 
only have so much money. The question is, what are we going to 
spend it on? Is it going to be true needs, or is it going to be 
wants?
    Senator Bill Nelson. Mr. Secretary, we would not have to do 
as much estimating if we knew about the 2006 aircraft cost. In 
most programs the contract would have been signed sometime 
during the middle of the fiscal year, not during the last 
quarter of the fiscal year. Isn't that the case?
    [The information referred to follows:]

    Most contracts are awarded during the first and second quarters of 
a new fiscal year. The fact that Lot 6 is scheduled to award in 
September 2006, however, is unavoidable. Due to unique circumstances 
during the previous Lot 5 negotiations, the Air Force awarded the 
contract several months late, on November 1, 2005. This delayed the 
start of Lot 6 negotiations. Both the contractor and the Air Force made 
changes to the process to accelerate Lot 6 negotiations. As such, Lot 6 
negotiations are currently on schedule and are expected to conclude by 
September 30, 2006.

    Secretary Wynne. Sir, I'd like to start this process by 
defending a really fine American, a former admiral, Dennis 
Blair.
    Senator Bill Nelson. Okay, and let's get to that in a 
minute.
    Secretary Wynne. I'd like to make sure, sir, that we all 
know that I googled up, this morning, all of the relevant facts 
in the article that Mr. Walker is referring to.
    Senator Bill Nelson. I didn't ask you that question.
    Secretary Wynne. Sir, I believe that all of it is a part of 
the public record, with the exception of those that have been 
talked to by Senator Inhofe, which were, in fact, false. The 
Air Force did not rely on the IDA report to make a commitment 
to enter this multiyear. The Air Force does rely on the 
intelligence of the people within IDA to do it. EDO is a fine 
supplier to every military service--Air Force, Navy, Marines, 
and Army--as well as international. They are about $655 million 
worth of sales.
    I would agree with Mr. Walker on one point, and that is 
that the absence of a conflict-of-interest rule is interesting, 
and maybe there should be some generic thing. But I would say 
that to impugn the study and to impugn this great American is 
wrong. To say that we can't rely on it means that we are 
fearful of the outcome of the analysis.
    Now to your question----
    Senator Bill Nelson. No, now let me just stop you. 
Obviously, you feel very strongly about that. I want to get 
into that, and I did not stop you, but that wasn't my question. 
My question had nothing to do with this IDA study. My question 
is, isn't it normal that you go about, in a contract, in most 
programs, that would have been signed sometime during the 
middle of the fiscal year, not until the end of the fiscal 
year?
    Secretary Wynne. Actually, we're very proud of them. I 
think they will, in fact, finish by the end of this fiscal 
year, and there is no rush by a Government agent who thinks 
that he is not getting the best deal for the Government. We try 
very hard not to put any pressure on the contract's 
representative. However, I can tell you, the current status is 
they are less than 1 percent apart in their offers and 
counteroffers. They feel like they will drive a settlement 
within 30 days, and it will, in fact, be closed up before the 
end of the fiscal year--something that didn't happen, by the 
way, early on.
    I would say that, to your point about: Would you like more 
facts? Yes, sir, I would like more facts. In fact, I will have 
those facts available to me when I negotiate finally, the 
multiyear contract. That's the real nut--having those facts 
available to you as you enter that negotiation.
    Senator Bill Nelson. Mr. Secretary, you're my friend. 
That's not the question I asked you. I asked you----
    Senator McCain. Mr. Secretary, could I caution you that 
we're having difficulty getting direct answers from you, sir, 
and the time of all the members is valuable, as is yours. So, I 
would caution you again to try to give a direct answer to the 
questions posed by the members. It would be very helpful to us.
    Secretary Wynne. Thank you, sir.
    Senator McCain. Thank you.
    Senator Bill Nelson. Mr. Secretary, I asked you a very 
direct, simple question that doesn't have anything to do on 
your two lengthy previous answers. The question is, in most of 
the programs, the contract would have been signed sometime 
during the middle of the fiscal year, not toward the end of the 
fiscal year, is that correct?
    Secretary Wynne. Sir, I cannot certify to that. I don't 
know.
    Senator Bill Nelson. You see, we are in the situation of 
trying to judge between two good men with diametrically opposed 
positions. We are trying to judge on what is the right, 
accurate figure and how can you determine the cost for a 
multiyear procurement if you don't know what the cost is in the 
existing current year? Can you help us?
    Secretary Wynne. The estimates actually--and the schedule 
adherence that Lockheed Martin has done through Lots 1 through 
5, in fact, closing in on Lot 5, gives me pretty good 
confidence that I could probably predict the cost of Lot 6. So, 
sir, could your staff, who are analysts, and I think they 
could, in fact, offer some appreciation for what the costs are 
going to be.
    Of course, the difficulty is really what is the cost of a 
multiyear, relative to the cost of an annual buy and where do 
you achieve that? That's where I would say most of the larger 
cost savings that are attributed to multiyear buys are for 4 or 
5 years, and most of the savings are, in fact, achieved in the 
4th or 5th year. Having only 3 years to do a multiyear is, in 
fact, somewhat constraining, because you just can't introduce 
the manufacturing and get the quantity buy that you could buy 
otherwise.
    So, I agree with your point that it is a very difficult 
thing working from estimates, but that's, many times, the way 
it works.
    Senator Bill Nelson. I just come to the table asking the 
common sense country-boy question, how does this outside group 
estimate savings if we don't know what the price is, because 
there hasn't been an agreement on price in this particular 
year?
    Let me ask you, Secretary Finley, I understand that the 
contractor was able to achieve--oh, you've already asked that, 
Mr. Chairman, about the incentive fee.
    Secretary Wynne, during operational testing, the testing 
community identified a number of deficiencies in operational 
suitability. I note, in your prepared statement, that the F-22 
was able to achieve a departure reliability, during a recent 
exercise, of 97 percent--in other words, flying 102 of 105 
sorties. Is that a good measure of how hard the ground crews 
had to work to keep the aircraft flying this high-intensity 
operating period?
    Secretary Wynne. Sir, I have the greatest respect for the 
Air Force maintainers who are working on this and all of our 
other fighter aircraft. I would tell you that I asked, in 
IOT&E, that they treat the maintainers as customers, and that 
they write up every deficiency as a maintenance corrective 
action. In fact, I think we have benefited from the maintainers 
feeling like customers. In fact, even today I read in the Air 
Force Times some letters from some maintainers who were 
appreciative of the ease of maintenance on the F-22. I don't 
think we've achieved what we can achieve on that program yet 
and I know that we have worked very hard to make sure that the 
suitability rating that we get is on a constantly improving 
rate.
    Senator Bill Nelson. What effect do you think entering in a 
multiyear contract for the remaining F-22 aircraft is going to 
have on your ability to correct these operational suitability 
deficiencies?
    Secretary Wynne. Many of the changes that we've put in are, 
in fact, to redo the technical manuals, redo the support 
equipment, and make sure the diagnostic test equipment is okay. 
I would say stabilizing the design, which is one of the 
requirements of a multiyear, really will assist my maintenance 
people in coming to closure with what they can do on that 
airplane.
    Senator Bill Nelson. Mr. Secretary, Congress has used 
incremental funding in certain cases to buy large capital 
ships. I don't think we've used this approach to buy aircraft. 
All four of the congressional defense committees have spoken on 
this matter, and they've rejected this incremental funding, 
