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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

March 2008: 

Defense Acquisitions: 

Progress Made in Fielding Missile Defense, but Program Is Short of 
Meeting Goals: 

Missile Defense: 

GAO-08-448: 

GAO Highlights: 

Highlights of GAO-08-448, a report to congressional committees March. 

Why GAO Did This Study: 

By law, GAO annually assesses the Missile Defense Agency’s (MDA) 
progress in developing and fielding a Ballistic Missile Defense System 
(BMDS). Funded at $8 billion to nearly $10 billion per year, it is the 
largest research and development program in the Department of Defense 
(DOD). The program has been managed in 2-year increments, known as 
blocks. Block 2006, the second BMDS block, was completed in December 
2007. GAO assessed MDA’s progress in (1) meeting Block 2006 goals for 
fielding assets, completing work within estimated cost, conducting 
tests, and demonstrating the performance of the overall system in the 
field, and (2) making managerial improvements to transparency, 
accountability, and oversight. In conducting the assessment, GAO 
reviewed the assets fielded; contractor cost, schedule, and 
performance; and tests completed during 2007. GAO also reviewed 
pertinent sections of the U.S. Code, acquisition policy, and the 
charter of a new missile defense board. 

What GAO Found: 

MDA made progress in developing and fielding the BMDS during Block 2006 
but fell short of meeting its original goals. Specifically, it fielded 
additional assets such as land-based interceptors and sea-based 
missiles and upgraded other assets, including Aegis BMD-equipped ships. 
It also met most test objectives, with a number of successful tests 
conducted. As a result, fielded capability has increased. On the other 
hand, it is difficult to assess how well BMDS is progressing relative 
to the funds it has received because fewer assets were fielded than 
originally planned, the cost of the block increased by at least $1 
billion, some flight tests were deferred, and the performance of the 
fielded system remains unverified. In particular, GAO could not 
determine the full cost of Block 2006 because MDA continued to defer 
budgeted work into the future, where it is no longer counted as a Block 
2006 cost. Also making cost difficult to assess is a work planning 
method—referred to as level of effort—used by contractors that does not 
link time and money with what is produced. When not appropriately used, 
level-of-effort planning can obscure work accomplished, portending 
additional cost in the future. MDA is working to minimize the use of 
this planning method—a needed step as contractors overran their fiscal 
year 2007 budgets. Performance of the fielded system is as yet not 
verifiable because too few tests have been conducted to validate the 
models and simulations that predict BMDS performance. Moreover, the 
tests that are done do not provide enough information for DOD’s 
independent test organization to fully assess the BMDS’ suitability and 
effectiveness. 

GAO has previously reported that MDA has been given unprecedented 
funding and decision-making flexibility. While this flexibility has 
expedited BMDS fielding, it has also made MDA less accountable and 
transparent in its decisions than other major programs, making 
oversight more challenging. MDA, with direction from Congress, has 
taken several steps to address these concerns. MDA implemented a new 
way of defining blocks—its construct for developing and fielding BMDS 
increments—that should make costs more transparent. For example, under 
the newly-defined blocks, MDA will no longer defer work from one block 
to another. Accountability should also be improved as MDA will, for the 
first time, estimate unit costs for selected assets and report 
variances from those estimates. DOD also chartered a new board with 
more BMDS oversight responsibility than its predecessor, although it 
does not have approval authority for some key decisions made by MDA. 
Finally, MDA will begin buying certain assets with procurement funds 
like other programs. This will benefit transparency and accountability, 
because procurement funding generally requires that assets be fully 
paid for in the year they are bought. Previously, MDA, with 
Congressional authorization, was able to pay for assets incrementally 
over several years. Additional steps could be taken to further improve 
oversight. For example, MDA has not yet estimated the total cost of a 
block, and therefore, cannot have its costs independently 
verified—actions required of other programs to inform decisions about 
affordability and investment choices. However, MDA does plan to 
estimate block costs and have them verified at some future date. 

What GAO Recommends: 

GAO makes several recommendations that include (1) adding sufficient 
scope to tests to enable an assessment of the BMDS’ suitability and 
effectiveness and (2) developing a cost estimate for each block and 
requesting an independent verification of that cost. DOD agreed with 
our recommendation to estimate the full cost of a block, but only 
partially agreed with adding scope to developmental tests. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-448]. For more information, contact Paul 
Francis, (202) 512-4841, francisp@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

More Capability Fielded but Less than Planned and at Higher Cost: 

Efforts Underway to Improve BMDS Management and Oversight: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: MDA Contracts: 

Appendix III: Incremental Funding: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Description of BMDS Elements: 

Table 2: BMDS Block 2006 Deliveries and Total Fielded Assets: 

Table 3: Prime Contractor Fiscal Year 2007 and Cumulative Cost and 
Schedule Performance: 

Table 4: Level of Effort Percentages for BMDS Prime Contracts: 

Table 5: MDA New Block Construct: 

Table 6: MDEB Standing Committee Functions: 

Table 7: Incremental Funding Costs versus Full funding Costs for THAAD 
and Aegis BMD Fielded Assets: 

Table 8: MDA's General Process for Determining Award Fee Amounts: 

Table 9: Fee Awarded during Fiscal Year 2007: 

Table 10: Amount of Fees Rolled over to Future Award Fee Periods During 
Fiscal Year 2007: 

Table 11: MDA's Block 2006 Unpriced Changes and Unpriced Task Orders 
from January 1, 2007 to September 26, 2007: 

Table 12: MDA Support Contractor Job Functions: 

Table 13: Program Office Full-time Equivalent Staffing Levels: 

Table 14: MDA's Incremental Funding Plan for THAAD and Aegis BMD 
Assets: 

Table 15: Full Funding Alternative for THAAD Fire Units versus MDA 
Incremental Funding Plan: 

Table 16: Full Funding Alternative for Aegis BMD Standard Missile-3s 
versus MDA Incremental Funding Plan: 

Table 17: Full Funding Alternative for Aegis BMD Shipsets versus MDA 
Incremental Funding Plan: 

Figures: 

Figure 1: Deployed BMDS Assets as of December 31, 2007: 

Figure 2: Percentages of LOE as of December 2007: 

Figure 3: Aegis AWS Fiscal Year 2007 Cost and Schedule Performance: 

Figure 4: Aegis BMD SM-3 Fiscal Year 2007 Cost and Schedule 
Performance: 

Figure 5: ABL Fiscal Year 2007 Cost and Schedule Performance: 

Figure 6: C2BMC Fiscal Year 2007 Cost and Schedule Performance: 

Figure 7: GMD Fiscal Year 2007 Cost and Schedule Performance: 

Figure 8: KEI Fiscal Year 2007 Cost and Schedule Performance: 

Figure 9: MKV Task Order 5 Fiscal Year 2007 Cost and Schedule 
Performance: 

Figure 10: MKV Task Order 6 Fiscal Year 2007 Cost and Schedule 
Performance: 

Figure 11: Sensors Fiscal Year 2007 Cost and Schedule Performance: 

Figure 12: STSS Fiscal Year 2007 Cost and Schedule Performance: 

Figure 13: THAAD Fiscal Year 2007 Cost and Schedule Performance: 

Abbreviations: 

ABL: Airborne Laser: 

AT&L: Acquisition, Technology, and Logistics: 

BMDS: Ballistic Missile Defense System: 

C2BMC: Command Control, Battle Management, and Communications: 

DFARS: Defense Federal Acquisition Regulation Supplement: 

DOD: Department of Defense: 

DOT&E: Director, Operational Test and Evaluation: 

EVM: Earned Value Management: 

EVMS: Earned Value Management System: 

FAR: Federal Acquisition Regulation: 

FBX-T: Forward-Based X-Band Transportable: 

FFRDC: Federally Funded Research and Development Center: 

FYDP: Future Years Defense Plan: 

GMD: Ground-based Midcourse Defense: 

ICBM: Intercontinental Ballistic Missile: 

KEI: Kinetic Energy Interceptor: 

LOE: Level of Effort: 

LRS&T: Long-range Surveillance and Tracking: 

MDA: Missile Defense Agency: 

MDEB: Missile Defense Executive Board: 

MDSG: Missile Defense Support Group: 

MKV: Multiple Kill Vehicle: 

SM-3: Standard Missile-3: 

STSS: Space Tracking and Surveillance System: 

THAAD: Terminal High Altitude Area Defense: 

United States Government Accountability Office: 

Washington, DC 20548: 

March 14, 2008: 

Congressional Committees: 

In 2002, the President of the United States directed the Department of 
Defense (DOD) to begin fielding an initial Ballistic Missile Defense 
System (BMDS) capable of defending the U.S. homeland, deployed troops, 
friends, and allies against ballistic missiles of all ranges in all 
phases of flight. Since the 1980s, DOD has spent more that $100 billion 
on the development and early fielding of this system and it estimates 
that continued development will require an additional $50 billion 
between fiscal years 2008 and 2013. 

The Missile Defense Agency (MDA) has been tasked to carry out the 
President's direction and is developing and fielding the BMDS, DOD's 
largest research and development program. MDA placed an initial set of 
missile defense components in the field by December 2005. These 
components are collectively referred to as Block 2004. Recently, MDA 
delivered its second increment of capability--Block 2006--which 
includes additional components as well as performance enhancements. 
Current plans call for the continuation of BMDS development for many 
years, with the system eventually including a diverse collection of 
land-, air-, sea-, and space-based assets located around the globe. 

In its fiscal year 2002 and 2006 National Defense Authorization Acts, 
Congress directed GAO to assess the cost, schedule, testing, and 
performance progress that MDA is making in developing the 
BMDS.[Footnote 1] We have delivered assessments covering fiscal years 
2003, 2004, 2005, and 2006.[Footnote 2] This report assesses Block 2006 
and gives special attention to the progress made during fiscal year 
2007 toward Block 2006 goals. It also follows up on BMDS program 
transparency, accountability, and oversight issues addressed in our 
March 2007 report. 

To assess progress during Block 2006, we examined the accomplishments 
of all nine BMDS elements that MDA is developing and fielding. These 
elements include the Airborne Laser (ABL); Aegis Ballistic Missile 
Defense (Aegis BMD); BMDS Sensors; Command, Control, Battle Management, 
and Communications (C2BMC); Ground-based Midcourse Defense (GMD); 
Kinetic Energy Interceptors (KEI); Multiple Kill Vehicles (MKV); Space 
Tracking and Surveillance System (STSS); and Terminal High Altitude 
Area Defense (THAAD).[Footnote 3] These elements collectively account 
for about 77 percent of MDA's research and development budget. In 
assessing BMDS progress, we examined documents such as Program 
Execution Reviews, test plans and reports, production plans, and 
Contract Performance Reports. We also interviewed officials within 
program offices and within MDA functional directorates, such as the 
Directorate for System Engineering. In addition, we discussed each 
element's test program and its results with DOD's Office of the 
Director, Operational Test and Evaluation. 

In following up on transparency, accountability, and oversight issues 
raised in our March 2007 report, we held discussions with officials in 
MDA's Directorate of Business Operations to determine whether its new 
block structure improved accountability and transparency of the BMDS. 
In addition, we reviewed pertinent sections of the U.S. Code to compare 
MDA's current level of accountability with federal acquisition laws. We 
also interviewed officials from the Office of the Under Secretary of 
Defense for Acquisition, Technology, and Logistics and DOD's Joint 
Staff to discuss the oversight role of the new Missile Defense 
Executive Board. Additionally, we reviewed the Board's charter to 
identify its oversight responsibility. Our scope and methodology is 
discussed in more detail in appendix IV. 

We conducted this performance audit from May 2007 to March 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

During Block 2006, MDA fielded additional and new assets, enhanced the 
capability of some assets, and demonstrated fielded elements in 
intercept tests. Although the fielded BMDS capability was increased, 
MDA did not meet the goals it originally set for the block. Ultimately, 
MDA fielded fewer assets, increased costs by about $1 billion, and 
conducted fewer tests. For example, MDA fielded one less Ground-based 
interceptor and seven fewer SM-3 missiles than planned. After MDA 
reported the $1 billion cost increase, it had to defer work to keep 
Block 2006 costs from increasing further, as some contractors overran 
their fiscal year 2007 budgets. Deferring work obscures the cost of the 
block because such work is no longer counted as part of Block 2006. The 
cost of the block may have been further obscured by the way that 
several contractors plan work. In planning work as level of effort, 
contractors can recognize work as complete when the time planned for 
the effort has been expended even if the work does not yield the 
intended product. To the extent that more work has to be done to 
complete the product, MDA could incur additional costs that are not yet 
recognized. While most test objectives were achieved, test delays were 
experienced by five of nine BMDS elements. In addition to tests of 
individual elements, MDA also sets goals for determining the overall 
performance of the BMDS. Similar to other DOD programs, MDA uses models 
and simulations to predict BMDS performance. However, data from flight 
tests are needed to prove the accuracy of the models and simulations. 
Although tests have been conducted that provide some assurance that the 
BMDS will perform as designed, further tests are needed to be highly 
confident that the models and simulations can make accurate 
predictions. Thus, we were unable to assess whether MDA met this 
overall performance goal. Moreover, the tests done to date have been 
developmental in nature, and do not provide sufficient realism for 
DOD's test and evaluation director to fully determine whether the BMDS 
is suitable and effective for battle. 

We previously reported that MDA has been given unprecedented funding 
and decision-making flexibility that has expedited the fielding of 
assets. This flexibility has also made oversight more challenging than 
for other programs. Several actions are underway that stand to improve 
oversight, but do not completely resolve concerns. First, MDA has 
adopted a new block approach that offers several improvements--unit 
costs for selected assets will now be tracked and work will no longer 
be deferred from one block to another. However, although MDA plans to 
do so, it has not yet estimated the total cost of any block of BMDS 
capability nor had that cost independently verified, as is done for 
other major programs. Second, DOD has established a Missile Defense 
Executive Board to review and make recommendations on MDA's acquisition 
strategy, plans, and funding. This board promises to be more 
substantive than its predecessor but will not provide the oversight 
that a Defense Acquisition Board provides on other major programs. For 
example, MDA does not need the Executive Board's approval for decisions 
regarding blocks. In addition, until MDA develops total cost estimates 
for each block, the Executive Board will not have access to such 
estimates. Neither will the board have a complete independent 
assessment of BMDS performance based on realistic testing. A unique 
challenge for the Executive Board is how to evaluate MDA's technology 
development efforts that range from $2 billion to $5 billion a year. 
Due to their experimental nature, such efforts normally do not have a 
firm cost, schedule, and performance baseline, but the scale of these 
investments warrant some basis for overseeing progress and cost. Third, 
Congress directed that MDA begin using procurement funds to purchase 
certain operational assets. This benefits transparency and 
accountability because procurement funding generally requires assets be 
fully paid for in the year they are bought. Previously, using research 
and development funding, MDA could spread the cost of individual assets 
over several years, making it more difficult to determine their cost. 