even though, when it went, as I said earlier, before the full 
Senate, the Senate adopted Senator Chambliss's amendment. Does 
having full funding for the F-22 in fiscal year 2007 change 
anything about the way in which you would propose to structure 
a multiyear contract for the F-22?
    Secretary Wynne. No, sir, it actually would not. The second 
buy was as if you were doing a piece-part buy. I think it would 
make it more complex for the contracting officer as time went 
on, to schedule these two advance procurements that would 
result from split funding. I would tell you that entering into 
a multiyear on a preferred basis that has been restored by both 
the Senate and the House is a much more worthwhile enterprise. 
The complexity of the contract would be the issue.
    Senator McCain. Senator Nelson, thank you.
    I note the presence of the distinguished chairman of the 
full committee. I wonder if he has any comments or questions he 
would like to make at this time.
    Senator Warner. I intend to join you. First, I commend you, 
Senator McCain. You have my full support in conducting this 
hearing. It's an important one--important from a number of 
standpoints. I've been on this committee 28 years, and I cannot 
recall when a decision of this import was carefully reviewed by 
a subcommittee and then endorsed by the full committee, and 
then to encounter, on the floor consideration of the bill, a 
reversal as a consequence of an extraordinary lobby campaign, 
which, frankly, I was just unaware of. That's history.
    But we're also faced with an ever-changing world and an 
ever-changing set of parameters by which each year we try and 
make determinations in regard to priorities within our budget, 
and the effect of this measure now, we'd just put a lockdown 
for a number of years on the Department of the Air Force in a 
certain category of its spending; thereby, perhaps, precluding 
some options to solve serious problems in other platforms, such 
as your tankers, your 130s. I just think it's not going to work 
in the best interest of the Department.
    Further, this committee and this country is solidly behind 
the JSF and somehow I feel that the impact of this decision 
could, in some ways, affect that very valuable program.
    I suppose the Air Force --as a participant in JSF, still 
represents its support, but there are certain signs that cause 
me an uneasiness. We have to go ahead with that program, 
subject to technical solutions that have to be achieved. We've 
made a bold decision to keep the two engines, which I think was 
a correct one. Certainly since the time that two-engine 
decision was made here in the committee room, certain tests and 
evaluation of both models have indicated there's considerable 
uncertainty in those two engines.
    I just mention that because this question cannot be looked 
in isolation from other factors, such as the other programs of 
the Air Force and its planes, JSF, and other considerations.
    So, Mr. Chairman, I hope we gain a perspective from this 
hearing that we can take to Congress.
    Senator McCain. Thank you very much.
    Senator Inhofe.
    Senator Inhofe. Okay, Mr. Chairman, thank you very much.
    Mr. Chairman, on the floor at this moment we have Jerome 
Holmes, who's the President's nominee for the Tenth Circuit. He 
was my recommendation to the President, and so I have to get 
any shot I have done right here. I won't be around for another 
round of questions. By the way, it's going to be one of the 
better nominees that we've had a chance to consider.
    I think we're veering away from the question--the questions 
that really need to be answered. There were six criteria, 
initially. I studied those six criteria, and I commend you, Mr. 
Walker, it's my understanding that we're down now to the three 
that would be--and correct me if I'm wrong--substantial 
savings, stability of funding, and stability of requirement. 
First of all, on the substantial savings, some time ago, they 
said, ``If you go to multiyear, it should be something in the 
neighborhood of 10 percent.'' However, I applaud the witnesses, 
and also those of us at the table, for not bringing that up 
now, because that was only 1 year, some 15 years ago. But then 
the press, and the very irresponsible press, like the 
Washington Post this morning, I'm sure will bring that up in 
the future.
    So, we have the substantial savings, in terms of 
definition. What is it, in our minds, that we consider to be 
substantial? I really believe that there are two of the six 
criteria that should not be up to either an outside panel or 
even the Secretaries, because that's what we are elected to do. 
Those two criteria are national security, which is not on the 
table now, so we won't talk about that. In my opening 
statement, I already talked about the pride I had in General 
Jumper in bringing up the fact that we had this great need in 
our strike fighting arsenal. The other one is substantial 
savings, because we're the ones who are answerable to the 
taxpayers. I've looked at this and I believe that this is 
something that is substantial, and I feel strongly about it.
    But I'd only ask you, Secretary Finley, do you think the 
estimated IDA cost savings are realistic? Do you think there's 
ability to save even more than the $225 million? Now, I've 
heard $225 million, then $230, $250, and up to $325 million. I 
have a great respect for your background, Secretary Finley, and 
would like to have your comments as to how optimistic you feel 
about these savings, and anything upward from this.
    Mr. Finley. Thank you, Senator Inhofe.
    I believe the numbers are achievable. I believe the numbers 
are estimates. I believe we have a starting point from which to 
only improve. I've discussed with the Air Force to use the $225 
million as a starting point. One, let's be sure we have a $225 
million that is achievable, and we'd build from that. As we 
have discussed here this morning, the $225 million is an 
estimate. We do not have definitized contracts, so you do not 
have a basis from which to start. But, as an estimate, I 
believe the numbers are realistic.
    Senator Inhofe. Maybe conservative?
    Mr. Finley. Conservative, I have read the IDA report. I 
have found areas in the IDA report where I feel there are 
opportunities for improvement. I believe the decision to use 
IDA on this report goes back to the congressional direction to 
use the Federally Funded Research and Development Center 
(FFRDC) IDA as the independent cost analyst on the F-22, back 
in 2005. I believe the use of IDA at this stage was also very 
instrumental on the basis of their performance in the 
independent cost estimate on the F-22 back in 2005.
    In previous discussions on the Hill in preparing for this 
hearing, it was requested of me to talk to the Cost Analysis 
Improvement Group (CAIG) at DOD. I did that. I talked to them 
directly as to where was the CAIG on this process of doing an 
independent cost estimate. The answer to that was that 
typically the CAIG does not do cost reviews beyond milestone C. 
They are focused and they have their plate full of issues and 
areas to investigate that are pre-milestone C, if not milestone 
C.
    But they related to me their utmost confidence that IDA 
was, in fact, the right FFRDC to go use. They had the right 
people, with the modeling that was used for the previous 
independent cost estimate. They updated that cost estimate for 
this particular round in the business case analysis, based on 
the actuals, based on the inputs from the contractor, to 
reflect pricing.
    Senator Inhofe. Yes, Secretary Finley, and I appreciate 
that very much. There's one other thing. You've made a 
statement to get the exact wording in your written statement. 
Apparently it wasn't there. When you said, ``We've saved $5 
billion over the last 7 years by using multiyear contracts,'' 
is that what you said?
    Mr. Finley. Yes, sir.
    Senator Inhofe. Would you like to elaborate on that at all?
    Mr. Finley. I think there have been numbers of programs 
that have used multiyear procurement, going back to the F-16, 
going back to the F-15. I might be wrong on the F-15. I 
apologize for that. But I do believe the F-16 had multiyear 
procurement on it. So, my staff organized for me the number on 
that and the details on that. I can certainly take the question 
for the record, and I can get back to you.
    [The information referred to follows:]