We are making several recommendations to build on the actions already 
taken to further improve the transparency of block costs and oversight 
of the BMDS program. These include having MDA (1) develop a full cost 
estimate for each block of BMDS capability with verification of that 
estimate, and (2) examine ways to develop a baseline or some other 
standard against which the progress of technology programs may be 
assessed. We are also recommending that MDA and the Director of 
Operational Test and Evaluation agree on criteria and incorporate 
corresponding scope into developmental tests that will allow a 
determination of whether a block of BMDS capability is suitable and 
effective for fielding. 

DOD concurred with three of our five recommendations, including having 
MDA develop block cost estimates and obtain independent verification of 
those estimates. DOD partially concurred with our recommendation that 
MDA examine ways to measure the progress of technology programs. DOD 
stated that MDA already uses key knowledge points, technology levels, 
and engineering readiness levels to assess the progress of technology 
programs and that it will continue to investigate other ways of making 
such assessment. Although we recognize the value of MDA's assessment 
methods, we continue to believe that DOD and MDA would benefit from 
understanding the remaining cost and time needed to complete a 
technology program, important information that MDA's methods do not yet 
provide. 

DOD also partially concurred with our recommendation on adding scope to 
developmental tests. DOD noted that MDA's mission is to work with the 
warfighter, rather than Director of Operational Test and Evaluation, to 
determine that the BMDS is ready for fielding. However, DOD stated that 
MDA will continue to work with operational testers to strengthen the 
testing of BMDS suitability and effectiveness. While we agree that the 
Director of Operational Test and Evaluation is not responsible for 
fielding decisions, it is relied upon to ensure that weapon systems are 
realistically and adequately tested so that production decisions can be 
based on accurate evaluations of operational effectiveness, 
suitability, and survivability. BMDS tests conducted to date only 
partially support such an evaluation. Because it is important that only 
reliable and effective systems be placed in the hands of the 
warfighter, we continue to believe that MDA should take specific steps 
to ensure that testing supports as full an evaluation of operational 
effectiveness, suitability, and survivability as possible. 

Background: 

The Missile Defense Agency's mission is to develop an integrated and 
layered BMDS to defend the United States, its deployed forces, allies, 
and friends. The BMDS is expected to be capable of engaging all ranges 
of enemy ballistic missiles in all phases of flight. This is a 
challenging expectation, requiring a complex combination of defensive 
components--space-based sensors, surveillance and tracking radars, 
advanced interceptors, and a battle management, command, control, and 
communications component--that work together as an integrated system. 

A typical scenario to engage an intercontinental ballistic missile 
(ICBM) would unfold as follows: 

* Infrared sensors aboard early-warning satellites detect the hot plume 
of a missile launch and alert the command authority of a possible 
attack. 

* Upon receiving the alert, land-or sea-based radars are directed to 
track the various objects released from the missile and, if so 
designed, to identify the warhead from among spent rocket motors, 
decoys, and debris. 

* When the trajectory of the missile's warhead has been adequately 
established, an interceptor--consisting of a kill vehicle mounted atop 
a booster--is launched to engage the threat. The interceptor boosts 
itself toward a predicted intercept point and releases the kill 
vehicle. 

* The kill vehicle uses its onboard sensors and divert thrusters to 
detect, identify, and steer itself into the warhead. With a combined 
closing speed on the order of 10 kilometers per second (22,000 miles 
per hour), the warhead is destroyed above the atmosphere through a "hit 
to kill" collision with the kill vehicle. 

To develop a system capable of carrying out such an engagement, MDA, 
until December 2007, executed an acquisition strategy in which the 
development of missile defense capabilities was organized in 2-year 
increments known as blocks. Each block was intended to provide the BMDS 
with capabilities that enhanced the development and overall performance 
of the system. The first 2-year block--Block 2004--fielded a limited 
initial capability that included early versions of the GMD, Aegis BMD, 
Patriot Advanced Capability-3, and C2BMC elements. The agency's second 
2-year block--Block 2006--culminated on December 31, 2007, and fielded 
additional BMDS assets. Block 2006 also continued the evolution of 
Block 2004 by providing improved GMD interceptors, enhanced Aegis BMD 
missiles, upgraded Aegis BMD ships, a Forward-Based X-Band- 
Transportable radar, and enhancements to C2BMC software. On December 7, 
2007, MDA's Director approved a new block construct that will be the 
basis for all future development and fielding.[Footnote 4] Table 1 
provides a brief description of all elements currently being developed 
by MDA. 

Table 1: Description of BMDS Elements: 

Element: Ground-based Midcourse Defense; 
Missile defense role: GMD is a ground-based missile defense system 
designed to destroy ICBMs during the midcourse phase of their flight. 
Its mission is to protect the U.S. homeland against ballistic missile 
attacks from North Korea and the Middle East. GMD is part of the 
initial capability fielded in 2004-2005 and to date 24 interceptors 
have been emplaced for operational use. MDA plans to field about 20 
additional interceptors in Alaska and California through 2011. 

Element: Aegis Ballistic Missile Defense; 
Missile defense role: Aegis BMD is a ship-based missile defense system 
designed to destroy short-to intermediate-range ballistic missiles 
during the midcourse phase of their flight. Its mission is twofold: to 
protect deployed U.S. forces, allies, and friends against ballistic 
missile attacks and to serve as a forward-deployed BMDS sensor, 
especially in support of the GMD mission. MDA is planning to procure 
147 Aegis BMD missiles--the Standard Missile 3--from calendar year 2004 
through 2013 and to upgrade 18 ships for the BMD mission by the end of 
2008. MDA also requested funding in its fiscal year 2008 budget request 
to make Aegis BMD capable of defeating targets during the terminal 
phase of their flight. 

Element: Command, Control, Battle Management and Communications; 
Missile defense role: C2BMC is the integrating and controlling element 
of the BMDS. Its role is to provide deliberate planning, situational 
awareness, sensor management--including control of the Forward-Based X- 
Band-Transportable (FBX-T) radar--and battle management for the 
integrated BMDS. 

Element: BMDS Sensors; 
Missile defense role: MDA is developing various stand-alone radars for 
fielding. In particular, MDA leveraged the hardware design for the 
THAAD radar and modified existing software to develop the FBX-T. MDA 
placed the first FBX-T in Japan to augment existing BMD surveillance 
and tracking capabilities. The program has produced two FBX-T radars 
and expects to produce two more during the 2008-2009 timeframe. 

Element: Airborne Laser; 
Missile defense role: ABL is an air-based missile defense system 
designed to destroy all classes of ballistic missiles during the boost 
phase of their flight. ABL employs a high- energy chemical laser to 
rupture a missile's motor casing, causing the missile to lose thrust or 
flight control. MDA plans to demonstrate proof of concept in a system 
demonstration in 2009. An operational ABL capability is expected to be 
demonstrated in the 2016-2017 timeframe. 

Element: Kinetic Energy Interceptors; 
Missile defense role: KEI is a mobile land-based missile defense system 
designed to destroy medium, intermediate, and intercontinental 
ballistic missiles during the boost and midcourse phases of their 
flight. The agency expects to demonstrate defensive capability through 
flight testing during 2012-2015. This capability could be expanded to 
sea-basing in subsequent blocks. 

Element: Space Tracking and Surveillance System; 
Missile defense role: The Block 2006 STSS consists of two demonstration 
satellites. MDA intends to use these satellites for testing missile 
surveillance and tracking capabilities in the 2008-2010 timeframe. If 
the demonstration satellites perform successfully, MDA plans an 
operational capability of next-generation satellites. 

Element: Terminal High Altitude Area Defense; 
Missile defense role: THAAD is a ground-based missile defense system 
designed to destroy short-and medium-range ballistic missiles during 
the late-midcourse and terminal phases of flight. Its mission is to 
defend deployed U.S. forces and population centers. MDA plans to field 
a fire unit, which includes 24 missiles, in 2010 and a second unit in 
2011. 

Element: Multiple Kill Vehicle; 
Missile defense role: The MKV is being designed as an optional warhead 
for all midcourse interceptors. The concept mitigates the need to 
pinpoint a single lethal object in a threat cluster by using numerous 
kill vehicles to engage all objects that might be lethal. The concept 
under development consists of a carrier vehicle housing a number of 
smaller kill vehicles, which would primarily benefit the Ground-based 
and Kinetic Energy interceptors. However, to mitigate risk, MDA has 
initiated a parallel acquisition with a second contractor that could 
result in an alternative payload for the Ground-based and Kinetic 
Energy interceptors as well as the Aegis BMD Standard Missile -3. 
Because MKV is a technology program, it does not project an initial 
capability date, but the program expects that the capability could be 
available by 2017. 

Source: MDA data. 

Note: The Patriot Advanced Capability-3 system is also part of the 
BMDS, but it is not included in the table because management 
responsibility for this element has been transferred to the Army. 

[End of table] 

More Capability Fielded but Less than Planned and at Higher Cost: 

MDA made progress in developing and fielding the BMDS during 2007. 
Additional assets were fielded and/or upgraded, several tests met 
planned objectives, and other development activities were conducted. On 
the other hand, fewer assets were fielded than originally planned, the 
cost of the block increased, some flight tests were deferred, and the 
performance of fielded assets could not be fully evaluated. 

Block 2006 Improves BMDS Capability: 

During Block 2006, MDA increased its inventory of BMDS assets while 
enhancing the system's performance. The agency fielded 14 additional 
Ground-based interceptors, 12 Aegis BMD missiles designed to engage 
more advanced threats, 4 new Aegis BMD destroyers, 1 new Aegis BMD 
cruiser, as well as 8 C2BMC Web browsers and 1 C2BMC suite. In 
addition, MDA upgraded half of its Aegis BMD ship fleet, successfully 
conducted four Aegis BMD and two GMD intercept tests, and completed a 
number of ground tests to demonstrate the capability of BMDS 
components. Considering assets fielded during Blocks 2004 and 2006, 
MDA, by December 31, 2007, had cumulatively fielded a total of 24 
Ground-based interceptors, 2 upgraded early-warning radars, an upgraded 
Cobra Dane surveillance radar, 1 Sea-based X-band radar, 2 Forward- 
Based X-Band Transportable radars, 21 Aegis BMD missiles, 14 Aegis BMD 
destroyers, and 3 Aegis BMD cruisers. In addition, MDA had fielded 6 
C2BMC suites; 46 warfighter enterprise workstations with situational 
awareness; BMDS planner and sensor management capabilities; 31 C2BMC 
Web browsers, 13 with laptop planners; and redundant communications 
node equipment to connect BMDS elements worldwide. 

MDA Does Not Meet Original Goals, but Meets or Exceeds Most Revised 
Goals: 

In March 2005, MDA submitted to Congress the number of assets it 
planned to field during Block 2006. However, increasing costs, 
technical challenges, and schedule delays prompted the agency to reduce 
the quantity of planned assets. Consequently, in March 2006, shortly 
after submitting its fiscal year 2007 budget, MDA notified Congress 
that it was revising its Block 2006 Fielded Configuration Baseline. 
Although MDA did not meet its original block fielding goals, it was 
able in nearly all instances to meet or exceed its revised goals. Of 
the four elements delivering assets during Block 2006, one--Sensors-- 
was able to meet its original goal. However, two elements--GMD and 
C2BMC--were able to exceed their revised fielding goals. Table 2 
depicts the goals and the number of assets fielded. 

Table 2: BMDS Block 2006 Deliveries and Total Fielded Assets: 

BMDS element: GMD; 
Original goal as of March 2005: Up to 15 interceptors; Thule Interim 
Upgrade Early Warning Radar; 
Goal as of March 2006: Up to 12 interceptors; Deferred to Block 2008; 
Block 2006 assets as of December 31, 2007: 14 interceptors; 
Total assets available (cumulative total for Block 2004and Block 2006): 
24 interceptors. 

BMDS element: Sensors; 
Original goal as of March 2005: 1 Forward-Based; X-Band-Transportable; 
Radar (FBX-T); 
Goal as of March 2006: 1 Forward- Based; X-Band-Transportable; Radar; 
Block 2006 assets as of December 31, 2007: 1 Forward-Based; X-Band-
Transportable; Radar; 
Total assets available (cumulative total for Block 2004and Block 2006): 
2 Forward- Based; X-Band-Transportable; Radars[A]. 

BMDS element: Aegis BMD; 
Original goal as of March 2005: 19 SM-3 missiles; 4 new destroyers; 
long-range surveillance and tracking (LRS&T) only; 8 upgraded 
destroyers for the engagement mission; 1 new cruiser; 
Goal as of March 2006: 15 SM-3 missiles; 4 new destroyers (LRS&T-only); 
7 upgraded destroyers for the engagement mission; 1 new cruiser; 
Block 2006 assets as of December 31, 2007: 12 SM-3 missiles; 4 new 
destroyers; 7 upgraded destroyers; all perform the engagement mission; 
1 new cruiser; that engages and performs LRS&T; 
Total assets available (cumulative total for Block 2004and Block 2006): 
21SM-3 missiles. 
14 destroyers; 7 perform LRS&T only and 7 engage and perform LRS&T; 3 
cruisers; all engage and perform LRS&T. 

BMDS element: C2BMC; 
Original goal as of March 2005: 3 suites; 
Goal as of March 2006: Suites deferred; replaced with 3 Web browsers; 
Block 2006 assets as of December 31, 2007: 1 suite; 8 Web 
browsers/planners; 
Total assets available (cumulative total for Block 2004and Block 2006): 
6 suites; 31 Web browsers; 46 enterprise workstations. 

Source: MDA data. 

[A] The second FBX-T radar is currently located at Vandenberg Air Force 
Base. It is available for use, but no decision has been made as to 
where it will be located. 

[End of table] 

Although GMD did not meet its original goal of fielding up to 15 
interceptors and partially upgrading the Thule early warning radar, the 
element was able to surpass its revised goal of fielding 12 
interceptors. By December 31, 2007, the GMD element fielded 14 
interceptors--2 more than planned. To achieve its revised goal, the 
element's prime contractor added a manufacturing shift during 2007 and 
extended the number of hours that certain shifts' personnel worked. 
These actions allowed the contractor to more than double its 
interceptor emplacement rate. 