    Over the last 7 years, the Department of Defense has saved 
approximately $7 billion. The multiyear procurement programs which 
resulted in $7 billion savings are shown in the table below:
Multiyear Contract Programs
    Apache Airframe MYP I & II
    Apache Aircraft Block II
    Black Hawk/Sea Hawk--Airframe MYP I & II
    Javelin
    Longbow Hellfire
    LW 155 Howitzer
    Family of Medium Tactical Vehicles (FMTV)
    A1 MYP I& II
    M1 Tank MYP I & II
    F/A-18E/F Airframe MYP I & II
    F/A-18E/F Engine
    E-2C Airframe/Engine MYP I & II
    DDG-51 MYP I & II
    Virginia Class Submarine
    Tactical Tomahawk
    Common Cockpit
    C-17 Airframe MYP I & II
    C-17 Engines MYP I & II
    C130J/KC130J Airframe

    Senator Inhofe. Okay, that's fine. That's fine. I have 
heard the same thing, and I agree. I just was glad you said 
that. It was not in your written statement.
    Now, in stability of requirement or, more specifically, 
would you say, does the minimum need for F-22s remain 
substantially unchanged during the contract period, in terms of 
production and total qualities? Mr. Walker accurately points 
out that the number of F-22s has continually decreased since we 
first planned on procuring 750 in 1986. 1986 happened to be the 
first year that I was serving over in the House side at that 
time, and I remember this program first being talked about at 
that time. Then we had the C-17, we had the B-1, and the B-2. 
I've never found a program that wasn't decreased. I think you 
start off with what is almost a wish-list level, and then when 
you see the complexities, the problems, and the competition for 
other platforms, it drops down. So, I've seen the same thing 
that we're looking at today in the F-22 in all the other 
systems. I think right now, in retrospect, if we look back at 
the C-17s, one of the higher figures would have served us much 
better, Mr. Chairman, than the number of C-17s we have today, 
because we could not have anticipated the needs that we have.
    Now, the Air Force still has an official requirement of 
381. Both the QDR and the Joint Air-Dominance Study support the 
absolute minimum need of 183. The independent Whitney, Bradley 
& Brown study recently performed also substantiates a minimum 
of 183, and in some scenarios recommends 240.
    Secretary Wynne and Secretary Finley, in turn, ask this 
panel; do you think the proposed F-22 multiyear meets the 
stability of requirements set forth by title 10 specifically? 
That's one of the three that's in question.
    Secretary Wynne. Yes, sir, I do. It is absolutely necessary 
to fill out 7 squadrons, even at the reduced rate of 18 per 
squadron, which is the minimum we would ever like to see. It 
does, therefore, afford us, the management team, and the 
warfighting team access to ranges across America, and will 
become a deployable force as a result.
    I think, as I mentioned in my testimony, we would have 
loved to consider any additional units, but that appetite was 
told to be suppressed. We then argued for stretching this 
program so that we had an active fifth-generation fighter line 
available to you and to the President in case of uncertain 
futures, because we wanted to make sure we had a fifth-
generation fighter line for when another fifth-generation 
fighter line came on, I can certify to you, sir, 183 is our 
absolute minimum.
    Senator Inhofe. I see. Secretary Finley, any comments?
    Mr. Finley. In terms of requirement stability, I've looked 
at this from the standpoint of--we are under a fixed price, in 
terms of production. We've had good solid years of production 
performance on this aircraft. In fact, they've had a recovery 
back to the contract schedule here, it's my understanding, in 
the last several months. There is a modernization element to 
the program, which I believe it is excellent for any major 
program like this to have a modernization element to it. My 
information has indicated that there may be concerns about the 
next generation of radar that would be integrated into the F-
22. I have a fair amount of radar background. Clearly, the 
engineering integration of these systems, in this complexity, 
certainly has risk. But the management of that risk--my notes 
indicate that on the F-15, for example, we've done four 
advanced radar integrations; on the F-16, we've done five 
advanced radar integrations; on the F-18, we're doing another 
new advanced radar integration; and I believe in the case of 
the F-22, the advanced radar integration will essentially be 
completed prior to the start of this multiyear procurement.
    Senator Inhofe. All right, Secretary Finley, thank you.
    The final one is stable funding. The Government 
Accountability Office (GAO) states that the Air Force is 
currently underfunding this proposed 20-20-20 multiyear by $674 
million. So, I'd ask you, Secretary Wynne, can you explain the 
shortfall, and anything further that you haven't already said, 
and whether this still exists under the current Air Force 
plans? Just to be sure that we're all clear on this point, can 
you confirm that the Air Force has committed to funding the F-
22 multiyear?
    Secretary Wynne. I can start there, sir, and tell you that 
the Air Force is fully committed to funding the multiyear. I 
think the point of confusion came about as a result of the out-
of-cycle nature of this multiyear authorization request. We 
have to correct, if you will, the FYDP, as Senator McCain 
pointed out earlier, and we are committed to do that as we 
approach a multiyear contract.
    Senator Inhofe. All right.
    Secretary Finley, I'd ask you, very specifically, is OSD 
committed to funding this F-22 multiyear at a required level to 
avoid contract cancellation?
    Mr. Finley. Yes, sir.
    Senator Inhofe. All right.
    Finally, the last thing, you made some comments--I was very 
glad you did, even though you went a little beyond the question 
that Senator Nelson had asked, Secretary Wynne, but a man's 
integrity, a man who I've heard nothing but good things about 
for a number of years, was impugned this morning on the eve of 
this hearing. I'd ask you, Secretary Finley, do you know Dennis 
Blair? Secretary Wynne's already made some comments.
    Mr. Finley. No, sir, I do not know Dennis Blair. I have met 
him on two courtesy visits, subsequent to my confirmation 
hearing, in terms of my contacts to meet FFRDC leadership.
    Senator Inhofe. All right. Secretary Wynne, is there 
anything further you want to say about this man that perhaps 
you didn't have time to say?
    Secretary Wynne. This man was a combatant commander of our 
Armed Forces. I think he's a man of utmost integrity. I would 
say that, as Mr. Walker pointed out, I think it should be taken 
up a little bit that there should be some conflict-of-interest 
regulations there. I do not think that there was any impact to 
the study, and I don't think there was any impact to the 
analysis, although you, sir, will be able to cover that in the 
second panel.
    Senator Inhofe. Yes, but I'll be dealing with our 
nomination to the Tenth Circuit during the second panel.
    Mr. Walker, do you know this gentleman?
    Mr. Walker. I may have met him. Let me be clear, I did not 
mention any names for the record, nor would I mention any names 
for the record. To me, this is not a personal issue. I have no 
reason to question Admiral Blair's integrity.
    My point is very specific. You need to have standards for 
independence.
    Senator Inhofe. Yes, I understand that. You made that clear 
in your comments.
    Mr. Walker. These don't meet them.
    Senator Inhofe. I was referring to what the Washington Post 
reporter said, not what you said.
    Mr. Walker. Right, thank you, sir.
    Senator Inhofe. Thank you, Mr. Chairman.
    Senator McCain. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Senator McCain. I'd remind my colleagues we have a vote at 
11:45 and we have another panel to go. Thank you.
    Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Referring to that article, I've never met Admiral Blair. 
I've never heard the name until today, so I start with no view, 
one way or the other. But I will say that I have served in 
appointed and elected public office for almost 30 years now in 
various positions. I have my own financial holdings that affect 
decisions, and I have spent a lot of time on these issues, 
personally, as State auditor of Minnesota, as one of five 
members on a State Board of Investment that made decisions of 
over $30 billion of pension fund investments. So, I've spent a 
lot of time looking at these questions.
    Mr. Blair, himself, quoting the article, said he was 
heavily involved in the preparation of the report endorsing the 
multiyear procurement as the chairman of an internal review 
committee that approved its final form. It says that Admiral 
Blair holds options to buy tens of thousands of shares of EDO 
stock, which closed yesterday at $22.63 a share. That means 
every 10,000 of that stock option is worth almost $230,000. 
Take that multiple by whatever the number of the tens of 
thousands of shares.
    Secretary Wynne, were you aware of this financial holding 
of Admiral Blair, prior to reading this story this morning?
    Secretary Wynne. No, sir. I went straight to Google and 
Googled it up. I found it to be part of the public record. You 
go to EDO Corporation, and you go to board of directors, you go 
to the 10-K, it's pretty much all there. It took 5 minutes to 
find all the facts.
    Senator Dayton. If I spent my life Googling everything that 
I was not aware of after it came to light, I would never see 
the light. [Laughter.]
    Secretary Finley, were you aware, prior to this morning?
    Mr. Finley. No, sir.
    Senator Dayton. All right. I find Admiral Blair says he 
chose not to recuse himself because his link to EDO was not of 
sufficient ``scale,'' to require it. IDA has no policy on 
conflicts of interest by its officers, Blair added. ``We 
evaluate each one as it comes,'' he explains, saying that he 
makes any recusal decisions himself.
    I will say that my view is that the extent of this 
financial holding, in its dollar amount, is most certainly what 
I would say is of a scale that would obligate someone 
ethically, if not legally, to make that disclosure. Again, I go 
back, and I realize this is governed by Federal laws and 
regulations, but in Minnesota, the law is, I think, a good one, 
both legally and ethically. It's not holding a financial 
interest that presents a conflict of interest that is against 
the law; it's not disclosing it. You can't have somebody, in my 
opinion, who is representing himself or his firm as independent 
and coming to independent judgments on these issues, who has 
financial holding of that scale. I mean, it's just 
fundamentally contradictory and if it doesn't involve the 
integrity of that individual, it should, because of that 
individual's concern about both the appearance and the fact of 
that lack of independence and that conflict of interest, and 
the failure to affirmatively disclose it to decisionmakers.
    I guess I just want to be clear, Mr. Walker, that I 
understand, there is no Federal law or regulation that impinges 
upon such a requirement.
    Mr. Walker. I'm not aware of any, and I think that there 
should be some requirement. You should have clear requirements 
for both individual and institutional independence as it 
relates to studies that are referred to as independent studies. 
I think it's not just the issue of the financial interest, it's 
also the fact that the individual involved--and I don't want to 
put names on the record--the individual involved was on the 
board of directors of a subcontractor that could benefit from 
this. That, by itself, under at least auditing standards--and I 
know you were the State auditor; I'm the Comptroller General of 
the United States--is a per se independence violation.
    Senator Dayton. Mr. Walker, you said earlier in your 
testimony that this whole project and the funding of it is a 
case study in what's wrong with DOD's acquisition system. I 
guess I would like to suggest that this failure of having such 
a requirement of disclosure is integral to the problems in that 
acquisition process. Would you concur with that or not?
    Mr. Walker. I would recommend that there be some 
requirement that standards exist either to piggyback on 
generally accepted governmental auditing standards, the 
independent requirement there, or another generally accepted 
set of standards. I think that's necessary. I am sure there 
have probably been other situations that have occurred and 
others that could occur in the future if we don't deal with it.
    Senator Dayton. Would it be appropriate for GAO to make 
such specific recommendations to Congress?
    Mr. Walker. You can consider us as having made a 
recommendation, and I'll be happy to provide something for the 
record if you want more specifics.
    Senator Dayton. I would ask if you would submit, please, 
your views on what should comprise such a disclosure 
requirement.
    Mr. Walker. I will do so, Senator.
    [The information referred to follows:]

    This follows up on the discussion during the July 25 hearing on the 
F-22A multiyear procurement proposal concerning whether Federally 
Funded Research and Development Centers (FFRDCs) have the requisite 
standards of independence and proper conflict of interest safeguards 
when performing their work. Though concerns have been expressed that 
FFRDCs are not governed by conflict of interest rules, they are in fact 
governed by some requirements in this area. Specifically, the Federal 
Acquisition Regulation (FAR) states that an FFRDC ``is required to 
conduct its business in a manner befitting its special relationship 
with the Government, to operate in the public interest with objectivity 
and independence, to be free from organizational conflicts of interest, 
and to have full disclosure of its affairs to the sponsoring agency.'' 
(FAR, 48 C.F.R. section 35.017(a)(2).) The Department of Defense (DOD) 
prohibits funding an FFRDC ``if a member of its board of directors or 
trustees simultaneously serves on the board of directors or trustees of 
a profit-making company under contract to DOD, unless the FFRDC has a 
DOD-approved conflict of interest policy for its members.'' (Defense 
FAR Supplement, 48 C.F.R. section 235.017(a)(2).) If there is a need 
for additional guidance regarding the requirement in the FAR and 
Defense Federal Acquisition Regulations Supplement that FFRDCs operate 
with objectivity and independence, it might be useful to consider the 
Generally Accepted Government Auditing Standards applicable to auditors 
and audit organizations which requires them to ``maintain independence 
so that opinions, conclusions, judgments, and recommendations will be 
impartial and will be viewed as impartial by knowledgeable third 
parties. Auditors should avoid situations that could lead reasonable 
third parties with knowledge of the relevant facts and circumstances to 
conclude that the auditors are not able to maintain independence and, 
thus, are not capable of exercising objective and impartial judgment on 
all issues associated with conducting and reporting on the work.'' 
(GAO-03-673G Government Auditing Standards, paragraph 3.04).