Last year, we reported that MDA delayed the partial upgrade of the 
Thule early-warning radar--one of GMD's original goals--until a full 
upgrade could be accomplished.[Footnote 5] According to DOD, the full 
upgrade of Thule is the most economical option and it meets DOD's 
desire to retain a single configuration of upgraded early warning 
radars. The Thule early warning radar upgrade is being accomplished by 
two separate contract awards. Raytheon was awarded a contract in April 
2006 to develop and install prime mission equipment; while Boeing was 
expected to receive a contract in January 2008 to integrate the 
equipment into the BMDS ground communication network. 

In March 2005, MDA included three C2BMC suites as part of its fielding 
goal for Block 2006. These suites were to be fielded at U.S. European 
Command, U.S. Central Command, and another location that was to be 
identified later. Faced with a $30 million reduction in C2BMC's fiscal 
year 2006 budget, MDA in March 2006 revised this goal to replace the 3 
suites with 3 less expensive Web browsers. However, by the end of Block 
2006, MDA found an innovative way to increase combatant commands' 
situational awareness and planning capability. In 2005, the C2BMC 
program conducted a network load analysis and concluded that 
situational awareness and planning capability--equivalent to that 
provided by a suite--could be gained by combining Web browsers and 
planners. To prove that this approach would work, MDA fielded 4 Web 
browsers and one planner at the U.S. European Command. MDA learned that 
this combination of hardware, fielded in the quantities needed to meet 
a command's needs and connected to an existing server, provided the 
situational awareness and planning capability of a suite at less cost. 
MDA extended this approach by fielding one Web browser and one planner 
at four other locations--U.S. Forces Japan; U.S. Forces Korea; the 
Commander of U.S. Strategic Command; and the Commander of the Space and 
Missile Defense Command. In addition, MDA fielded one suite at U.S. 
Pacific Command. 

The Aegis BMD element was able to meet its revised block goals for only 
one of its two components. The program upgraded all planned ships, but 
fielded three fewer Aegis BMD Standard Missile-3s (SM-3) than planned. 
The program did not meet its revised missile goal because three U.S 
missiles were delayed into 2008 to accommodate an unanticipated 
requirement to deliver three missiles to Japan. Figure 1 below depicts 
the location of current BMDS assets. 

Figure 1: Deployed BMDS Assets as of December 31, 2007: 

This figure is a map showing deployed BMDS assets as of December 31, 
2007. 

[See PDF for image] 

Source: MDA (data); GAO (presentation), map (Map Resources). 

[End of figure] 

Block Costs Have Increased, but Full Cost Is Not Known: 

MDA's Block 2006 program of work culminated with higher than 
anticipated costs. In March 2007, we reported that MDA's cost goal for 
Block 2006 increased by approximately $1 billion because of greater 
than expected GMD operations and sustainment costs and technical 
problems. During fiscal year 2007, some prime contractors performing 
work for the BMDS overran their budgeted costs. To stay within its 
revised budget, MDA was forced to reduce the amount of work it expected 
to accomplish during the block. The full cost of the block cannot be 
determined because of the deferral of work from one block to another. 
In addition, some MDA prime contractors too often employ a planning 
methodology that has the potential to obscure the time and money that 
will be needed to produce the outcomes intended. If the work does not 
yield the intended results, MDA could incur additional future costs. 
While MDA struggled to contain costs during Block 2006, the agency 
awarded two contractors a large percentage of available fee for 
performance in cost and/or program management although the contractor- 
reported data showed declining cost and schedule performance. Both 
award fee plans for these contractors direct that cost and schedule 
performance be considered as factors in making the evaluation. While 
these factors are important, MDA's award fee plans provide for the 
consideration of many other factors in making award fee determinations. 

Five Contractors Overran 2007 Budgets: 

To determine if contractors are executing the work planned within the 
funds and time budgeted, each BMDS program office requires its prime 
contractor to provide monthly Earned Value Management reports detailing 
cost and schedule performance.[Footnote 6] If more work was completed 
than scheduled and the cost of the work performed was less than 
budgeted, the contractor reports a positive schedule and cost variance. 
However, if the contractor was unable to complete all of the work 
scheduled and needed more funds to complete the work than budgeted, the 
contractor reports a negative schedule and cost variance. Of course, 
the results can be mixed. That is, the contractor may have completed 
more work than scheduled but at a cost that exceeded the budget. 

As shown in table 3 below, the contractors for the nine BMDS elements 
collectively overran their fiscal year 2007 budgets by approximately 
$166 million.[Footnote 7] We estimate that at completion, the 
cumulative overrun in the contracts could be between about $1.3 billion 
and $1.9 billion. Our predictions of final contract costs were 
developed using formulas accepted within the cost community and were 
based on the assumption that the contractor will continue to perform in 
the future as it has in the past. It should also be noted that some 
contracts include more than Block 2006 work. For example, the STSS 
contract includes work being accomplished in anticipation of future 
blocks. Our analysis is presented in table 3 below. Appendix II 
provides further details on the cost and schedule performance of the 
contractors outlined in the table. 

Table 3: Prime Contractor Fiscal Year 2007 and Cumulative Cost and 
Schedule Performance: 

(Dollars in millions). 

BMDS element: ABL; 
FY07 Cost variance[A]: $3.7; 
FY07 Schedule variance[A]: $24.2; 
Cumulative cost variance: ($74.2); 
Cumulative schedule variance: ($25.8); 
Percent of contract completed: 83%; 
Estimated contract underrun/overrun at completion[B]: Overrun of $95.4 
to $202.5. 

BMDS element: Aegis BMD Weapon System; 
FY07 Cost variance[A]: $7.7; 
FY07 Schedule variance[A]: ($3.8); 
Cumulative cost variance: $7.0; 
Cumulative schedule variance: ($3.3); 
Percent of contract completed: 67%; 
Estimated contract underrun/overrun at completion[B]: Underrun of $8.8 
to $17.7. 

BMDS element: Aegis BMD SM-3 (through March 2007)[C]; 
FY07 Cost variance[A]: $4.1; 
FY07 Schedule variance[A]: $8.4; 
Cumulative cost variance: $7.2; 
Cumulative schedule variance: ($.5); 
Percent of contract completed: 98%; 
Estimated contract underrun/overrun at completion[B]: Underrun of $7.2. 

BMDS element: Aegis BMD SM-3 (February 2007 through September 2007)[D]; 
FY07 Cost variance[A]: $6.2; 
FY07 Schedule variance[A]: ($4.0); 
Cumulative cost variance: $6.2; 
Cumulative schedule variance: ($4.0); 
Percent of contract completed: 66%; 
Estimated contract underrun/overrun at completion[B]: Underrun of $7.4 
to $11.1. 

BMDS element: C2BMC; 
FY07 Cost variance[A]: ($11.1); 
FY07 Schedule variance[A]: ($1.5); 
Cumulative cost variance: ($14.5); 
Cumulative schedule variance: ($3.5); 
Percent of contract completed: 90%; 
Estimated contract underrun/overrun at completion[B]: Overrun of $9.9 
[E]. 

BMDS element: GMD; 
FY07 Cost variance[A]: ($22.1); 
FY07 Schedule variance[A]: $84.9; 
Cumulative cost variance: ($1,081.8); 
Cumulative schedule variance: ($52.9); 
Percent of contract completed: 77%; 
Estimated contract underrun/overrun at completion[B]: Overrun of 
$1,055.9 to $1,422.3. 

BMDS element: KEI; 
FY07 Cost variance[A]: $2.1; 
FY07 Schedule variance[A]: ($7.5); 
Cumulative cost variance: $5.7; 
Cumulative schedule variance: ($12.8); 
Percent of contract completed: 10%; 
Estimated contract underrun/overrun at completion[B]: N/A[F]. 

BMDS element: MKV (Design and test of prototype propulsion system); 
FY07 Cost variance[A]: ($2.3); 
FY07 Schedule variance[A]: $0.0; 
Cumulative cost variance: ($2.7); 
Cumulative schedule variance: $0.0; 
Percent of contract completed: 93%; 
Estimated contract underrun/overrun at completion[B]: Overrun of $2.6 
to $2.9. 

BMDS element: MKV (Prototype Carrier Vehicle Seeker)[G]; 
FY07 Cost variance[A]: $0.3; 
FY07 Schedule variance[A]: $0.9; 
Cumulative cost variance: $0.3; 
Cumulative schedule variance: $0.9; 
Percent of contract completed: 37%; 
Estimated contract underrun/overrun at completion[B]: Underrun of $0.8 
to $2.5. 

BMDS element: Sensors; 
FY07 Cost variance[A]: $3.9; 
FY07 Schedule variance[A]: ($8.8); 
Cumulative cost variance: $24.1; 
Cumulative schedule variance: $17.8; 
Percent of contract completed: 65%; 
Estimated contract underrun/ overrun at completion[B]: Underrun of 
$22.0 to $46.8. 

BMDS element: STSS[H]; 
FY07 Cost variance[A]: ($67.7); 
FY07 Schedule variance[A]: $84.7; 
Cumulative cost variance: ($231.4); 
Cumulative schedule variance: ($19.7); 
Percent of contract completed: 49%; 
Estimated contract underrun/overrun at completion[B]: N/A. 

BMDS element: THAAD[I]; 
FY07 Cost variance[A]: ($91.1); 
FY07 Schedule variance[A]: $19.0; 
Cumulative cost variance: ($195.2); 
Cumulative schedule variance: ($9.1); 
Percent of contract completed: 86%; 
Estimated contract underrun/overrun at completion[B]: Overrun of $227.2 
to $325.8. 

Total; 
FY07 Cost variance[A]: ($166.4); 
FY07 Schedule variance[A]: $196.5; 
Cumulative cost variance: ($1,549.3); 
Cumulative schedule variance: ($112.6); 
Percent of contract completed: [Empty]; 
Estimated contract underrun/overrun at completion[B]: Overrun of 
$1,344.8 to $1,878.1. 

Source: Contract Performance Reports (data); GAO (analysis). 

[A] A cost variance is defined as the difference between the budget for 
the work performed and the actual cost of work performed; while a 
schedule variance is the difference between the budgeted cost of 
planned work and the budgeted cost of work performed. Negative cost 
variances (budget overruns) and negative schedule variances (less work 
performed than planned) are shown with parentheses around the dollar 
amounts. 

[B] Contracts may include some work that is not related to Block 2006. 

[C] The Aegis BMD SM-3 contractor concluded work in March 2007 on three 
contract line items that directed SM-3 development, flight tests, and 
delivery of 12 Block 1A missiles. However, the contractor continues to 
flight test the SM-3 Block 1A missile and develop additional SM-3 
capability. 

[D] The Aegis BMD SM-3 contractor began work in February 2007 on a 
third contract line item that directed the acquisition of 20 additional 
SM-3 Block 1A missiles. 

[E] C2BMC Part 4 work was completed in December 2007. The actual 
overrun for that work is reported as of March 4, 2008. 

[F] We could not estimate the likely outcome of the KEI contract at 
completion because a trend cannot be predicted until 15 percent of the 
planned work is completed. 

[G] All MKV work is performed under task orders issued as part of an 
Indefinite Delivery/Indefinite Quantity contract performed by one 
contractor. The contractor provided the first cost and schedule 
performance data for the prototype seeker in March 2007. 

[H] We did not estimate the cost of the STSS contract at completion. 
The STSS contract includes not only the effort to develop and launch 
two demonstration satellites (the Block 2006 capability) but also 
effort that will benefit future blocks. Block 2006 work is about 86 
percent complete, while work on future blocks is about 16 percent 
complete. 

[I] Earned Value data for the THAAD contract is reported under two 
contract line item numbers, 1 and 10. We report only the contractor's 
cost and schedule performance for contract line item 1 because it 
represents the majority of the total work performed under the contract. 
Contract line item 10 provides for Patriot Common Launcher initiatives 
funded by the Army's Lower Tier Program Office. 

[End of figure] 

Technical problems and software issues caused several BMDS elements to 
overrun their fiscal year 2007 budgeted costs. In addition, 4 of the 10 
contracts we reviewed contained some kind of replanning activity during 
fiscal year 2007 and the ABL contract was partially rebaselined. 
Contractors may replan when they conclude that the current plan for 
completing the effort remaining on the contract is unrealistic. A 
replan can include reallocating the remaining budget over the rest of 
the work, realigning the schedule within the contractually defined 
milestones, and setting either cost or schedule variances to zero or 
setting both to zero. A rebaseline is similar, but it may also add 
additional time and/or funding for the remaining work. 

The ABL contractor was overrunning both its fiscal year 2007 budget and 
schedule early in the year. Although by year's end it appears that the 
contractor recovered, the contractor would have continued to overrun 
both its budget and its schedule if most of the contract had not been 
rebaselined. The contractor realized cost and schedule growth as it 
worked to solve software integration problems in the Beam Control/Fire 
Control component and dealt with a low-power laser needed for flight 
tests that was not putting enough energy on the target. After 
encountering these problems, the ABL contractor did not have sufficient 
schedule or budget to complete the remaining contract work. Therefore, 
in May 2007, the program allowed the contractor to rebaseline all of 
the remaining work devoted to developing, integrating, flight testing, 
and delivering the ABL prototype. The rebaselining effort added about 
$253 million to the contract and extended the contract's period of 
performance by more than a year. 

The THAAD prime contractor's cost overrun of $91.1 million was 
primarily caused by technical problems related to the element's 
missile, launcher, radar, and test components. Missile component cost 
overruns were caused by higher than anticipated costs in hardware 
fabrication, assembly, and support touch labor for structures, 
propulsion, and other subassembly components. Additionally, design 
issues with the launcher's missile round pallet and the electronics 
assembly that controls the launcher caused the contractor to experience 
higher than anticipated labor and material costs. The radar component 
ended the fiscal year with a negative cost variance as more staff was 
required than planned to resolve hardware design issues in the radar's 
prime power unit. The contractor also experienced negative cost 
variances with the system test component because the Launch and Test 
Support Equipment required additional set-up time at the flight test 
range. 