    Senator Dayton. With due respect, Secretary Wynne, your 
comment that the absence of a conflict-of-interest requirement 
is interesting, I will say my own view is the absence of a 
conflict-of-interest requirement is appalling. I would urge 
both of you, in your respective capacities, also to look at 
what should be a requirement of every contractor and every 
individual to meet the kind of standard that gives the American 
taxpayer confidence that these dollars are being spent wisely 
in the public interest and not for any self-interest.
    I have more questions, Mr. Chairman, but I realize that 
we're short of time. I'll pass until later.
    Senator McCain. Secretary Wynne, did you want to say 
something else?
    Secretary Wynne. I just wanted to say that the Senator is 
exactly right. I was surprised, myself, because, for all that 
we have been through, for all that Senator McCain drew out of 
our entire system, it was surprising to me.
    Senator Warner. I would just simply say as one who's been 
an observer of these issues and conflicts all the way from my 
time in the Pentagon to this moment, this is extremely serious. 
I've had the privilege of knowing Admiral Blair through the 
years, particularly when he was a senior officer in the Navy. 
I've met him subsequently. I mean, persons who have had the 
opportunities that he has been given by our country to rise to 
four-star rank and have the responsibilities that he did, you 
just assume that intuitively they have their own set of moral 
standards. This is extremely disturbing. I really think it 
taints the validity of the entire report, such that the report 
no longer can be considered as an argument for the proponents 
of this multiyear.
    Senator McCain. Senator Chambliss.
    Senator Chambliss. Thank you, Mr. Chairman.
    Secretary Wynne, the statute for a multiyear has six 
different requirements. In your letter to both the authorizing 
and the appropriations committees dated May 16, 2006, you 
outlined the significance of all six, and the justification of 
all six. Is that correct?
    Secretary Wynne. Yes, sir.
    Senator Chambliss. Do you still stand by the contents of 
that letter and the justification for the multiyear?
    Secretary Wynne. Yes, sir, I do.
    Senator Chambliss. There was also a follow-up letter 
dated--I just noticed it doesn't have a date on it, but it's in 
response to Senator McCain's letter dated July 7, 2006, so I 
assume it was within a day or two after that--from Kenneth J. 
Krieg to Senator McCain, again referencing your letter as the 
justification for complying with the six steps. Are you 
familiar with that letter? Would you agree that the contents of 
that letter are correct?
    Secretary Wynne. I'm less familiar with that letter, but I 
do agree that the contents of the letter sound correct.
    Senator Chambliss. Okay. Following your letter dated May 
16, 2006, did Mr. Walker or anybody from GAO ever call you and 
say, ``Hey, Mr. Secretary, I've seen your letter. We have some 
problems with what you're saying there''? Did anybody from GAO 
ever talk to you about this?
    Secretary Wynne. No, sir.
    Senator Chambliss. Okay.
    Mr. Chairman, I'd like to ask unanimous consent to enter 
those two letters in the record, please.
    Senator McCain. Without objection.
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    Senator Chambliss. Mr. Secretary, again, Senator McCain 
asked you about the FYDP. I believe this multiyear contract was 
included in the 2007 FYDP, as well as the 2007 POM, is that not 
correct?
    Secretary Wynne. What I recall, sir, is it was definitely 
in the 2007 POM. I just don't remember if we adjusted the FYDP.
    Senator Chambliss. Okay.
    Mr. Walker, you have raised, as one of your questions here 
today, the fact that the termination costs of the multiyear 
contract are not budgeted in the current budget, is that 
correct?
    Mr. Walker. That's correct, as well as that they represent 
a risk that one has to consider.
    Senator Chambliss. What is the purpose of a multiyear 
contract?
    Mr. Walker. Part of the purpose of a multiyear contract is 
to save money, as compared to otherwise being able to purchase 
on annual increments.
    Senator Chambliss. Do you expect both parties to live up to 
that contract when you sign it?
    Mr. Walker. If it's a firm fixed-price contract, 
absolutely, we do.
    Senator Chambliss. That's what this is supposed to be, is 
that not right?
    Mr. Walker. That's correct, although, as has been noted for 
the record, it's based upon estimates because negotiations 
haven't taken place.
    Senator Chambliss. Why would you fund the fact that we're 
going to break this contract in a budget where you are entering 
into a contract to save money? Why does that make sense, or is 
that a quirk that the Government has, once again?
    Mr. Walker. Because the history has shown that the Pentagon 
wants way more than it can afford, and that we have, from time 
to time, had to change our mind when the budget crunch hits. 
There are many differences between wants, needs, affordability, 
and sustainability, not just within the Air Force budget but 
also within the Pentagon budget.
    Senator Chambliss. Have all of those instances that you 
have referenced been funded in the budget at the time the 
multiyear was entered into?
    Mr. Walker. Senator, I'd have to check. I can't answer but 
I will check and provide something for the record.
    [The information referred to follows:]

    Not all programs with multiyear procurement (MYP) contracts fund 
termination costs in the budget. Defense Federal Acquisition 
Regulations Supplement MYP regulations state that if an MYP has 
estimated cancellation costs of more than $100 million and is not going 
to fund those costs in the budget, the head of the agency must report 
to Congress: (1) planned cancellation ceiling amounts; (2) the extent 
to which these amounts are not funded in the budget; and (3) an 
assessment of the financial risk associated without funding these 
costs. Three of the MYP contracts referenced in the Institute for 
Defense Analysis study included cancellation ceiling clauses and 
estimated termination costs. At least one of those, the F-18 MYP, fully 
funded all of its cancellation costs. Historically, we found programs 
that funded these costs and some that did not. The M1 tank program is 
an example of a major weapon acquisition which did not fund 
cancellation costs during MYP. On the other hand, the Blackhawk 
helicopter and the Maverick missile acquisitions both fully funded the 
liability.