The STSS contractor's $67.7 million fiscal year 2007 cost variance is 
primarily attributed to problems that occurred during thermal vacuum 
testing of the first satellite. Since the satellites are legacy 
hardware built under a former program, there are no spares available 
for testing. As a result, the contractor needed to handle the parts 
carefully to avoid damage to the hardware, increasing the time devoted 
to the test. Further test delays occurred when a number of interface 
issues surfaced during testing and when the cause of component problems 
could not be easily traced to their source. The program office believes 
that the cost variance would have been less if design engineers had 
been available during testing. Because engineers were not present to 
quickly identify the cause of component problems, a time-consuming 
analysis of each problem was needed. 

Total Block 2006 Costs Cannot be Determined: 

In March 2007, we reported that a full accounting of Block 2006 costs 
was not possible because MDA has the flexibility to redefine block 
outcomes. That is, MDA can delay the delivery of assets or other work 
activities from block to block and count the work as a cost of the 
block during which the work is performed, even though the work does not 
benefit that block. For example, MDA deferred some Block 2004 work 
until Block 2006 so that it could use the funds appropriated for that 
work to cover unexpected cost increases caused by technical problems 
recognized during development, testing, and production. With the 
deferral of the work, its cost was no longer counted as a Block 2004 
cost, but as a Block 2006 cost. As a result, Block 2004's cost was 
understated and Block 2006's cost is overstated. Because MDA did not 
track the cost of the deferred work, the agency could not make an 
adjustment that would have matched the cost with the correct block. 

The cost of Block 2006 was further blurred as MDA found it necessary to 
defer some Block 2006 work until a future block. For example, when the 
STSS contractor overran its fiscal year 2007 budget because of testing 
problems, the program did not have sufficient funds to launch the 
demonstration satellites in 2007 as planned. The work is now scheduled 
for 2008. The consequence of deferring Block 2004 work to Block 2006 
and Block 2006 to 2008 is that the full cost of Block 2006 cannot be 
determined. 

Contractors' Planning Methodology Has the Potential to Obscure Block 
Cost: 

Some MDA prime contractors too often employ a planning methodology that 
has the potential to obscure the time and money that will be needed to 
produce the outcomes intended. Contractors typically divide the total 
work of a contract into small efforts in order to define them more 
clearly and to ensure proper oversight. Work may be planned in 
categories including (1) level of effort (LOE) --work that contains 
tasks of a general or supportive nature and do not produce a definite 
end product--or (2) discrete work--work that has a definable end 
product or event. 

Level of effort work assumes that if the staff assigned to the effort 
spend the planned length of time, they will attain the outcome 
expected. According to earned value experts and the National Defense 
Industrial Association, while it is appropriate to plan such tasks as 
supervision or contract administration as LOE, it is not appropriate to 
plan tasks that are intended to result in a product, such as a study or 
a software build, as LOE because contractors do not report schedule 
variances for LOE work.Therefore, when contractors incorrectly plan 
discrete work as LOE, reports that are meant to allow the government to 
assess contractor cost and schedule performance may be positive, but 
the government may not have full insight into the contractor's 
progress. The greater the percentage of LOE, the weaker the link 
between inputs (time and money) and outcomes (end products), which is 
the essence of earned value analysis. Essentially, depending on the 
magnitude of LOE, schedule variances at the bottom line can be 
understated. The significant amount of BMDS work being tracked by LOE 
may have limited our assessment of the contractors' performance. That 
is, the contractor's performance may appear to be more positive than it 
would be if work had been correctly planned. In such cases, the 
government may have to expend additional time and money to achieve the 
outcomes desired. MDA Earned Value Management officials agreed that 
some BMDS prime contractors incorrectly planned discrete work as LOE, 
but the agency is taking steps to remedy this situation so that they 
can better monitor the contractors' performance. 

While it is not possible to state with certainty how much work a 
contractor should plan as LOE, experts within the government cost 
community, such as Defense Contract Management Agency officials, agree 
that LOE levels over 20 percent warrant investigation. According to 
MDA, many of its prime contractors plan a much larger percentage than 
20 percent of their work as LOE. Table 4 presents the percentage of 
work in each BMDS prime contract that is categorized as LOE. 

Table 4: Level of Effort Percentages for BMDS Prime Contracts: 

BMDS contract element: Aegis BMD SM-3 (Development, flight test, and 
delivery of 12 Block 1A missiles)[A]; 
Level of effort percentage: 73. 

BMDS contract element: MKV; 
Level of effort percentage: 63[B]. 

BMDS contract element: ABL; 
Level of effort percentage: 57. 

BMDS contract element: C2BMC; 
Level of effort percentage: 52. 

BMDS contract element: KEI; 
Level of effort percentage: 40. 

BMDS contract element: Aegis BMD Weapon System; 
Level of effort percentage: 40. 

BMDS contract element: THAAD; 
Level of effort percentage: 30. 

BMDS contract element: GMD; 
Level of effort percentage: 28. 

BMDS contract element: Sensors (FBX-T); 
Level of effort percentage: 26. 

BMDS contract element: STSS; 
Level of effort percentage: 25. 

BMDS contract element: Aegis BMD SM-3 (Production of 20 additional 
Block 1A missiles)[C]; 
Level of effort percentage: 18. 

Source: MDA data. 

Note: Percentages For Aegis BMD SM-3 (Production Of 20 Additional Block 
1a Missiles), ABL, C2BMC, And MKV Were Updated In January 2008. The 
Percentage of LOE Forall Other Elements Is The Amount Reported By MDA 
as Of December 2007.7. 

[A] Aegis BMD concluded work on SM-3 development, flight tests, and 
delivery of 12 Block 1A missiles in March 2007. 

[B] The percentage LOE reported for MKV is a weighted average for Task 
Orders 4 through 8. For more details on the amount of LOE included in 
individual tasks directed by the contract, refer to appendix II. 

[C] Aegis BMD began work on 20 additional SM-3 Block 1A missiles in 
February 2007. 

[End table] 

The Aegis BMD SM-3, MKV, ABL, and C2BMC contractors planned more than 
half of certain work as LOE.[Footnote 8] In several instances, MDA 
Earned Value Management officials and program office reviewers agreed 
that some of the LOE work could be redefined into discrete work 
packages. For example, from January through December 2007, the C2BMC 
contractor planned 73 percent of its work as LOE. This included 
activities such as software development and integration and test 
activities that result in two definable products--software packages and 
tests. At the direction of the C2BMC Program Office, the C2BMC 
contractor redefined some contract work, including software development 
and integration and test activities, as discrete, reducing the amount 
of LOE on the contract to 52 percent. 

The Aegis BMD element also reported a high percentage of LOE for its 
Standard Missile-3 contract, particularly considering that its 
products--individual missiles--are quite discrete. In August 2007, the 
element reported that the contractor had planned 73 percent of the 
contract work as LOE. The portion of the work that contained this 
amount of LOE was completed in March 2007 with an underrun of $7.2 
million. Although the contractor reported an underrun for this work 
upon its completion, the high percentage of LOE may have, over the 
contract period, distorted the contractor's actual cost and schedule 
performance. Similarly, it is important to note that the amount of LOE 
for the SM-3 work that is currently ongoing is considerably less. 
Program officials told us that prior to the commencement of this 
segment of work, the MDA Earned Value Management Group and program 
officials recommended that the program minimize the amount of LOE on 
its contracts. Currently, only 18 percent of the SM-3 contract is 
considered LOE. 

Two Contractors Awarded Fee That Does Not Reflect Earned Value 
Performance: 

MDA uses award fees to encourage its contractors to perform in an 
innovative, efficient, and effective way in areas considered important 
to the development of the BMDS. Because award fees are intended to 
motivate contractor performance for work that is neither feasible nor 
effective to measure objectively, award fee criteria and evaluations 
tend to be subjective. Each element's contract has an award fee plan 
that identifies the performance areas to be evaluated and the 
methodology by which those areas will be assessed. An award fee 
evaluation board--made up of MDA personnel, program officials, and 
officials from key organizations knowledgeable about the award fee 
evaluation areas--judges the contractor's performance against specified 
criteria in the award fee plan. The board then recommends to a fee 
determining official the amount of fee to be paid. MDA's Director is 
the fee-determining official for all BMDS prime contracts that we 
assessed. 

During fiscal year 2007, MDA awarded approximately 95 percent, or $606 
million, of available award fee to its prime contractors. While the 
cost, schedule, and technical performance of several contractors 
appeared to be aligned with their award fee, two contractors were rated 
as performing very well in the cost and/or program management elements 
and received commensurate fees even though earned value management data 
showed that their cost and schedule performance was declining. On the 
other hand, MDA did not award any fee to the THAAD contractor for its 
management of contract cost during a time when earned value data showed 
steadily increasing costs. Although DOD guidance discourages the use of 
earned value performance metrics in award fee criteria, MDA includes 
this as a factor in several of its award fee plans. The agency 
considers many factors in rating contractors' performance and making 
award fee determinations, including consideration of earned value data 
that shows cost, schedule, and technical trends. In addition, MDA has 
begun to revise its award fee policy to align agency practices more 
closely with DOD's current policy that better links performance with 
award fees. 

The ABL and Aegis BMD weapon system contractors received a large 
percentage of the 2007 award fee available to them for the cost and/or 
program management element. MDA rated the ABL contractor's performance 
in cost and program management elements as "very good," awarding the 
contractor 88 percent of the fee available in these performance areas. 
According to the award fee plan, one of several factors that is 
considered in rating the contractor's performance as very good is 
whether earned value data indicates that there are few unfavorable 
cost, schedule, and/or technical variances or trends. During the 
February 2006 to January 2007 award fee period, earned value data shows 
that the contractor overran its budget by more than $57 million and did 
not complete $11 million of planned work. Similarly, the Aegis BMD 
weapon system contractor was to be rated as to how effectively it 
managed its contract's cost. The award fee plan for this contractor 
also directs that earned value be one of the factors considered in 
making such an evaluation. During the fee period that ran from October 
2006 through March 2007, MDA rated the contractor's cost management 
performance as outstanding and awarded 100 percent of the available 
fee. Earned value data during this time period indicates that the 
contractor overran its budget by more than $6 million. MDA did not 
provide us with more detailed information as to other factors that may 
have influenced its decision as to the amount of fee awarded to the ABL 
and Aegis BMD Weapon System contractors. 

MDA recognizes that there is not always a good link between the 
agency's intentions for award fees and the amount of fee being earned 
by its contractors. In an effort to rectify this problem, the agency 
released a revised award fee policy in February 2007 to ensure its 
compliance with recent DOD policies that are intended to address award 
fee issues throughout the Department. Specifically, MDA's policy 
directs that every contract's award fee plan include: 

* Criteria for each element of the award fee that is specific enough to 
enable the agency to evaluate contractor performance and to determine 
how much fee the contractor can earn for that element. The criteria is 
to clearly define the performance that the government expects from the 
contractor for the applicable award fee period and the criteria for any 
one element must be distinguishable from criteria for other elements of 
the award fee; 

* An emphasis on rewarding results rather than effort or activity; and: 

* An incentive to meet or exceed agency requirements. 

Additionally, MDA's policy calls for using the Award Fee Advisory Board 
to not only make award fee recommendations to the fee determining 
official, but to also biannually report to MDA's Director as to whether 
award fee recommendations are consistent with DOD's Contractor 
Performance Assessment Report--a report that provides a record, both 
positive and negative, on a given contract for a specific period of 
time. Appendix II of this report provides additional information on 
BMDS prime contracts and award fees. 

Most Test Objectives Achieved Despite Schedule Delays: 

During 2007, several BMDS programs experienced setbacks in their test 
schedules. The Aegis BMD, THAAD, ABL, STSS, and C2BMC elements 
experienced test delays, but all were able to achieve their primary 
test objectives. GMD, on the other hand, experienced a schedule delay 
caused by an in-flight target anomaly that prevented full 
accomplishment of one major 2007 test objective. The remaining three 
elements--MKV, KEI, and Sensors--were able to execute all scheduled 
activities as planned. 

Several Elements Met Key Test Objectives: 

The Aegis BMD, THAAD, C2BMC, ABL, and STSS elements continued to 
achieve important test objectives in 2007, although some tests were 
delayed. Aegis BMD proved its capability against more advanced threats, 
while THAAD proved that it could intercept both inside and outside of 
the atmosphere. C2BMC completed a number of software and system-level 
tests. The ABL and STSS programs saw delays in important ground tests, 
but ABL was able to begin flight testing its beam control/fire control 
component using a low-power laser in 2007 and STSS completed thermal 
vacuum testing of both satellites by the end of the year. However, the 
delays in the ABL and STSS programs may hold up their incorporation 
into the BMDS during future blocks. 

Although the Aegis BMD program encountered some test delays, it was 
able to achieve all fiscal year 2007 test objectives. In December 2006, 
the program stopped a test after a crew member changed the ship's 
doctrine parameters just prior to target launch, preventing the ship's 
fire control system from conducting the planned engagement. During this 
test event, the weapon system failed to recognize the test target as a 
threat, which prevented the SM-3 missile from launching. Also, 
according to program officials, the system did not provide a warning 
message which contributed to the mission being aborted prematurely and 
prevented the Aegis BMD program from meeting its test objectives. 
However, 4 months later, the same flight test event was successfully 
completed and all test objectives were met. During that event, the 
program was able to demonstrate that the Aegis BMD could simultaneously 
track and intercept a ballistic missile and an anti-ship cruise 
missile. In June 2007, the program successfully completed its first 
flight test utilizing an Aegis BMD destroyer to intercept a separating 
target, and in November, the program conducted its first test that 
engaged two ballistic missile targets simultaneously. During the last 
test, Aegis missiles onboard an Aegis BMD cruiser successfully 
intercepted two short-range non-separating targets and achieved all 
primary test objectives outlined for this event. 

The THAAD program expected to complete four flight tests prior to the 
end of fiscal year 2007 but was only able to complete three. Two tests 
successfully resulted in intercepts of short-range ballistic missiles 
at different levels of the atmosphere. The third test successfully 
demonstrated component capability in a high-pressure environment and 
was the lowest altitude interceptor verification test to date. However, 
the fourth test was delayed, initially due to target availability 
driven by late modifications to the target hardware configuration. 
Additionally, during pre-flight testing, the contractor found debris in 
the interceptor. This caused the interceptor to be returned to the 
factory for problem investigation. While the problem was corrected and 
the interceptor was returned to the test range in only 7 days, the test 
was rescheduled because the test range was not available before the end 
of fiscal year 2007. 