    Senator Chambliss. All right. I'd venture to say none of 
them have.
    Let's look at your letter of June 20, which was about a 
month after the letter that I asked Secretary Wynne about that 
went to the authorizing and appropriations committees where he 
detailed the requirements of the multiyear and the 
substantiation of those requirements. In fact, you reference 
that letter in your letter, I believe. Were you familiar with 
that letter before you sent your letter of June 20, 2006?
    Mr. Walker. Do you mean Secretary Wynne's letter? Is that 
what you mean, sir?
    Senator Chambliss. No, I'm talking about your letter to 
Bill Young dated June 20. Were you familiar with Secretary 
Wynne's letter dated May 16?
    Mr. Walker. My staff was. They brought it to my attention.
    Senator Chambliss. Why did you not call the Secretary's 
office and say, ``We have some problems with this, and let's 
discuss this. Give me further substantiation for the issues 
that we think are still outstanding''?
    Mr. Walker. Several things, Senator. First, we work for 
Congress, not for the executive branch. Second, if I made a 
call every time something came out of the Pentagon or anyplace 
else in Government where we have a disagreement, I'd be on the 
phone 100 percent of the time.
    Senator Chambliss. Yes. Senator McCain and I agree that we 
have a flawed procurement system, but we also have a flawed 
internal system. There's no reason for you not being able to do 
that. If you're going to be responsible to Congress, you should 
do that.
    Mr. Walker. Senator, with all due respect, there's no 
question that the Pentagon and the Air Force understands that 
we've had a longstanding concern with regard to the F-22A. This 
is not news.
    Senator Chambliss. Well, we've never been to this point 
before, have we? We've never been to the point of a multiyear 
before.
    Mr. Walker. That's correct, Senator, not to my knowledge.
    Senator Chambliss. Now, let's take your letter dated June 
20. You cite three issues in that letter. The first issue is 
savings. In there you say that, instead of saving $225 million, 
or about 2.7 percent, this contract is actually going to cost 
the taxpayer money. Now, in the trial of a lawsuit, what we do 
when we secure an opinion is we have the expert base that 
opinion on facts in evidence. Now, the facts in evidence here, 
Mr. Walker, are that originally we were going to buy 27 
airplanes in this fiscal year, is that correct? Excuse me, the 
next fiscal year, the first year of this multiyear.
    Mr. Walker. I believe that's correct, Senator.
    Senator Chambliss. All right. Now, sometime back the latter 
part of last year, before the President's budget was submitted 
in January--I don't know the exact date, but let's assume it 
was December 2005--a decision was made by the Air Force and by 
the President to request a multiyear of 20 airplanes for each 
of the next 3 years and extend this program out for 3 years. 
Would you agree with that?
    Mr. Walker. It was part of the budget request, the most 
recent budget request, I believe, if I'm not mistaken.
    Senator Chambliss. The budget request that was submitted to 
the Hill in January 2006. Isn't that right, Mr. Walker?
    Mr. Walker. I don't know the exact date that it was 
submitted, but my understanding was it was the 2007 budget 
request.
    Senator Chambliss. Okay. Well, the law says it has to be 
submitted in January, so we'll take that as one fact. In that 
budget, there was a requirement that we have 20 airplanes 
rather than 29 airplanes in the 2007 budget. That fact was 
again substantiated and approved by both authorizing committees 
in the House and the Senate and ultimately, at about the time 
of your letter of June 20, by the Appropriations Committee on 
the House side. I don't know the exact date of that 
appropriation, but certainly before your follow-up letter of 
July 6, where you again reference the same issue of this 
multiyear costing the taxpayer money. What you did, Mr. Walker, 
was, you said that there is a savings issue based upon facts 
that are not in evidence, because your question regarding 
savings relates to a prior decision to request 29 airplanes in 
a fiscal year when everybody in the world had already requested 
and approved 20 airplanes in that fiscal year, is that not 
correct?
    Mr. Walker. I don't recall when they approved it. I stand 
by what I said, Senator. I said that--and the numbers are 
clear, and they're factbased--the fiscal year 2006 budget 
versus what's on the table now, which includes multiyear, but 
not solely multiyear; it also includes adding four aircraft and 
extending things out at least 2 years. This is $1.7 billion 
more than last year. Just look at the multiyear; it's an 
estimated savings of $225 million without considering 
termination charges, without considering any other risk. I 
stand by that. That's factbased.
    Senator Chambliss. Mr. Walker, you've spent a lot of time 
here today talking about budget savings and budget crunches and 
why we can't afford this and why we can't afford that. Did you 
ever think about the fact that we may not have been able to 
afford 29 airplanes this year?
    Mr. Walker. We have been saying for years, Senator, that 
the difference between wants, needs, affordability, and 
sustainability is great, and it's greater today than it was a 
year ago.
    Senator Chambliss. Mr. Walker, I would just say I'm a 
little bit embarrassed that, as a representative of the 
Government, you would come in here and say that there are not 
savings to the taxpayer in this multiyear contract, there are 
actually costs to the taxpayer in this contract because we are 
now buying 20 airplanes, as the President requested, as this 
committee approved, and as the House Armed Services Committee 
approved. I mean, that's just based on facts that are not in 
evidence, and it truly is embarrassing.
    Mr. Walker. Senator, we're saving an estimated $225 
million, which I've said for the record, if the estimates are 
correct, without considering termination charges, without 
considering the other risk associated with entering into a 
multiyear. So, if you look at the multiyear, standing alone, I 
stand by what I said.
    Senator Chambliss. Second, let's look at your issue 
relative to funding. You talk about the fact that this airplane 
is underfunded by $674 million. There was an issue relative to 
incremental funding. That was originally proposed. It was 
rejected. You've already talked about that. Everybody agrees 
with that. We have incrementally funded ships, but we've never 
incrementally funded an aircraft. A decision was made by this 
committee, as well as by the House Armed Services Committee, in 
the authorizing process, not to have incremental funding. That 
was approved in advance by both committees, in advance of your 
letter dated June 20, 2006, and yet you still talked about 
incremental funding in your letter of June 20, 2006. Why do you 
do that?
    Mr. Walker. Senator, it was an issue that we had raised 
before. If it had already been settled, then I wouldn't have 
included it, had I known that at the time.
    Senator, there's a very fluid environment up here, there 
are many things that happen that are in public view, and there 
are many things that happen that aren't in public view, and I 
can't be aware of everything.
    Senator Chambliss. Did anybody on your staff check the mark 
coming out of Senator McCain's committee to see whether or not 
incremental funding was included for this aircraft?
    Mr. Walker. They may have, Senator, but they didn't bring 
it my attention, if they did.
    Senator Chambliss. Third issue you raise is design 
stability. We've already had testimony here today--Senator 
Nelson asked the question to Secretary Wynne--about the most 
recent exercise that was done, where this plane has a 97-
percent rating. Granted, it's had design problems from day one 
because of the sophistication of the aircraft, but now it's 
flying at a 97-percent rate. You don't mention any particular 
design stability issues in here, other than there have been 
problems in the past, and, therefore, under your rationale 
here, we would never satisfy design stability. Certainly, 97 
percent ought to, but the way I read this, you would never have 
design stability.
    Let me just ask you about stability in other programs, like 
the F/A-18. Would you not admit that, even though we had a 
multiyear on that, that there were actual design stability 
problems with the F/A-18?
    Mr. Walker. There were issues there and, by the way, 
Senator, I did not mention design stability today. I mean, 
there's no question that with regard to the base design, we 
have stability. There's no question. The only issue that you 
might have, and I didn't raise it today, was, it originally was 
an F-22, now it's an F-22A, and obviously there are issues with 
regard to ground attack. But I don't think that's relevant to 
the multiyear that we're talking about today.
    Senator Chambliss. All right, let's talk about significant 
savings. $225 million is the estimated savings, and that has 
not been refuted here today. Mr. Finley and Secretary Wynne 
have told you how they have calculated that. Do you have any 
problems with how that has been calculated, or is that a fair 
estimate, in your opinion?
    Mr. Walker. I have concerns about the IDA study, for the 
reasons that I said before and, to the extent that this is 
based upon that study, I have concerns.
    Here's my concern about substantial savings, Senator. $225 
million, in absolute terms, is a lot of money. But I do not 
believe you should just look at it in absolute terms. I think 
you also should look at it in relative terms, and I think you 
also need to look at it with regard to the risk associated with 
that $225 million. I've already heard that people are now 
making an argument for a similar action for the V-22, and the 
basis they're giving for substantial savings is because their 
estimate is more than the F-22 savings. We need to have some 
standards, I would respectfully suggest. You need to have some 
standards in order to be comfortable that you are consistently 
making that determination, although, as the elected officials, 
you're the ones that have the right to make it, no matter what 
it is.
    Senator Chambliss. I'm just looking at a list of previous 
multiyear contracts, some of which are still in effect, some of 
which have already been completed, where we've saved $51 
million on the F-414 engine. We saved $127 million on the C-17A 
engine. We saved $92 million on the C-17 engine in another 
multiyear. We saved $173 million on the KC-130J multiyear for 
the Marine Corps and $246 million on an F-16 multiyear.
    Senator McCain. Senator Chambliss, you're going to have to 
truncate a little bit here. You've been 15 minutes, so far.
    Senator Chambliss. I'm sorry, Mr. Chairman. I promise, I'm 
close to the end.
    What about all those multiyears? Should they not have been 
entered into?
    Mr. Walker. The question I would ask you, Senator, is, what 
percentage of the estimated production cost did that represent? 
I think you'll find out it was a lot higher than this. Believe 
me I understand this. I used to live in Marietta, so I'm very 
familiar with the----
    Senator Chambliss. Let's talk about that. The F-414 engine 
was 2.8 percent. The C-17 multiyear fiscal year 1997 to 2003 
was 5 percent. There's another one here that is 5.7 percent. I 
don't know. All I would say is, significant savings of $225 
million in south Georgia is a lot of money, and my taxpayers 
and my constituents appreciate any amount of money we can save, 
especially when it comes to $225 million.
    That's all I have, Mr. Chairman.
    Senator McCain. Thank you, Senator Chambliss.
    Just very briefly, Secretary Wynne, did you ask IDA to 
analyze the effects of F-22 procurement on the JSF production 
line? I don't believe you did. I think that's important.
    Secretary Wynne. I don't think so, Senator.
    Senator McCain. I think that's an important factor. 
Because, as Mr. Walker said, and I said in my opening 
statement, everyone knows that we are facing a serious, serious 
crunch on procurement because of the costs of the war, and 
decreasing defense spending. I notice that the Senate and House 
Appropriations Committees have cut money from defense 
appropriations. Whether they should or not, they have. I really 
believe that we should base this decision in the entire context 
of our defense procurement practices.
    So, I thank the witnesses. I'd be glad to hear your 
responses, Secretary Wynne, Mr. Walker, or Secretary Finley.
    Secretary Wynne. Senator, I've always appreciated your 
point of inquiry and, in this case, I think the needs of the 
airmen to make sure we give them the right weaponry will be 
best met here by doing this. I can appreciate the concerns.
    Senator McCain. But, unfortunately, those choices cannot be 
made in a vacuum.
    Mr. Walker or Secretary Finley, do you have any concluding 
comments?
    Mr. Walker. I would just say, Senator, that you're correct 
that the crunch is coming. While obviously we want to look 
every way that we can to save money--and $225 million is a lot 
of money, in my view--at the same point in time, we need 
flexibility, because we don't know how bad the crunch is going 
to be and there is a ripple effect with regard to other 
platforms, both within the Air Force as well as within DOD, 
and, frankly, outside the DOD.
    Senator McCain. Secretary Finley, would you like to make 
any closing comment?
    Mr. Finley. I'd like to thank you, Mr. Chairman, for your 
time and thank the subcommittee for their questions. I do 
believe the multiyear procurement, based on the information 
I've seen so far, is the right thing to do for F-22, sir. I 
completely pledge to work with this committee and with you, Mr. 
Chairman, on acquisition excellence as we move forward.
    Thank you.
    Senator McCain. Thank you very much.
    We'll ask the second panel, which is David Newman, the 
principal analyst in defense in the Congressional Budget Office 
(CBO); J. Richard Nelson, who's a research staff member with 
the Operational Evaluation Division of IDA; Christopher 
Bolkcom, who's a specialist in national defense in the 
Congressional Research Service (CRS); and Danielle Brian, who's 
the executive director for the Project on Government Oversight 
(POGO).
    Senator Chambliss. Mr. Chairman?
    Senator McCain. Yes, sir.
    Senator Chambliss. I would ask unanimous consent that Mr. 
Walker's letters dated June 20, 2006, and July 6, 2006, be 
entered in the record, along with the table of previous 
multiyears.
    Senator McCain. Without objection.
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    Senator McCain. Welcome, to the witnesses.
    Mr. Newman, we'll begin with you, sir.
    I apologize for keeping you waiting. It's obviously been a 
spirited discussion.