During fiscal year 2007, the C2BMC program completed BMDS-level ground 
and flight tests, successfully achieving its test objectives of 
verifying the capabilities and readiness of a new software 
configuration. The software is designed to provide the BMDS with 
improved defense planning capability, including better accuracy and 
speed; a new operational network; and additional user displays. Because 
of the integral nature of the C2BMC product, problems encountered in 
some elements' test schedules have a cascading effect on C2BMC's test 
schedule. Even though this limited C2BMC testing, a review of the 
integrated and distributed ground test data resulted in the decision to 
field the software in December 2007. 

ABL achieved most of its test objectives during fiscal year 2007, but 
experienced delays during Block 2006 that deferred future BMDS program 
decisions. The program experienced a number of technical problems 
during fiscal year 2006 that pushed some planned activities into fiscal 
year 2007. One such activity was the execution of the program's first 
of four key knowledge points--a ground test to demonstrate ABL's 
ability to acquire and track a target while performing atmospheric 
compensation.[Footnote 9] The test was conducted in December 2006, 3 ˝ 
months later than planned. At the culmination of the test, program 
officials noted two problems. First, the system's beam control/fire 
control software was not integrated as anticipated. In addition, the 
energy that the low-power laser placed on the target during the test 
was not optimal. According to program officials, both of these issues 
were resolved before the system began flight testing the full beam 
control/fire control component in February 2007. However, the delays 
caused the program to further postpone a key lethality demonstration-- 
a demonstration in which the ABL will attempt to shoot down a short- 
range ballistic missile--until last quarter of fiscal year 2009. This 
demonstration is important to the program because it is the point at 
which MDA will decide the program's future. 

Although the ABL program experienced some setbacks with its first key 
knowledge point, it was able to meet all objectives for each subsequent 
knowledge point. In addition to the first knowledge point, the program 
planned to demonstrate three additional knowledge points during fiscal 
year 2007. The second knowledge point was contingent upon completion of 
the first. To demonstrate the achievement of the two knowledge points, 
the contractor performed a flight test that showed the low-power laser 
was integrated and the beam control/fire control functioned 
sufficiently to perform target tracking and atmospheric compensation 
against an airborne target board. The third knowledge point was 
completed three months ahead of the planned 2007 schedule and 
demonstrated that ABL's optical subsystem was adequate to support its 
high-power laser system. The fourth knowledge point-the completion of a 
series of flight tests to demonstrate the performance of the low-power 
laser system in flight--was completed in August 2007. 

Delays in the STSS test program, along with funding shortages, 
postponed the planned 2007 launch of the program's demonstration 
satellites. The STSS program is integrating two demonstration 
satellites with sensor payloads from legacy hardware developed under a 
former program. The use of legacy hardware has complicated the test 
program because spares needed for testing are not available. In order 
to preserve the condition of the legacy components, the program must 
exercise caution in handling the components to prevent damage, which 
has caused delays in testing. Additionally, a thermal vacuum test on 
the first space vehicle, to assess the ability of the satellite to 
operate in the cold vacuum of space, took twice as long as scheduled, 
due to a number of interface issues.[Footnote 10] Although the program 
was able to complete the integration and test of both demonstration 
satellites in 2007--major objectives for the program--funds were not 
available to launch the satellites as planned. Program officials 
believe that the satellites could be launched as early as April 2008 
and as late as July 2008, 1 year later than originally scheduled. 
According to the program office, there is no margin in the 2008 budget, 
so any unexpected issues could put the 2008 launch date at risk. The 
delays in launching the STSS demonstration satellites do not impact 
MDA's Block 2006 fielding plans as the satellites are intended to 
demonstrate a surveillance and tracking capability and do not provide 
any operational capability during the block. However, the delay in 
launching the demonstration satellites is causing a delay in MDA's 
ability to initiate development of an operational constellation, which 
may delay a BMDS global midcourse tracking capability. 

Despite delays in hardware and software testing and integration, other 
parts of the STSS program have proceeded according to schedule. Lessons 
learned from the thermal vacuum test for the first satellite's sensor 
payload facilitated the completion of thermal vacuum testing of the 
second satellite's payload in November 2007. Additionally, command and 
control capabilities of the ground segment were demonstrated and the 
second part of the acceptance test of STSS ground components was 
completed in September 2007. 

Test Delays Prevent GMD from Achieving All 2007 Objectives: 

A target anomaly prevented the GMD element from achieving all 2007 
objectives. The GMD program planned to conduct three flight tests-two 
intercept attempts and one radar characterization test--but was only 
able to conduct the radar test and one intercept test. The radar 
characterization test was conducted in March 2007. The target was 
launched from Vandenberg Air Force Base and was successfully tracked by 
the SBX radar and the radar of two Aegis BMD ships. During the test, 
officials indicated the SBX exhibited some anomalous behavior, yet was 
able to collect target tracking data and successfully transmit the 
information to the C2BMC element and the GMD fire control system at 
DOD's Missile Defense Integration and Operations Center. No live 
interceptor was launched. However, an intercept solution was generated 
and simulated interceptor missiles were "launched" from Fort Greely, 
Alaska. To address anomalous behavior, MDA adjusted software and 
performance parameters of the SBX radar. 

In May 2007, the program attempted an intercept test, but a key 
component of the target malfunctioned. For that reason, the weapon 
system did not release the Ground-based interceptor and program 
officials declared the flight test a "no test" event. To date, program 
officials have not determined the root cause of the malfunction. In 
September 2007, the program successfully conducted a re-test and 
achieved an intercept of the target using target tracking data provided 
by the Beale upgraded early warning radar. MDA test officials told us 
that aging target inventory could have contributed to the target 
anomaly. The officials explained that some targets in MDA's inventory 
are more than 40 years old and their reliability is relatively low. 
Target officials told us that they are taking preventive actions to 
avoid similar anomalies in the future. 

The time needed to complete the first 2007 intercept delayed GMD's 
second planned intercept attempt until at least the second quarter of 
fiscal year 2008. The delayed test was to have determined whether the 
SBX radar could provide data in "real time" that could be used by the 
GMD fire control component to develop a weapon task plan. Although the 
weapon task plan was not developed in real time during 2007, GMD was 
able to demonstrate that the SBX radar could plan an engagement when 
the target was live but the interceptor was simulated. 

Three BMDS Elements Completed Activities as Planned: 

During 2007, the KEI program redefined its development efforts and 
focused on near-term objectives. Also, the MKV program redefined its 
strategy to acquire multiple kill capability. Once redefined, these 
programs conducted all planned activities as scheduled and each was 
able to meet all planned objectives. In addition, the Sensors program 
successfully completed all planned tests. 

In June 2007, MDA directed the KEI program to focus on two near-term 
objectives--the development of its booster and its 2008 booster flight 
test. Some work, such as development of the fire control and 
communications and mobile launcher, was deferred into the future. 
During fiscal year 2007, the KEI program conducted all planned test 
activities, including booster static fire tests that demonstrated the 
rocket motor's performance in induced environments and wind tunnel 
tests that gathered data to validate aerodynamic models for the booster 
flight controls. 

MKV officials redefined their acquisition strategy by employing a 
parallel path to develop multiple kill vehicles for the GMD and KEI 
interceptors and the Aegis BMD SM-3 missile. MDA initiated the MKV 
program in 2004 with Lockheed Martin. In 2007, the MKV program added 
Raytheon as a second payload provider. According to program officials, 
the two payload providers may use different technologies and design 
approaches, but both adhere to the agency's goal of delivering common, 
modular MKV payloads for integration with all BMDS midcourse 
interceptors. In fiscal year 2007, Lockheed Martin successfully 
conducted static fire tests of its Divert Attitude Control System as 
planned. Additionally, Raytheon, funded with excess KEI funds made 
available when that program was replanned, began concept development. 
Raytheon did not have any major test activities scheduled for the 
fiscal year. 

During 2007, the Sensors program focused on testing FBX-T radars that 
were permanently emplaced and newly produced. After the first FBX-T was 
moved from its temporary location in Japan to its permanent location in 
Shariki, Japan, various ground tests and simulations were conducted to 
ensure its interoperability with the BMDS. The program also delivered a 
second FBX-T to Vandenberg Air Force Base, where its tracking 
capability is being tested against targets of opportunity. According to 
program officials, a decision has not been made as to where the second 
FBX-T radar will be permanently located. 

BMDS Achievement of Performance Goals Remains Uncertain: 

As we reported in March 2007, MDA altered its original Block 2006 
performance goals commensurate with the agency's reductions in the 
delivery of fielded assets.[Footnote 11] However, insufficient data 
exists to fully assess whether MDA achieved its revised performance 
goals. The performance of some fielded assets is also questionable 
because parts have not yet been replaced that were identified by 
auditors in MDA's Office of Quality, Safety, and Mission Assurance as 
less reliable or inappropriate for use in space. In addition, tests of 
the GMD element have not included target suite dynamic features and 
intercept geometries representative of the operational environment in 
which GMD will perform its mission and BMDS tests only allow a partial 
assessment of the system's effectiveness, suitability, and 
survivability. 

MDA uses a combination of simulations and flight tests to determine 
whether performance goals are met. Models and simulations are needed to 
predict performance because the cost of tests prevents the agency from 
conducting sufficient testing to compute statistical probabilities of 
performance. The models and simulations that project BMDS capability 
against intercontinental ballistic missiles present several problems. 
First, the models and simulations that predict performance of the GMD 
element have not been accredited by an independent agency. According to 
the Office of the Director, Operational Test and Evaluation without 
accredited models, GMD's performance cannot be predicted with respect 
to (1) variations in threat parameters that lie within the bounds of 
intelligence estimates, (2) stressing ground-based interceptor fly- 
outs and exoatmospheric kill vehicle engagements, and (3) variations in 
natural environments that lie within meteorological norms. Second, too 
few flight tests have been completed to ensure the accuracy of the 
models' and simulations' predictions. Since 2002, MDA has only 
completed two end-to-end tests of engagement sequences that the GMD 
element might carry out. While these tests provide some evidence that 
the element can work as intended, MDA must test other engagement 
sequences, which would include other GMD assets that have not yet 
participated in an end-to-end flight test. For example, MDA has not yet 
used the Sea-based X-band radar as the primary sensor in an end-to-end 
test. Additionally, officials in the Office of the Director, 
Operational Test and Evaluation told us that MDA needs more flight 
tests to have a high level of confidence that GMD can repeatedly 
intercept incoming ICBMs. Further testing is also needed to demonstrate 
that Aegis BMD can provide real-time, long-range surveillance and 
tracking data for the GMD element. In March 2006, we reported that the 
cancellation of a GMD flight test prevented MDA from exercising Aegis 
BMD's long-range surveillance and tracking capability in a manner 
consistent with an actual defensive mission.[Footnote 12] Program 
officials informed us that the Aegis BMD is capable of performing this 
function and has demonstrated its ability to surveil and track ICBMs in 
several exercises. However, MDA has not yet shown that Aegis BMD can 
communicate this data to GMD during a live intercept engagement and 
that GMD can use the data to prepare a weapon task plan for actual-- 
rather than simulated--interceptors. Officials in the Office of the 
Director for Operational Test and Evaluation told us that having Aegis 
BMD perform long-range surveillance and tracking during a live 
engagement would provide the data needed to more accurately gauge 
performance. 

Similarly, MDA has not yet proved that the FBX-T radar can provide real-
time, long-range surveillance and tracking data for the GMD element. On 
several occasions, MDA has shown that the FBX-T can acquire and track 
targets of opportunity, but the radar's data has not yet been used to 
develop a weapon system task plan for a GMD intercept engagement. 
Because the radar's permanent location in Japan does not allow MDA to 
conduct tests in which the FBX-T is GMD's primary fire control radar, 
the Director, Operational Test and Evaluation, in 2006 recommended that 
prior to emplacing a second FBX-T at its permanent location that MDA 
test the radar's capability to act as GMD's primary sensor in an 
intercept test. 

Confidence in the performance of the BMDS is also reduced because of 
unresolved GMD technical and quality issues. The GMD element has 
experienced the same anomaly during each of its flight tests since 
2001. This anomaly has not yet prevented the program from achieving any 
of its primary test objectives, but to date neither its source nor 
solution has been clearly identified or defined. Program officials plan 
to continue their assessment of test data to identify the anomaly's 
root cause and have implemented design changes to mitigate the effects 
and reduce risks associated with the anomaly. The reliability of 
emplaced GMD interceptors raises further questions about the 
performance of the BMDS. Quality issues discovered by auditors in MDA's 
Office of Quality, Safety, and Mission Assurance nearly 3 years ago 
have not yet been rectified in all fielded interceptors. According to 
the auditors, inadequate mission assurance and quality control 
procedures may have allowed less reliable parts or parts inappropriate 
for use in space to be incorporated into the manufacturing process, 
thereby limiting the reliability and performance of some fielded 
assets. The program has strengthened its quality control processes and 
is taking several steps to mitigate similar risks in the future. These 
steps include component analysis of failed items, implementing 
corrective action with vendors, and analyzing system operational data 
to determine which parts are affecting weapon system availability. MDA 
has begun to replace the questionable parts in the manufacturing 
process and to purchase the parts that it plans to replace in fielded 
interceptors. However, it will not complete the retrofit effort until 
2012. 

Additionally, test officials told us that although the end-to-end GMD 
test conducted during 2007 demonstrated that for a single engagement 
sequence military operators could successfully engage a target, the 
target represented a relatively unsophisticated threat because it 
lacked specific target suite dynamic features and intercept geometry. 
Other aspects of the test were more realistic--such as closing velocity 
and fly-out range--but these were relatively unchallenging. While the 
test parameters may be acceptable in a developmental test, they are not 
fully representative of an operational environment and do not provide 
high confidence that GMD will perform well operationally. 

Finally, because BMDS assets are being fielded based on developmental 
tests, which are not always representative of the operational 
environment, operational test officials have limited test data to 
determine whether all BMDS elements/components being fielded are 
effective and suitable for and survivable on the battlefield. MDA has 
added operational test objectives to its developmental test program, 
but many of the objectives are aimed at proving that military personnel 
can operate the equipment. In addition, limited flight test data is 
available for characterizing the BMDS' capability against 
intercontinental ballistic missiles. Up until 2007, the overall lack of 
data limited the Office of the Director of Operational Test and 
Evaluation, in annual assessments, to commenting on the operational 
realism of tests and recommending other tests needed to characterize 
system effectiveness and suitability. In 2007, tests provided 
sufficient information to partially quantify the effectiveness and 
suitability of the BMDS' midcourse capability (Aegis BMD and GMD) and 
to fully characterize a limited portion of the BMDS' terminal 
capability (PAC-3). However, according to the Office of the Director of 
Operational Test and Evaluation, further testing that incorporates 
realistic operational objectives and verification, validation, and 
accreditation of models and simulations will be needed before the 
performance, suitability, and survivability of the BMDS can be fully 
characterized. 

Efforts Underway to Improve BMDS Management and Oversight: 

Since its initiation in 2002, MDA has been given a significant amount 
of flexibility in executing the development of the BMDS. While the 
flexibility has enabled MDA to be agile in decision making and to field 
an initial capability relatively quickly, it has diluted transparency 
into MDA's acquisition processes, making it difficult to conduct 
oversight and hold the agency accountable for its planned outcomes and 
costs. As we reported in 2007, MDA operates with considerable autonomy 
to change goals and plans, which makes it difficult to reconcile 
outcomes with original expectations and to determine the actual cost of 
each block and of individual operational assets. In the past year, MDA 
has begun implementing two initiatives--a new block construct and a new 
executive board-to improve transparency, accountability, and oversight. 
These initiatives represent improvements over current practices, 
although they provide for less oversight than statutes provide for 
other major defense acquisition programs. In addition, Congress has 
directed that MDA's budget materials, after 2009, request funds using 
the appropriation categories of research, development, and evaluation, 
procurement, operations and maintenance, and military construction, 
which should promote accountability for and transparency of the 
BMDS.[Footnote 13] 

New Block Construct Offers Improvements, but Does Not Address All 
Issues: 

In 2007, MDA redefined its block construct to better communicate its 
plans and goals to Congress. The agency's new construct is based on 
fielding capabilities that address particular threats as opposed to the 
biennial time periods that were the agency's past approach to 
development and fielding. MDA's new block construct makes many positive 
changes. These include establishing unit cost for selected block 
assets, including in a block only those elements or components that 
will be fielded during the block, and abandoning the practice of 
deferring work from block to block. 

Features of New Block Construct: 

Table 5 illustrates MDA's new block construct for fielding the BMDS. 

Table 5: MDA New Block Construct: 

Block: Block 1.0: Initial Defense of U.S. from North Korea; 
Description: Includes quantities, schedule, performance metrics, 
engagement sequence groups, and cost needed to defend U.S. homeland 
from limited North Korean long-range threats. 

Block: Block 2.0: Initial Defense of Allied Forces; 
Description: Includes quantities, schedule, performance metrics, 
engagement sequence groups, and cost needed to defend allies and 
deployed forces from short-to medium-range threats in one 
region/theater. 

Block: Block 3.0: Initial Defense of U.S. from Iran; 
Description: Includes quantities, schedule, performance metrics, 
engagement sequence groups, and cost need to expand defense of U.S. to 
include limited Iranian long-range threats. 

Block: Block 4.0: Expanded Defense of U.S. and Allies from Iran; 
Description: Includes quantities, schedule, performance metrics, 
engagement sequence groups, and cost needed to defend allies and 
deployed forces in Europe from limited Iranian long-range threats and 
to expand protection of the U.S. homeland. 

Block: Block 5.0: Expanded Defense of Allied Forces; 
Description: Includes quantities, schedule, performance metrics, 
engagement sequence groups, and cost needed to expand defense of allies 
and deployed forces from short-to intermediate-range threats in two 
regions/theaters. 

Categories: Capability Development; 
Description: Includes BMDS elements that are not ready to be fielded, 
such as ABL and MKV. These programs have knowledge points tailored to 
critical risks. 

Categories: Sustainment; 
Description: Includes annual operations and sustainment costs. 

Categories: Mission Area Investment; 
Description: Investments that cut across several blocks and cannot be 
reasonably allocated to a specific block. Examples include modeling and 
simulation and intelligence and security. 

Categories: MDA Operations; 
Description: Contains operations support functions such as MDA 
headquarters management. 

Source: MDA data. 

Note: Capability development programs will transition to a block when a 
match exists between desired capability and resources. The decision to 
initiate a new block will be made by the Director, MDA. The Director 
will consider the severity of threats, the imminence of threats, 
achievement of knowledge points, proven technologies, cost estimates, 
and funding for each element prior to its transition. 

[End of table] 

MDA's new block construct provides a means for comparing the expected 
and actual unit cost of assets included in a block. As we noted in our 
fiscal year 2006 report, MDA's past block structure did not estimate 
unit costs for assets considered part of a given block or categorize 
block costs in a manner that allowed calculations of expected or actual 
unit costs.[Footnote 14] For example, the expected cost of Block 2006 
GMD interceptors emplaced for operational use was not separated from 
other GMD costs. Even if MDA had categorized the interceptors' cost, it 
would have been difficult to determine the exact cost of these 
interceptors because MDA acquires and assembles components into 
interceptors over several blocks and it has been difficult to track the 
cost of components to a specific group of interceptors. Under the new 
block construct, MDA expects to develop unit costs for selected block 
assets--such as THAAD interceptors--and request an independent 
verification of that unit cost from DOD's Cost Analysis Improvement 
Group. MDA will also track the actual unit cost of the assets and 
report significant cost growth to Congress. However, MDA has not yet 
determined for which assets a unit cost will be developed and how much 
a unit cost must increase before that increase is reported to Congress. 

The new construct also makes it clearer as to which assets should be 
included in a block. Under the agency's prior block construct, assets 
included in a given block were sometimes not planned for delivery until 
a later block. For example, as we reported in March 2007, MDA included 
costs for ABL and STSS as part of its Block 2006 cost goal although 
those elements did not field or plan to field assets during Block 
2006.[Footnote 15] Agency officials told us those elements were 
included in the block because they believed the elements could offer 
some emergency capability during the block timeframe. 

Finally, the new block construct should improve the transparency of 
each block's actual cost. Under its prior construct, MDA deferred work 
from one block to another; but it did not track the cost of the 
deferred work so that it could be attributed to the block that it 
benefited. For example, MDA deferred some work needed to characterize 
and verify the Block 2004 capability until Block 2006 and counted the 
cost of those activities as a cost of Block 2006. By doing so, it 
understated the cost of Block 2004 and overstated the cost of Block 
2006. Because MDA did not track the cost of the deferred work, the 
agency was unable to adjust the cost of either block to accurately 
capture the cost of each. MDA officials told us that under its new 
block construct, MDA will no longer transfer work, along with its cost, 
to a future block. Rather, a block of work will not be considered 
complete until all work that benefits a block has been completed and 
its cost has been properly attributed to that block. 

Block Construct Does Not Resolve All Issues: 

Although improvements are inherent in MDA's new block construct, the 
new construct will not dispel all transparency and accountability 
concerns. MDA has not yet estimated the full cost of a block. Also, MDA 
has not addressed whether it will transfer assets produced during a 
block to a military service for production and operation at the block's 
completion, or whether MDA will continue its practice of concurrently 
developing and fielding BMDS elements and components. 

According to its fiscal year 2009 budget submission, MDA does not plan 
to initially develop a full cost estimate for any BMDS block. Instead, 
when a firm commitment can be made to Congress for a block of 
capability, MDA will develop a budget baseline for the block. This 
budget will include anticipated funding for each block activity that is 
planned for the 6 years included in DOD's Future Years Defense Plan. 
MDA officials told us that if the budget for a baselined block changes, 
MDA plans to report and explain those variations to Congress.[Footnote 
16] At some future date, MDA does expect to develop a full cost 
estimate for each committed block and is in discussions with DOD's Cost 
Analysis Improvement Group on having the group verify each estimate; 
but documents do not yet include a timeline for estimating block cost 
or having that estimate verified. For accountability, other DOD 
programs are required to provide the full cost of developing and 
producing their weapon system before system development and 
demonstration can begin. Until the cost of a block of BMDS capability 
is fully known, it will be difficult for decision makers to compare the 
value of investing in a block of BMDS capability to the value of 
investing in other DOD programs or to determine whether the block of 
capability that is being initiated will be affordable over the long 
term. 

The new block construct does not address whether the assets included in 
a block will be transferred at the block's completion to a military 
service for production and operation. Officials representing multiple 
DOD organizations recognize that the transfer criteria established in 
2002 are neither complete nor clear given the BMDS's complexity. 
Without clear transfer criteria, MDA has transferred the management of 
only one element--the Patriot Advanced Capability-3--to the military 
for production and operation. Joint Staff officials told us that for 
all other elements, MDA and the military services have been negotiating 
the transition of responsibilities for the sustainment of fielded 
elements--a task that has proven arduous and time consuming. Although 
MDA documents show that under its new block construct the agency should 
be ready at the end of each block to deliver BMDS components that are 
fully mission-capable, MDA officials could not tell us when MDA's 
Director will recommend that management of components, including 
production responsibilities, be transferred to the military. MDA 
officials maintain that even though a particular configuration of a 
weapon could be fully mission-capable, that configuration may never be 
produced because it could be replaced by a new configuration. Yet, by 
the block's end, a transfer plan for the fully mission-capable 
configuration will have been drafted, developmental ground and flight 
tests will be complete, elements and components will be certified for 
operations, and doctrine, organization, training, material, leadership, 
personnel, and facilities are expected to be in place. 

Another issue not addressed under MDA's new block construct is whether 
the concurrent development and fielding of BMDS elements and/or 
components will continue. Fully developing a component or element and 
demonstrating its capability prior to production increases the 
likelihood that the product will perform as designed and can be 
produced at the cost estimated. To field an initial capability quickly, 
MDA accepted the risk of concurrent development and fielding during 
Block 2004. For example, by the end of Block 2004, the agency realized 
that the performance of some Ground-based interceptors could be 
degraded because the interceptors included inappropriate or potentially 
unreliable parts. MDA has begun the process of retrofitting these 
interceptors, but work will not be completed until 2012. Meanwhile 
there is a risk that some interceptors might not perform as designed. 
MDA also continued to accept this risk during Block 2006 as it fielded 
assets before they were fully tested. MDA has not addressed whether it 
will accept similar performance risks under its new block construct or 
whether it will fully develop and demonstrate all elements/components 
prior to fielding. 

New Executive Board Offers Improved, but Not Full, Oversight: 

In March 2007, the Deputy Secretary of Defense established a Missile 
Defense Executive Board (MDEB) to recommend and oversee implementation 
of strategic policies and plans, program priorities, and investment 
options for protecting the United States and its allies from missile 
attacks. The MDEB was also to replace existing groups and structures, 
such as the Missile Defense Support Group (MDSG). However, while it has 
some oversight responsibilities, the MDEB was not established to 
provide full oversight of the BMDS program and it would likely be 
unable to carry out this mission even if tasked to do so. The MDEB will 
not receive some information that the Defense Acquisition Board relies 
upon to make program recommendations, and in other cases, MDA does not 
plan to seek the MDEB's approval before deciding on a course of 
action.[Footnote 17] In addition, there are parts of the BMDS program 
for which there will be no baseline against which progress can be 
measured, which makes oversight difficult. 

Functions of the New Board: 

According to its charter, the MDEB is vested with more responsibility 
than its predecessor, the MDSG. When the MDSG was chartered in 2002, it 
was to provide constructive advice to MDA's Director. However, the 
Director was not required to follow the advice of the group. According 
to a DOD official, although the MDSG met many times initially, it did 
not meet after June 2005. This led, in 2007, to the formation of the 
MDEB. This board's mission is to review and make recommendations on 
MDA's comprehensive acquisition strategy to the Deputy Secretary of 
Defense. It is also to provide the Under Secretary of Defense, 
Acquisition, Technology and Logistics, with a recommended strategic 
program plan and a feasible funding strategy based on "business case" 
analysis that considers the best approach to fielding integrated 
missile defense capabilities in support of joint MDA and warfighter 
objectives: 

The MDEB will be assisted by four standing committees. These 
committees, which are chaired by senior-level officials from the Office 
of the Secretary of Defense and the Joint Staff, could play an 
important oversight role as they are expected to make recommendations 
to the MDEB, which in turn will recommend courses of action to the 
Under Secretary of Defense for Acquisition, Technology, and Logistics 
(USD AT&L) and the Director, MDA, as appropriate. The following table 
identifies the chair of each standing committee as well as key 
committee functions. 

Table 6: MDEB Standing Committee Functions: 

Standing committee: Policy Oversight; 
Committee chair: Principal Deputy Under Secretary of Defense for 
Policy; 
Function: * Advises the board on strategic missile defense policy 
direction to ensure full consistency with DOD policy; 
* Conducts and oversees international activities; 
* Represents the Department in inter-agency matters. 

Standing committee: Operational Forces; 
Committee chair: Vice Chairman, Joint Chiefs of Staff; 
Function: * Oversees fielding schedules and deployments to ensure 
consistency with planned schedules and DOD objectives; 
* Oversees agreements, documentation, and requirements between MDA, the 
DOD components, and the fielding organizations for ensuring appropriate 
funding policies for operational and support resources. 

Standing committee: Program, Acquisition and Budget Development 
Committee; 
Committee chair: Deputy Under Secretary of Defense, Acquisition, 
Technology, and Logistics; 
Function: * Ensures that missile defense program and budget development 
is integrated effectively into the board's oversight role and that 
missile defense programs are properly aligned with missions, taking 
appropriate account of relevant risk factors; 
* Oversees implementation of the missile defense acquisition guidance 
to include transition and transfer of responsibilities/authorities of 
the system from MDA to the services; 
* Provides oversight for missile defense system procurement, operation, 
and support. 

Standing committee: Test and Evaluation; 
Committee chair: Deputy Under Secretary of Defense, Acquisition, 
Technology, and Logistics; 
Function: 
* Oversees the test and evaluation planning and resource road map as it 
relates to MDA test requirements and test program; 
* Provides technical recommendations and oversight for the conduct of 
an integrated T&E program and investment strategy. 

Source: DOD. 

[A] The acronyms C4 and ISR stand for command, control, communications, 
and computers and intelligence, surveillance, and reconnaissance, 
respectively. 