  STATEMENT OF DAVID B. NEWMAN, PRINCIPAL ANALYST IN DEFENSE, 
                  CONGRESSIONAL BUDGET OFFICE

    Mr. Newman. Mr. Chairman and members of the subcommittee, 
I'm pleased to appear before you today to discuss the multiyear 
procurement proposal for the F-22 program.
    The additional material provided by the Air Force in May 
leads me to the following three observations. First, the 
estimated savings from that contract are smaller, in percentage 
terms, than from other multiyear procurement programs. Second, 
in dollars, the savings are about the same as the unfunded 
cancellation liability the Air Force would incur when it signs 
the F-22 contract. Third, Congress should consider those 
factors and the uncertainty of the estimated savings when 
determining whether to grant multiyear procurement authority.
    The estimated savings of just over 2 percent are smaller 
than savings estimated for other multiyear procurement 
contracts, which have ranged from 5 percent to 11 percent. 
Because the F-22 is more expensive than other fighters, the Air 
Force has already taken advantage of most potential cost-
reduction initiatives. There just aren't that many 
opportunities left for additional cost reductions at this point 
and because the Air Force will also buy fewer planes than were 
procured in other multiyear contracts, the opportunities for 
additional savings from this contract are limited.
    While it no longer includes incremental funding, the Air 
Force's budget strategy for the contract is still a cause for 
concern. That strategy currently includes an unfunded 
cancellation ceiling estimated at $200 million in the first 
year of the contract. Although that liability has been 
described as a contingent liability, it is not. In fact, it is 
part of the Air Force's minimum liability under the contract.
    The Government may cancel the multiyear contract at the end 
of any fiscal year if funds aren't available to proceed in the 
next year. But, because some nonrecurring costs may be spread 
over items that have yet to be produced, the Government could 
owe the contractor more than had been appropriated up to the 
point where the contract was canceled.
    The Air Force would obligate the Government for the full 
cost of all 60 planes--that's over $10 billion--when it signs 
the contract. However, because it can cancel the contract at 
the end of the first year or the second year, the Government's 
minimum liability will be the sum of the production costs for 
the items already ordered and the cancellation cost for the end 
of that year. An appropriation that covered only the cost for 
each annual production lot as it was manufactured would be 
insufficient to finance that minimum obligation.
    CBO concludes that an unfunded cancellation ceiling is not 
good budget practice. It distorts the resource allocation 
process by understating the costs and decisions made for the 
budget year, and may require future Congresses to find the 
resources to pay for decisions made today.
    Ultimately, Congress must weigh the potential for savings 
against the risk, that additional funds that have to be 
provided if the contract is canceled. It must also consider 
that by authorizing DOD to make an upfront commitment to 
purchase additional aircraft in subsequent years, it will 
reduce budget flexibility in those years as today's commitments 
consume resources and make them unavailable for tomorrow's 
requirements.
    When considering whether to grant multiyear procurement 
authority, it is important to note that estimates from such 
contracts are inherently uncertain. The savings are based on 
the estimates of the cost of a multiyear procurement contract, 
versus annual contracts. Because DOD pursues only one or the 
other, but not both, there are no actual data for a comparison 
of cost to determine if savings are, in fact, realized. Also, 
some parts of the cost models that are used in estimates are 
inexact, so savings could be significantly different from 
estimates.
    Congress will have to judge whether the estimated savings 
for the F-22 program, accounting for the inherent uncertainty, 
are enough to compensate for the risk that additional 
appropriations will be necessary if the contract is canceled, 
and for the loss of budget flexibility that Congress will face.
    That concludes my remarks, gentlemen. I look forward to 
your questions.
    [The prepared statement of Mr. Newman follows:]
                 Prepared Statement by David B. Newman
    Mr. Chairman, Senator Lieberman, and members of the subcommittee, I 
am pleased to appear before you today to discuss the Air Force's 
acquisition strategy for the F-22 fighter program. At your request, the 
Congressional Budget Office (CBO) has examined the proposal for a 
multiyear procurement contract for 60 aircraft, focusing specifically 
on the additional material that the Air Force submitted to Congress 
after the Airland Subcommittee's hearing on this matter on March 28, 
2006.
    When the Air Force proposed a multiyear procurement contract for 60 
F-22As in February as part of the President's budget request for fiscal 
year 2007, it had not completed the analysis required by the statute 
that authorizes multiyear procurement (10 U.S.C. 2306b) to determine 
whether such a contract would result in ``substantial savings'' 
compared with the cost of procuring the aircraft through a series of 
annual contracts. At the request of the Department of Defense (DOD), 
the Institute for Defense Analyses (IDA) completed that analysis in 
May, in which it determined that procuring those aircraft through a 
multiyear contract could save $235 million, or about 2.2 percent, of 
the estimated $10.8 billion cost of procuring those aircraft through 
three annual contracts.1,2
---------------------------------------------------------------------------
    \1\ The cost of procuring the aircraft includes the costs of 
separate contracts for the air vehicles and the engines, as well as 
support expenses and other costs.
    \2\ In the budget justification documents submitted in May, the Air 
Force indicated that the amount of funding it intended to request for 
the F-22A program in the Future Years Defense Program for the 2007-2011 
period would be sufficient to purchase only 56 aircraft and that an 
additional $674 million would be required to purchase all 60 planes 
envisioned in its multiyear procurement proposal. If that additional 
funding was not available, IDA estimated that the Air Force could save 
$225 million by procuring 56 aircraft through a multiyear procurement 
contract.
---------------------------------------------------------------------------
    After reviewing the material provided by the Air Force, I offer the 
following observations:

         The estimated savings from procuring the 60 F-22As 
        through a multiyear contract are smaller in percentage terms 
        than the savings estimated for other aircraft procurement 
        programs.
         The Air Force does not intend to set aside funds to 
        cover potential cancellation costs for the multiyear contract. 
        It also has not requested funding to cover the full cost of the 
        60 aircraft that it will commit to buy when it signs the 
        contract. Thus, if the requested funding is provided, the funds 
        available to the Air Force for the F-22A procurement contract 
        will be less than the government's minimum liability.
         The savings from procuring F-22As through a multiyear 
        contract could differ from the amounts estimated because of the 
        uncertainty inherent in such estimates.