[End of table] 

Limitations of the Board: 

The MDEB will not have access to all information normally available to 
oversight bodies. For other major defense acquisition programs, the 
Defense Acquisition Board must approve the program's progress through 
the acquisition cycle. Further, before a program can enter the System 
Development and Demonstration phase of the cycle, statute requires that 
certain information be developed. This information is then provided to 
the Defense Acquisition Board. However, in 2002, the Secretary of 
Defense allowed MDA to defer application of the defense acquisition 
system that among other things require programs to follow a defined 
acquisition cycle and obtain approval before advancing from one phase 
of the cycle to another. Because MDA does not follow this cycle, it 
does not enter System Development and Demonstration and it does not 
trigger the statutes requiring the development of information that the 
Defense Acquisition Board uses to inform its decisions. For example, 
most major defense acquisition programs are required by statute to 
obtain an independent verification of program cost prior to beginning 
system development and demonstration, and/or production and 
deployment.[Footnote 18] Independent life-cycle cost estimates provide 
confidence that a program is executable within estimated cost and along 
with other DOD-wide budget demands. Although MDA plans to develop unit 
cost for selected block assets and request that DOD's Cost Analysis 
Improvement Group verify the unit costs, the agency does not initially 
plan to develop a block cost estimate and, therefore, cannot seek an 
independent verification of that cost. In addition, even when MDA 
estimates block costs, the agency will not be required to obtain an 
independent verification of that cost, because, as noted earlier, the 
BMDS program operates outside of DOD's acquisition cycle. Although not 
required, MDA officials told us that they have initiated discussions 
with the Cost Analysis Improvement Group on independent verifications 
of block cost estimates. 

Statute also requires an independent verification of a system's 
suitability for and effectiveness on the battlefield before a program 
can proceed beyond low-rate initial production.[Footnote 19] After the 
test is completed, the Director for Operational Test and Evaluation 
assesses whether the test was adequate to support an evaluation of the 
system's suitability and effectiveness for the battlefield, whether the 
test showed the system to be acceptable, and whether any limitations in 
suitability and effectiveness were noted. However, a comparable 
assessment of the BMDS assets being produced for fielding will not be 
available to the MDEB. As noted earlier, the limited amount of testing 
completed, which has been primarily developmental in nature, and the 
lack of verified, validated, and accredited models and simulations 
prevent the Director of Operational Test and Evaluation from fully 
assessing the effectiveness, suitability, and survivability of the BMDS 
in annual assessments. 

MDA will also make some decisions without approval from the MDEB or any 
higher level DOD official. Although the charter of the MDEB includes 
the mission to make recommendations to MDA and the Under Secretary of 
Defense for AT&L on investment options, program priorities, and MDA's 
strategy for developing and fielding an operational missile defense 
capability, the MDEB will not have the opportunity to review and 
recommend changes to BMDS blocks. According to a briefing on the 
business rules and processes for MDA's new block structure, the 
decision to initiate a new block of BMDS capability will be made by 
MDA's Director. Also cost, schedule, and performance parameters will be 
established by MDA when technologies that the block depends upon are 
mature, a credible cost estimate can be developed, funding is 
available, and the threat is both imminent and severe. The Director 
will inform the MDEB as well as Congress when a new block is initiated, 
but he will not seek the approval of either. 

Finally, there will be parts of the BMDS program that will be difficult 
for the MDEB to oversee because of the nature of the work being 
performed. MDA plans to place any program that is developing technology 
in a category known as Capability Development. These programs, such as 
ABL, KEI, and MKV, will not have a firm cost, schedule, or performance 
baseline. This is generally true for technology development programs in 
DOD because they are in a period of discovery, which makes schedule and 
cost difficult to estimate. On the other hand, the scale of the 
technology development in BMDS is unusually large, ranging from $2 
billion to about $5 billion dollars a year--eventually comprising 
nearly half of MDA's budget by fiscal year 2012. The MDEB will have 
access to the budgets planned for these programs over the next 5 or 6 
years, each program's focus, and whether the technology is meeting 
short-term key events or knowledge points. But without some kind of 
baseline for matching progress with cost, the MDEB will not know how 
much more time or money will be needed to complete technology 
maturation. MDA's experience with the ABL program provides a good 
example of the difficulty in estimating the cost and schedule of 
technology development. In 1996, the ABL program believed that all ABL 
technology could be demonstrated by 2001 at a cost of about $1 billion. 
However, MDA now projects that this technology will not be demonstrated 
until 2009 and its cost has grown to over $5 billion. While the 
uncertainties of technology development must be recognized, some 
organizations suggest ways to establish a baseline appropriate for such 
efforts. For example, the Air Force Research Laboratory suggested a 
methodology to estimate a technology's cost once analytical and 
laboratory studies physically validate analytical predictions of 
separate elements of the technology. 

MDEB Could Play Key Role In Proposal to Return BMDS to Standard 
Requirements Process: 

In an effort to further improve oversight, the Joint Requirements 
Oversight Council proposed a plan to transition the BMDS into standard 
DOD processes. In August 2007, the Vice Chairman of the Joint Chiefs of 
Staff and Joint Requirements Oversight Council Chairman requested the 
Deputy Secretary of Defense approve a proposal to return MDA to the 
Joint Capabilities Integration and Development System process and 
direct the Joint Requirements Oversight Council to validate BMDS 
capabilities.[Footnote 20] The Vice Chairman believed that the council 
should exercise oversight of MDA in order to improve Department-wide 
capability integration. More specifically, he noted that: 

* In 2002, the Secretary of Defense exempted the BMDS program from the 
traditional requirements generation process to expedite fielding the 
system as soon as practicable. 

* Now that an initial capability for homeland defense has been 
deployed, there is no longer the same need for flexibility provided by 
the requirements exemption. 

* The current process, with MDA exempted, does not allow the Joint 
Requirements Oversight Council to provide appropriate military advice 
or to validate missile defense capabilities. Without this change, there 
is increasing potential that MDA-fielded systems will not be 
synchronized with other air and missile defense capabilities being 
developed. 

* The current process hinders the military departments' ability to plan 
and program resources for fielding and sustainment of MDA-developed 
systems. 

In responding to the proposal, the Acting Under Secretary of Defense 
for AT&L recommended that the Deputy Secretary of Defense delay his 
approval of the Joint Staff's proposal until the MDEB could review the 
proposal and provide a recommendation. However, he agreed that more 
Joint Requirements Oversight Council involvement was necessary for the 
BMDS, although he was not sure that returning BMDS to standard DOD 
processes was the appropriate solution to the agency's oversight 
issues. Instead, he noted that the Deputy Secretary of Defense recently 
established the MDEB to recommend and oversee the implementation of 
strategic policies and plans, program priorities, and investment 
options for the BMDS. He stated that since the MDEB is tasked with 
determining the best means of managing the BMDS throughout its life 
cycle, it should consider the Joint Staff's proposal. 

MDA Directed to Use Procurement Funding for the First Time: 

In an effort to improve the transparency of MDA's acquisition 
processes, Congress has directed that MDA's budget materials delineate 
between funds needed for research, development, and evaluation, 
procurement, operations and maintenance, and military 
construction.[Footnote 21] Using procurement funds will mean that MDA 
generally will be required to adhere to congressional policy that 
assets be fully funded in the year of their purchase, rather than 
incrementally funded over several years. The Congressional Research 
Service reported in 2006 that "incremental funding fell out of favor 
because opponents believed it could make the total procurement costs of 
weapons and equipment more difficult for Congress to understand and 
track, create a potential for DOD to start procurement of an item 
without necessarily stating its total cost to Congress, permit one 
Congress to 'tie the hands' of future Congresses, and increase weapon 
procurement costs by exposing weapons under construction to uneconomic 
start-up and stop costs."[Footnote 22] Our analysis of MDA developed 
costs, which are presented in table 7, also shows that incremental 
funding is usually more expensive than full funding, in part, because 
inflation decreases the buying power of the dollar each year. 

The National Defense Authorization Act for Fiscal Year 2008 directed 
MDA to submit a plan to transition from using research and development 
funds exclusively to using procurement, operations and maintenance, 
military construction, and research and development funds by March 1, 
2008. However, it allowed MDA to continue to use research and 
development funds in fiscal year 2009 to incrementally fund previously 
approved missile defense assets. The act also directed that beginning 
in fiscal year 2009, the MDA budget request include, in addition to 
RDT&E funds, military construction funds and procurement funds for some 
long lead items such as those required for the third and fourth THAAD 
fire units and Aegis BMD SM-3 Block 1A missiles. MDA did not request 
long lead funding for either THAAD or SM-3 missiles in its fiscal year 
2009 budget because MDA has slipped the schedule for procuring fire 
units 3 and 4 by one year, and the National Defense Authorization Act 
for Fiscal Year 2008 was not signed in time to allow MDA to adjust its 
budget request for SM-3 missiles. 

Congress also provided MDA with the authority to use procurement funds 
for fiscal years 2009 and 2010 to field its BMDS capabilities on an 
incremental funding basis, without any requirement for full funding. 
Congress has granted similar authority to other DOD programs. In the 
conference report accompanying the Fiscal Year 2008 National Defense 
Authorization Act, the conferees indicated that if MDA wishes to use 
incremental funding after fiscal year 2010, DOD must request additional 
authority for a specific program or capability. Conferees cautioned DOD 
that additional authority will be considered on a limited case-by-case 
basis and that future missile defense programs will be funded in a 
manner more consistent with other DOD acquisition programs. 

Since 2002, MDA has been granted the flexibility to incrementally fund 
the fielding of its operational assets with research and development 
funds. In some cases, the agency spreads the cost of assets across 5 to 
7 budget years. After reviewing the agency's incremental funding plan 
for future procurements of THAAD fire units and Aegis BMD missiles, we 
analyzed the effect of fully funding these assets using present value 
techniques and found that the agency could save about $125 million by 
fully funding their purchase and purchasing them in an economical 
manner. Our analysis is provided in table 7. In addition, more detailed 
analysis is available in appendix III. 

Table 7: Incremental Funding Costs versus Full funding Costs for THAAD 
and Aegis BMD Fielded Assets: 

(Dollars in Then Year Thousands). 

BMDS element: THAAD; 
(Incrementally Funded from 2009-2013); 
Asset: Fire Units 3 and 4 (launchers, battle manager, radars, and 48 
missiles); 
Cost if incrementally funded: $1,173,346; 
Cost if fully funded: $1,069,486; 
Savings provided by full funding: $103,860. 

BMDS element: Aegis BMD; 
(Missiles Incrementally Funded from 2008-2010; 
Shipsets Incrementally Funded from 2009-2015); 
Asset: 48 1B SM-3s for Blocks 2012 and 2014; 
Cost if incrementally funded: $519,000; 
Cost if fully funded: $501,600; 
Savings provided by full funding: $17,400. 

BMDS element: Asset: 19 4.0.1 shipset procurement and installs; 
Cost if incrementally funded: $512,120; 
Cost if fully funded: $508,000; 
Savings provided by full funding: $4,120. 

Total; 
Asset: [Empty]; 
Cost if incrementally funded: $2,204,466; 
Cost if fully funded: $2,079,086; 
Savings provided by full funding: $125,380. 

Source: MDA (data); GAO (analysis). 

[End of table] 

According to our analysis, fully funding the THAAD and Aegis BMD assets 
will, in all instances, save MDA money. For example, full funding would 
save the THAAD program approximately $104 million and the Aegis BMD 
program nearly $22 million. In addition, by providing funds upfront, 
the contractors should be able to arrange production in the most 
efficient manner. 

Conclusions: 

By the end of Block 2006, MDA posted a number of accomplishments for 
the BMDS, including fielding more assets, conducting several successful 
tests, and progressing with developmental efforts. As a result, fielded 
capability has increased. On the other hand, some problems continue 
that make it difficult to assess how well the BMDS is progressing 
relative to the funds it has received and the goals it has set for 
those funds. First, under the proposed block construct, MDA plans to 
develop a firm baseline for each block and have it independently 
reviewed. However, MDA has not yet developed estimates for full block 
costs, so the initial baseline incorporates the budget for each block 
only through DOD's Future Years Defense Plan. Second, while MDA expects 
to estimate unit costs and track increases, it is unclear as to what 
criteria will be used for reporting variances to Congress. Third, while 
MDA has gotten some contractors to lower the portion of work planned as 
level of effort, a substantial amount of work remains so planned. 
Fourth, while it may not be reasonable to expect the same level of 
accountability for technology development efforts as it is for 
development and production of systems, the high level of investment--up 
to half of its budget--MDA plans to make in technology development 
warrants some mechanism for reconciling the cost of these efforts with 
their progress. Finally, MDA fields assets before development testing 
is complete and without conducting operational testing. We have 
previously recommended that MDA return to its original non-concurrent, 
knowledge-based approach to developing, testing, and fielding assets. 
Short of that, the developmental testing that is done provides the 
primary basis for the Director of Operational Test and Evaluation to 
assess whether a block of BMDS capability is suitable and effective for 
the battlefield. So far, BMDS testing has not yielded sufficient data 
to make a full assessment. 

Recommendations for Executive Action: 

To build on efforts to improve the transparency, accountability, and 
oversight of the missile defense program, we recommend that the 
Secretary of Defense direct: 

* MDA to develop a full cost for each block and request an independent 
verification of that cost; 

* MDA to clarify the criteria that it will use for reporting unit cost 
variances to Congress; 

* MDA to examine a contractor's planning efforts when 20 percent or 
more of a contract's work is proposed as level of effort; 

* MDA to investigate ways of developing a baseline or some other 
standard against which the progress of technology programs may be 
assessed; and: 

* MDA and the Director of Operational Test and Evaluation to agree on 
criteria and incorporate corresponding scope into developmental tests 
that will allow a determination of whether a block of BMDS capability 
is suitable and effective for fielding. 

Agency Comments and Our Evaluation: 

DOD provided written comments on a draft of this report. These comments 
are reprinted in appendix I. DOD also provided technical comments, 
which we incorporated as appropriate. 

DOD concurred with three of our five recommendations--developing a full 
cost estimate for each block and requesting an independent verification 
of that cost, clarifying criteria for reporting unit cost variances to 
Congress, and examining contractors' planning efforts when 20 percent 
or more of a contract's work is proposed as level of effort. The 
Department indicated that MDA has already taken steps to develop new 
cost models aligned with its new block structure and met with DOD's 
Cost Analysis Improvement Group to initiate the planning process for 
the independent verifications of MDA's cost estimates. The cost 
estimates will extend until block completion and will not be limited by 
a 6-year Future Years Defense Plan window. MDA is also working to 
establish criteria for reporting unit cost variances and to incorporate 
them into an MDA directive. Finally, MDA has made a review of prime 
contractors' work planning efforts part of the Integrated Baseline 
Review process and the Defense Contract Management Agency has agreed to 
continuously validate the appropriateness of each contractor's planning 
methodology as part of its ongoing contract surveillance. 