          comparison with other multiyear procurement programs
    The estimated savings from a multiyear procurement contract for F-
22As are relatively small--as a percentage of contract costs--compared 
with the savings estimated for other multiyear procurement contracts 
for aircraft programs. For example, the Navy estimated that the 
multiyear contract to procure 210 F/A-18 E/F/G fighter/attack aircraft 
over the 2005-2009 period would save 11 percent compared with a series 
of annual contracts for those aircraft. In pursuing a multiyear 
contract to procure 80 C-17A intertheater transport aircraft over the 
1997-2003 period, the Air Force anticipated savings of 5 percent in 
comparison with the cost of a series of annual contracts. Estimates of 
savings from multiyear contracts for other aircraft procurement 
programs, such as those for the C-130 cargo aircraft, the F-16 fighter, 
and the UH-60 helicopter, were between 5 percent and 11 percent.
    The savings that could accrue from a multiyear procurement for the 
F-22A are lower than estimates for other programs for two reasons. 
First, the Air Force has already undertaken many cost-reduction 
initiatives prior to proposing the multiyear contract for the F-22A. A 
substantial portion of the savings that the military Services expect to 
realize from multiyear procurement contracts is derived from 
investments in equipment, facilities, materials, and techniques that 
improve the efficiency and reduce the cost of production processes. 
However, because the F-22A has turned out to be much more expensive 
than other fighter aircraft--procuring 182 aircraft will cost an 
average of $185 million per plane--the Air Force has already funded 
many cost-reduction initiatives during the development and initial 
production phases in an effort to hold down total costs.\3\ As a 
result, few such initiatives remain to be funded as part of the 
proposed multiyear contract, reducing the savings available from that 
acquisition strategy.
---------------------------------------------------------------------------
    \3\ The average procurement cost for each annual production lot has 
declined over time as the production process becomes more efficient. 
The Air Force will pay an average of $157 million per plane for the 24 
aircraft it ordered this fiscal year. However, the average procurement 
cost of aircraft ordered in the next three production lots is expected 
to increase to about $175 million because the Air Force will procure 
those planes at a slower, less cost-effective rate of 20 aircraft each 
year.
---------------------------------------------------------------------------
    A second explanation for the lower estimated savings is that the 
Air Force would buy fewer planes under the proposed multiyear contract 
for the F-22A than were procured under other aircraft programs. The 
Navy plans to purchase a total of 432 F/A-18 E/F/G aircraft by the time 
it completes a second multiyear procurement contract for those aircraft 
in 2009. The Air Force purchased 1,830 F-16 fighters under three 
sequential multiyear contracts over the 1982-1993 period. It also will 
acquire a total of 140 C-17 aircraft by the time it completes the 
second multiyear contract for that program next year. Because 
relatively few F-22A fighters remain to be procured under current 
plans--the Air Force has already ordered 122 of the 182 aircraft it 
intends to buy--the opportunity for savings is limited.
                  budgeting for multiyear procurement
    CBO's testimony before this subcommittee in March focused on two 
issues regarding the Air Force's acquisition strategy for the F-22A--
incremental funding and unfunded cancellation liability. The Air Force 
had requested the authority to budget and pay for each annual 
production lot incrementally over a 2-year period rather than obtaining 
appropriations for the full cost of those aircraft in the year 
production was to begin. That plan would have reduced the amount of 
budget authority needed in the first year, although it would have 
increased the amount needed in subsequent years. Incremental funding 
might constrain the funding available for other programs in future 
years as programs that were partially funded in previous years continue 
to require the appropriation of budgetary resources. Because it does 
not display the full cost of decisions at the time they are made, 
incremental funding might also limit transparency and accountability 
and tilt the playing field in favor of expensive programs that benefit 
from such a funding arrangement. Because the Committees on Armed 
Services and Appropriations in both Houses disapprove of using 
incremental funding for the F-22A, the Air Force has indicated that it 
will submit a proposal to fully fund each annual lot of aircraft before 
that lot enters production.\4\
---------------------------------------------------------------------------
    \4\ The committee reports accompanying the defense authorization 
and appropriation bills for 2007 indicate that funding will be provided 
for the full cost of the aircraft before they are ordered.
---------------------------------------------------------------------------
    Under a multiyear contract, the Government may, at the end of each 
fiscal year, cancel its order for all remaining years of the contract 
if it notifies the contractor that funds are not available to proceed 
for the next fiscal year. Thus, cancellation of a multiyear contract 
occurs between fiscal years if Congress does not provide the additional 
appropriations needed to continue. In such a contract, some 
nonrecurring costs may be allocated to items expected to be produced in 
future years. Therefore, if the contract is canceled, the Government 
may owe the contractor more than the amount appropriated for items 
produced in the years before the cancellation. The maximum liability 
for cancellation at the end of any given year is usually negotiated 
upfront and included in the terms of the contract.\5\
---------------------------------------------------------------------------
    \5\ The maximum cancellation liability is known as the cancellation 
ceiling. Contract cancellation differs from contract termination. The 
Government has the right to end any contract early, when doing so is in 
the Government's interest, but must pay the contractor for any 
authorized work performed before it was notified to cease work. 
Contract termination is the act of rescinding orders for items for 
which funds have already been appropriated and on which work has 
already begun. The cost of terminating an annual procurement contract 
early should not exceed the available appropriations because an agency 
should have sufficient appropriations to cover all recurring and 
nonrecurring costs before it initiates an annual procurement contract.
---------------------------------------------------------------------------
    In the budget justification material that the Air Force submitted 
in May, it estimated that the multiyear contract for the F-22A could 
include a cancellation ceiling of approximately $200 million in the 
first year of the contract--approximately the same as the estimated 
savings from using such a contract. The Air Force does not intend to 
dedicate budget authority for that liability at the time it is 
incurred.
    DOD does not request budget authority specifically for cancellation 
liability because it considers cancellation a contingent liability with 
only a remote probability of happening.\6\ Although the amount of the 
Government's actual liability depends on how the program proceeds, its 
minimum liability is the sum of the production costs for the items 
ordered in the first year and the cancellation costs at the end of that 
year. Regardless of whether the multiyear procurement contract proceeds 
for the full term or is canceled early, the Government's initial 
obligation to the contractor will exceed the amount required to pay for 
the items ordered in the first year. For example, after the first year 
of the 3-year contract proposed for the F-22A, the Air Force could 
either cancel the remaining 2 years of production and pay the costs for 
cancellation, or it could continue production for the second year and 
pay for the cost of those aircraft. Under the multiyear contract, the 
Air Force would not have the option of forgoing future production lots 
without paying the cancellation charge. Thus, in no case would the 
government pay only the cost of the aircraft produced in the first 
year. An appropriation that covered only the cost for each annual 
production lot as it was manufactured would therefore be insufficient 
to finance the Government's minimum obligation under the multiyear 
contract.
---------------------------------------------------------------------------
    \6\ DOD is authorized by 10 U.S.C. 2306b to pay cancellation costs 
from funds originally available for the performance of the contract, 
appropriations currently available to procure the type of property at 
issue (in this case, other aircraft) and not otherwise obligated, or 
funds appropriated for cancellation payments.
---------------------------------------------------------------------------
    The Air Force indicates that it may be able to pay contract 
cancellation costs with funds appropriated for procuring the F-22A, 
which suggests that there would be sufficient funds to pay both the 
cost of canceling future production lots and the cost of procuring the 
aircraft that had been ordered up to that point. However, if that were 
the case, the Air Force would be committing the same appropriations for 
both purposes simultaneously. But with no funds set aside specifically 
for cancellation costs, the Air Force would have to terminate orders 
for some of the aircraft that had already entered production if a 
decision was made to cancel subsequent orders. Thus, if it canceled the 
remaining years of the multiyear contract at the end of the first year, 
the Government not only would forego the aircraft to be produced in 
later years but also would not receive some of the planes it had 
ordered in the first year--and the taxpayers' investment in those 
aircraft would be lost. In particular, if the Government decided to 
cancel the contract at the end of the first year but had not set aside 
funds specifically for cancellation costs, it would not only forego the 
40 aircraft that had not entered production, but, to free up funds for 
cancellation costs, also have to stop work on some of the 20 aircraft 
that had already been ordered. Alternatively, the Air Force could 
divert funds appropriated to procure a different aircraft to pay the 
cost of canceling the contract for the F-22A. However, to make such 
funds available to pay cancellation costs, the Air Force would have to 
buy fewer of that other aircraft.
    DOD's failure to request funding for cancellation liability may 
distort the resource allocation process by understating the cost of 
decisions made for the budget year and may require future Congresses to 
find the resources to pay for decisions made today.
                          issues for congress
    Neither the estimated savings nor the cancellation liability is 
large relative to the cost of the Air Force's proposed multiyear 
contract to procure the remaining F-22A aircraft. Congress must weigh 
the potential for savings against the risk that additional funds will 
have to be provided if the contract is canceled. It must also consider 
that, by authorizing DOD to commit to additional purchases in 
subsequent years, it will reduce budgetary flexibility in those years, 
as past commitments make resources unavailable for other requirements.
    When considering those risks and benefits, it is important to note 
that estimates of savings from such contracts are inherently uncertain. 
The savings that might be realized from a multiyear procurement 
strategy are based on estimates of the costs of the two alternate 
approaches--multiyear procurement and annual contracts--made at the 
time the multiyear contract is proposed. Because DOD pursues only one 
of those approaches, there are no actual data for a comparison of the 
costs to determine if savings are realized. In this particular case, 
some of the cost-estimating relationships that IDA used to calculate 
the savings associated with several aircraft components are not strong. 
The savings could be significantly different from what has been 
estimated.
    The statute authorizing multiyear procurement contracts requires 
that such contracts result in ``substantial savings'' but does not 
quantify in either dollars or percentage terms a threshold for meeting 
that requirement. Therefore, Congress will have to judge whether the 
estimated savings for the F-22A program are sufficient to compensate 
for the risk that additional appropriations will be necessary if the 
contract is canceled and for the loss of budgetary flexibility that it 
will face.

    Senator McCain. Thank you very much.
    Dr. Nelson, welcome.

    STATEMENT OF J. RICHARD NELSON, RESEARCH STAFF MEMBER, 
OPERATIONAL EVALUATION DIVISION, INSTITUTE FOR DEFENSE ANALYSES

    Dr. Nelson. Thank you, Mr. Chairman and members of the 
subcommittee. I'm happy to be here to testify on this issue.
    I need to begin by setting the record straight, because I 
was there. There is considerable confusion because of this 
morning's newspaper article about two studies at IDA. We were 
sponsored to do an independent cost estimate for the F/A-22 in 
September 2004, completed that study in August 2005, and 
delivered it to Congress. It was a congressionally-mandated 
study. Our sponsor was the Under Secretary of Defense for 
Acquisition, Technology, and Logistics (USD(AT&L)), who 
directed the task. I directed the work. It seemed logical to 
our sponsor that we continue with an examination of the F-22 
multiyear business case analysis. Again, USD(AT&L) was the 
sponsor and directed the task and, again, I, at IDA, directed 
the work.
    Admiral Blair attended reviews of the F-22 independent cost 
estimate, which we completed in August 2005. He was not 
chairman of the review. General Larry Welch chaired a high-
level review panel, and our sponsor, AT&L, chaired a working-
group level that included members of organizations in OSD, the 
Air Force, the contractors, and Defense Contract Audit Agency 
(DCAA) and Defense Contract Management Agency (DCMA).
    Senator McCain. So, let me get this straight. You were 
tasked to do an independent analysis, and it was staffed by Air 
Force personnel and Pentagon personnel. Thank you.
    Dr. Nelson. For the independent cost estimate, we were 
tasked by USD(AT&L).
    Senator McCain. Fine. So, you included in the studies the 
Air Force personnel and Pentagon personnel.
    Dr. Nelson. Yes, as reviewers.
    Senator McCain. Thank you. Then I hope you----
    Dr. Nelson.--at the working level----
    Senator McCain.--don't call it independent. It's fine with 
me, but just don't call it independent.
    Dr. Nelson. We did the work. We did the data collection.
    Senator McCain. I'm sure you did.
    Dr. Nelson. We did the information collection. We did the 
analysis. We did the documentation. We did the report. It was 
an independent and objective piece of work. Admiral Blair did 
not attend the final reviews for this work. No officer of IDA 
attended the reviews of the F-22 multiyear procurement (MYP) 
business case analysis (BCA). So, Admiral----
    Senator McCain. Dr. Nelson, I asked you to come here to 
testify on the issue of the F-22 multiyear procurement 
proposal, and I would like to have that testimony, if we could 
have that, Doctor. I have not raised the issue of Admiral 
Blair, and I don't intend to. But I do intend to have your 
testimony on this issue, or you can be excused. Now, which do 
you prefer?
    Dr. Nelson. Yes, sir. I will now do that.
    I will now proceed with my testimony.
    Senator McCain. Thank you very much, Doctor.
    Dr. Nelson. IDA's work was based on paper P-4116, copies of 
which have been provided extensively to the committee.
    In January 2006, IDA was asked by the USD(AT&L) to conduct 
a BCA for a possible F-22A MYP. IDA's task was to estimate the 
cost savings to the Government of pursuing a multiyear 
procurement contract for the three final planned lots of the F-
22A program, and a multiyear procurement contract was to be 
compared to three single-year procurement contracts. The study 
team collected existing F-22 data. We updated the work from the 
independent cost estimate. We added considerable data on the 
basis of further deliveries of aircraft from Marietta and 
further component deliveries by the contractors and 
subcontractors to Marietta.
    That model then was used, in terms of looking at a 
constrained and unconstrained budget for four scenarios, as 
outlined in Table 1 of this testimony. So, we looked at a 
scenario comparison of single-year versus multiyear for an 
unconstrained, and single-year versus multiyear for a 
constrained budget. This was for, in the unconstrained 
scenario, the 20/20/20 Air Force program; and, in the 
constrained scenario, 20 in Lot 7, 20 in Lot 8, and X in Lot 9, 
depending upon how much of the constrained budget was available 
for the purchase of aircraft in Lot 9.
    The results are shown in Table 2, in which we provide the 
budgets, the savings, and the average unit flyaway and average 
unit procurement costs for those airplanes.
    The balance of my testimony is further description of the 
analytical approach and the detailed results of our work--
again, documented in P-4116.
    Our bottom line for what we were asked to do: the 
unconstrained savings--$235 million, and the constrained 
savings--$225 million. If you prefer to buy additional 
airplanes with the savings, you can buy 2 more airplanes, so 
that the unconstrained budget gets you 60, the constrained 
budget gets you 58.
    That is my testimony.
    [The prepared statement of Dr. Nelson follows:]
              Prepared Statement by Dr. J. Richard Nelson
    Mr. Chairman and members of the subcommittee, I am pleased to come 
before you today to discuss IDA's work regarding the recently completed 
F-22A Multiyear Procurement (MYP) Business Case Analysis (BCA).\1\
---------------------------------------------------------------------------
    \1\ IDA Paper P-4116, ``F-22A Multiyear Procurement Business Case 
Analysis,'' For Official Use Only, May 2006.
---------------------------------------------------------------------------
    My testimony today will be based on IDA Paper P-4116, copies of 
which have been provided previously.
                      task objective and approach
    In January 2006, the Institute for Defense Analyses (IDA) was asked 
by the Office of the Under Secretary of Defense Acquisition Technology 
and Logistics to conduct a Business Case Analysis for a possible F-22A 
Multiyear Procurement. IDA's task was to estimate the cost savings to 
the Government of pursuing an MYP contract for the three final planned 
lots of the F-22A program. An MYP contract was compared to three 
Single-Year Procurement (SYP) contracts.
    The study team first updated IDA's existing F-22 cost model. This 
model, which IDA developed for its 2005 Independent Cost Estimate (ICE) 
for the F/A-22,\2\ was updated to reflect recent production experience 
and other new information. We then used the updated cost model to 
analyze the procurement strategies under constrained and unconstrained 
budgets under four scenarios, as outlined in Table 1. All scenarios 
involved the purchase of aircraft in the last three lots of production, 
Lots 7, 8, and 9.
---------------------------------------------------------------------------
    \2\ IDA Paper P-4029, ``F/A-22 Independent Cost Estimate,'' For 
Official Use Only, August 2005.

                                      TABLE 1. SCENARIOS ADDRESSED IN STUDY
----------------------------------------------------------------------------------------------------------------
                                                                 Lot Number (Number of
               Scenario                        SYP/MYP                   Units)            Budget Constrained?
----------------------------------------------------------------------------------------------------------------
1....................................  SYP....................  7 (20), 8 (20), 9 (20).  No
2....................................  MYP....................  7 (20), 8 (20), 9 (20).  No
3....................................  SYP....................  7 (20), 8 (20), 9 (16).  Yes
4a...................................  MYP....................  7 (20), 8 (20), 9 (16).  Yes
4b...................................  MYP....................  7 (20), 8 (20), 9 (18).  Yes
----------------------------------------------------------------------------------------------------------------

    For Scenarios 1 and 2, the unconstrained cases, IDA estimated the 
costs of building 60 aircraft over the three lots regardless of whether 
the Defense Department's current budgetary limits on the F-22A program 
would permit the Air Force to do so. Comparing these two scenarios is 
the best way to examine the impact of MYP on the purchase of 60 
aircraft. For Scenarios 3 and 4, the constrained cases, IDA estimated 
the costs of the three-lot buy under budgetary limits established in 
the President's budget for fiscal year 2007 (PB07). For Scenario 4b, 
IDA applied the MYP savings in 4a towards procuring additional aircraft 
in Lot 9. Scenarios 3, 4a, and 4b assume funding flows are adequate to 
support the lot sequence 20, 20, and x--where x is the incremental 
number of units in Lot 9 afforded under the cumulative PB07 budget 
authority. Note that the constraint we imposed is the total funding in 
PB07 for Lots 7, 8, and 9, and not its year-to-year funding levels. In 
Scenarios 3, 4a, and 4b the year-to-year funding levels would have to 
be shifted (within the PB07 total) to fully fund the SYP and the MYP.
    IDA used data provided by F-22A contractors and Government offices 
to estimate MYP savings. These data included information from previous 
F-22 MYP studies and recent MYP experience with other aircraft 
programs. In analyzing these data we took into account differences 
between the currently proposed F-22A MYP and MYP programs in the 
historical database. For example, our estimate recognizes that the F-22 
MYP would include fewer lots and aircraft units than previous fighter 
aircraft MYPs. IDA also had in-depth discussions with suppliers who 
were expected to be a source of savings under the MYP strategy. From 
these data and analyses, IDA developed percentage reductions in the 
cost elements in the model that would benefit from cost savings in an 
MYP. The sum of these reductions constitute our estimate of the savings 
provided by the MYP. The cost estimating approach we used was otherwise 
identical to that used for IDA's F/A-22 ICE, copies of which were 
provided to Congress in August 2005.
                           summary of results
    IDA estimated the savings with MYP to be 2.2 percent of procurement 
costs. We estimated the savings for the air vehicle contract (Lockheed 
Martin Aeronautics and Boeing) to be 2.6 percent for both the 
constrained and unconstrained cases. Savings for the engine contract 
(Pratt & Whitney) were estimated to be 2.7 percent, also for both 
cases. The percentage savings on total procurement are lower than on 
contract costs because substantial portions of the procurement budget 
would not be part of the multiyear contracts.
    Table 2 summarizes the BCA results. In the unconstrained total 
budget cases, Scenarios 1 and 2, MYP results in the maximum savings 
since the maximum number of aircraft are procured. The $235 million in 
savings represent 2.2 percent of procurement cost for Lots 7-9. 
Constraining the buy to the total budget of record reduces the number 
of aircraft by 4 to 56 in the SYP Scenario 3. At 56 units (three lots 
of 20, 20, and 16 aircraft), the MYP strategy reduces the cost by the 
same 2.2 percent, but for a lower total savings of $225 million. If the 
$225 million in savings were applied instead towards additional 
aircraft, the Air Force would be able to buy 2 more units for a total 
of 58.
    The addition of two aircraft using $225 million in MYP savings may 
seem optimistic. Note, however, that IDA's cost modeling approach takes 
into account fixed as well as variable costs, so the $225 million has 
to cover only the variable portion of aircraft costs. The fixed portion 
must be paid regardless of lot quantity.

                    TABLE 2. MYP BCA RESULTS SUMMARY
                   [Then-year in millions of dollars]
------------------------------------------------------------------------
                                   Scenario 1-  Scenario 3-  Scenario 3-
                                        2            4a           4b
------------------------------------------------------------------------
SYP Budget (Scenarios 1 and 3)...      $10,863      $10,438      $10,438
MYP Budget (Scenarios 2, 4a, and        10,628       10,213       10,423
 4b).............................
                                  --------------------------------------
MYP under/(over) SYP.............          235          225           15
                                  ======================================
Savings Percentage of Procurement          2.2          2.2          N/A
Constrained to Budget............           No          Yes          Yes

AUFC of Lots 7-9 Aircraft (SYP/      $158/$154    $162/$158    $162/$156
 MYP)............................
AUPC of Lots 7-9 Aircraft (SYP/      $181/$177    $186/$182    $186/$180
 MYP)............................
Aircraft in Lots 7-9 (SYP/MYP)...        60/60        56/56        56/58

Total Quantity, including                  182          178          180
 Production, Production
 Representative Test Vehicles,
 and Replacement Test Aircraft...
------------------------------------------------------------------------

    That completes my description of IDA's work on the F-22A MYP BCA. 
We provided this information to our sponsor to inform the Defense 
Department's decision process. We were not asked for, nor did we 
provide, a recommendation on the decision itself. Our role was to 
estimate the cost savings with MYP.
    Mr. Chairman and members of the subcommittee, thank you for your 
attention. I am available for comments and questions.

    Senator McCain. Thank you very much, Dr. Nelson.
    Mr. Bolkcom, welcome.

   STATEMENT OF CHRISTOPHER BOLKCOM, SPECIALIST IN NATIONAL 
            DEFENSE, CONGRESSIONAL RESEARCH SERVICE

    Mr. Bolkcom. Thank you, sir.
    C