DOD partially concurred with our recommendation that MDA investigate 
ways of developing a baseline or some other standard against which the 
progress of technology programs may be assessed. DOD observed that MDA 
uses knowledge points, technology readiness levels, and engineering and 
manufacturing readiness levels in assessing the progress of its 
technology programs and that it will continue to investigate other 
methods of making such assessments. While we recognize their value, 
these methods typically assess progress in the short term and do not 
provide an estimate of the remaining cost and time needed to complete a 
technology program. Because MDA must balance its efforts to improve the 
existing BMDS while developing new capability, DOD and MDA need to 
ensure that only the most beneficial technology programs in terms of 
performance, cost, and schedule are pursued. This will require an 
understanding of not only the benefit to be derived from the 
technology, but also an understanding of the cost and time needed to 
bring the technology to fruition. 

DOD also partially concurred with our last recommendation that MDA and 
the Director of Operational Test and Evaluation (DOT&E) agree on 
criteria and additional scope for developmental tests that will allow a 
full determination of the effectiveness and suitability of a BMDS block 
for fielding. DOD noted that it is MDA's mission to work with the 
warfighter, rather than DOT&E, to determine that the BMDS is ready for 
fielding, but that MDA will work closely with DOT&E to strengthen the 
testing of BMDS suitability and effectiveness. We agree that DOT&E is 
not responsible for fielding decisions, but its mission is to ensure 
that weapon systems are realistically and adequately tested and that 
accurate evaluations of operational effectiveness, suitability, and 
survivability are available for production decisions. MDA improved the 
operational realism of testing in 2007 and for the first time DOT&E 
considered tests at least partially adequate to make an assessment of 
the BMDS. However, a full assessment is not yet possible and we 
continue to recommend that MDA and DOT&E take steps to make as full a 
BMDS evaluation as possible. In doing so, MDA and DOT&E can work 
cooperatively to reduce the number of unknowns that will confront the 
warfighter when the system is required operationally and improve the 
likelihood that the BMDS will perform as needed in the field. 

We are sending copies of this report to the Secretary of Defense and to 
the Director, MDA. We will make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at [hyperlink, http://www.gao.gov]. 

If you, or your staff have any questions concerning this report, please 
contact me at (202) 512-4841. Contact Points for our offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. The major contributors are listed in appendix V. 

Signed by: 

Paul Francis: 
Director, Acquisition and Sourcing Management: 

List of Congressional Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Ted Stevens: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Duncan L. Hunter: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Comments from the Department of Defense: 

Acquisition, Technology, And Logistics: 

Office Of The Under Secretary Of Defense: 
3000 Defense Pentagon: 

Washington, DC 20301-3000: 

March 12, 2008: 

Mr. Paul Francis
Director, Acquisition and Sourcing Management: 
U. S. Government Accountability Office: 
441 G. Street, N.W.: 
Washington, DC 20548: 

Dear Mr. Francis: 

This is the Department of Defense (DoD) response to the GAO draft 
report, "Defense Acquisitions: Progress Made in Fielding Missile 
Defense, but Program is Short of Meeting Goals," dated February 5, 2008 
(GAO Code 120662/GAO-08-448). Detailed comments on the report 
recommendations are enclosed. 

The DoD concurs with three of the draft report's recommendations and 
partially concurs with two. The rationale for our position is included 
in the enclosure. I submitted separately a list of technical and 
factual errors for your consideration. As you note in the report, the 
Missile Defense Executive Board reviews and makes recommendations on 
MDA's acquisition strategy, plans, and funding. The Board will continue 
to promote the improvement of our nation's ballistic missile defense 
capabilities, ensure proper oversight of their acquisition, and align 
the Department's business processes to enhance life cycle management of 
the Ballistic Missile Defense System. 

We appreciate the opportunity to comment on the draft report. My point 
of contact for this effort is Mr. Greg Hulcher, (703) 695-2680, 
Greg.Hulcher@osd.mil. 

Sincerely, 

Signed by: David G. Ahern: 
Director: 
Portfolio Systems Acquisition: 

Enclosure: 
As stated: 

GAO Draft Report Dated February 5, 2008 GAO-08-448: 
(GAO CODE 120662): 

"Defense Acquisitions: Progress Made In Fielding Missile Defense, But 
Program Is Short Of Meeting Goals": 

Department Of Defense Comments To The Gao Recommendations: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
direct the Missile Defense Agency (MDA) to develop a full cost for each 
initiated block and request an independent verification of that cost. 
(Page 41/GAO Draft Report) 

DoD Response: Concur. MDA is taking a step by step approach to building 
cost estimates for BMDS blocks. This is a complex undertaking that has 
to be done carefully. MDA is currently conducting a review of 
restructured cost models for MDA program elements. These new cost 
models are aligned with the new MDA block structure. At conclusion of 
these reviews, MDA will compile the relevant portions of each program 
element estimate to develop a full cost estimate for the entire block. 
The cost estimates will extend until block completion and will not be 
limited by a 6-year Future Years Defense Plan window. MDA has met with 
the Cost Analysis Improvement Group to initiate the planning process 
for the independent verification of MDA's cost estimates. The CAIG has 
been supportive and is working with MDA to develop a concept for 
completing the independent reviews. Because MDA is implementing these 
steps, no direction from the Secretary of Defense is warranted at this 
time. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
direct the MDA to clarify the criteria that it will use for reporting 
unit cost variances to Congress. (Page 41/GAO Draft Report) 

DoD Response: Concur. MDA is now working to establish criteria for 
reporting unit cost variances and incorporate them in a MDA directive. 
No direction from the Secretary of Defense is required at this time. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
direct the MDA to examine a contractor's planning efforts when 20 
percent or more of a contract's work is proposed as level of effort. 
(Page 41/GAO Draft Report) 

DoD Response: Concur. The review of the planning is now a requirement 
of the Integrated Baseline Review process. This responsibility applies 
to all MDA elements regardless of their respective contract's 
percentage of Level of Effort (LOE). A memorandum of agreement with the 
Defense Contract Management Agency (DCMA) was signed in January 2008, 
in which DCMA agreed to continuously validate the appropriateness of 
MDA contractors' planning methodology as part of its ongoing contract 
surveillance. In December 2007, MDA began the process of reviewing each 
contract's LOE percentages during its formal program reviews with the 
goal to minimize the LOE percentage where appropriate. No direction 
from the Secretary of Defense is warranted at this time. 

Recommendation 4: The GAO recommends that the Secretary of Defense 
direct the MDA to investigate ways of developing a baseline or some 
other standard against which the progress of technology programs maybe 
assessed. (Page 41/GAO Draft Report) 

DoD Response: Partially concur. While GAO noted MDA's use of knowledge 
points in assessing the maturity of the Airborne Laser, GAO's draft 
report did not comment on the adequacy of MDA's current knowledge-based 
approach to assessing progress in complex technology programs. MDA uses 
standards—called knowledge points—to assess the progress of its 
technology programs. These knowledge points address both technical 
maturity and affordability issues. The Agency also pays close attention 
to technology readiness levels and engineering and manufacturing 
readiness levels in assessing the progress of technology programs. 
However, MDA continually seeks better engineering and business 
practices and will continue to investigate other means for assessing 
technology programs. No direction from the Secretary of Defense is 
warranted at this time. 

Recommendation 5: The GAO recommends that the Secretary of Defense 
direct the MDA and the Director of Operational Test and Evaluation to 
agree on criteria and incorporate corresponding scope into 
developmental tests that will allow a determination of whether a block 
of Ballistic Missile Defense System capability is suitable and 
effective for fielding. (Page 41/GAO Draft Report) 

DoD Response: Partially concur. MDA has the mission to enable the 
fielding of BMDS elements in coordination with the war fighter. The war 
fighter participates in ground and flight tests to build confidence and 
support capability activation through the Warfighter Operational 
Readiness and Acceptance program. DOT&E does not participate in 
fielding decisions. DOT&E provides independent oversight of combined 
developmental/operational testing and conducts capability and test 
adequacy assessments to support Congressional reporting requirements. 
MDA will continue working closely with DOT&E and the operational test 
agencies in the Services to strengthen our testing of Ballistic Missile 
Defense System suitability and effectiveness.

[End of section] 

Appendix II: MDA Contracts: 

Overview of MDA Prime and Support Contracts: 

The Missile Defense Agency (MDA) employs prime contractors and support 
contractors to accomplish different tasks that are needed to develop 
and field the ballistic missile defense system. Prime contractors 
receive the bulk of funds MDA requests each year and work to provide 
the hardware and software for elements of the Ballistic Missile Defense 
System (BMDS). Support contractors provide a wide variety of useful 
services, such as special knowledge and skills not available in the 
government and the capability to provide temporary or intermittent 
services. 

Prime Contracts: 

MDA has prime contracts with four defense companies--Boeing, Raytheon, 
Lockheed Martin, and Northrop Grumman--to develop elements of the BMDS. 
All current contracts and agreements are cost reimbursement type that 
provide for payment of reasonable, allowable, and allocable incurred 
costs to the extent provided in the contract or agreement.[Footnote 23] 
The contracts also provide fee for the contractor performing the work, 
but the amount earned depends on many variables, including the type of 
cost contract, contractor performance, technical risk, and complexity 
of the requirement. All of the cost reimbursement contracts used for 
the BMDS elements include cost plus award fee aspects. Cost plus award 
fee contracts provide for a fee consisting of a base fee--fixed at the 
inception of the contract that may be zero--and an award amount based 
upon a subjective evaluation by the government, meant to encourage 
exceptional performance. It should be noted that some award fee 
arrangements include objective criteria such as Key Performance 
events.[Footnote 24] 

The Multiple Kill Vehicle (MKV) contract and Command, Control, Battle 
Management and Communications (C2BMC) Other Transaction Agreement 
differ somewhat from the other elements' contracts. The MKV prime 
contractor was awarded an indefinite delivery/indefinite quantity cost 
reimbursement contract. This type of contract allows MDA to order 
services as they are needed through a series of task orders. Without 
having to specify a firm quantity of services (other than a minimum or 
maximum quantity), the government has greater flexibility to align the 
tasks with available funding. The C2BMC element operates under an Other 
Transaction Agreement with cost reimbursement aspects. These types of 
agreements are not always subject to procurement laws and regulations 
meant to safeguard the government. MDA chose the Other Transaction 
Agreement to facilitate a collaborative relationship between industry, 
government, federally funded research and development centers, and 
university research centers. 

DOD requires that all contractors awarded cost reimbursement contracts 
or other agreements of $20 million or greater implement an Earned Value 
Management System (EVMS) to integrate the planning of work scope, 
schedule, and resources, and to provide insight into their cost and 
schedule performance. To implement this system, contractors examine the 
totality of the work directed by the contract and break it into 
executable work packages. Each work package is assigned a schedule and 
a budget that is expected to enable the work's completion. On a monthly 
basis, the contractor examines initiated work packages to determine 
whether the work scheduled for the month was performed on time and 
within budget. If more work was completed than scheduled and the cost 
of the work performed was less than budgeted, the contractor reports a 
positive schedule and cost variance. However, if the contractor was 
unable to complete all of the work scheduled and needed more funds to 
complete the work than budgeted, the contractor reports a negative 
schedule and cost variance. Of course, the results can be mixed. That 
is, the contractor may have completed more work than scheduled but at a 
cost that exceeded the budget. The contractor details its performance 
to MDA each month in Contract Performance Reports. These reports also 
identify the reasons that negative or positive variances are occurring. 
Used properly, the earned value concept allows program managers to 
identify problems early so that steps can be taken before the problems 
increase the contract's overall cost and/or schedule. 

In the course of subdividing the total work of the contract into 
smaller efforts, contractors plan work according to its type. Included 
in these classifications are discrete work--work that is expected to 
produce a product, such as a study, lines of software code, or a test-
-and work considered to be level of effort (LOE). LOE is work that does 
not result in a product, but is of a general or supportive nature. 
Supervision and contract administration are examples of work that do 
not produce definable end products and are appropriately planned as 
LOE. 

Some BMDS Contracts Have a High Percentage of Level of Effort Work: 

Several contracts for BMDS systems have relatively high proportions of 
work planned as LOE. When work is incorrectly planned as LOE, the 
contractor's performance becomes less transparent because earned value 
does not recognize schedule variances for such work. Rather, it is 
assumed that the time budgeted for an LOE effort will produce the 
intended result. Although an LOE work package will report cost 
variances, those variances will only be measured against how much the 
program intended to spend at certain time intervals. If LOE were to be 
used on activities that could otherwise be measured discretely, the 
project performance data could be favorably distorted and contractors 
and program managers might not be able to discern the value gained for 
the time spent on the task. Specifically, the program's Contract 
Performance Reports would not indicate whether or not the work 
performed produced the product expected. By losing early insight into 
performance, the program could potentially need to spend more time and 
money to complete the task. 

Since earned value management is less suited for work that is not 
intended to produce a specific product, or work that is termed LOE, the 
Standard for Earned Value Management Systems Intent Guide instructs 
that although some amount of LOE activity may be necessary, it must be 
held to the lowest practical level.[Footnote 25] In addition, earned 
value experts such as Defense Contract Management Agency officials 
agree that if a contractor plans more than 20 percent of the total 
contract work as LOE, the work plan should be examined to determine if 
work is being properly planned. 

Although the amount of LOE should be minimized, some BMDS prime 
contracts have a relatively high percentage of LOE. As figure 2 
illustrates, the MKV contractor planned much of the work for task 
orders open during fiscal year 2007 as LOE. Contractors for Aegis BMD 
SM-3 and C2BMC also planned a high percentage of their work as LOE. 
Both MDA's Earned Value Management Group and program office reviewers 
encouraged the SM-3 and C2BMC contractors to reduce their LOE 
percentages. By the end of the fiscal year, the SM-3 and C2BMC 
contractors had reduced the amount of work planned as LOE. 

Figure 2: Percentages of LOE as of December 2007: 

This figure is a vertical bar graph showing percentages of LOW as of 
December 2007. 

Aegis SM-3 (March 2007}: 73; 
Aegis SM-3 (September 2007): 18; 
Aegis AWS: 40; 
ABL: 57; 
C2BMC: 52; 
GMD: 28; 
FBX-T: 26; 
KEI: 40; 
MKV (TO 6): 3; 
STSS: 25; 
THAAD: 30. 

[See PDF for image] 

Source: MDA (data); GAO (presentation). 

Note: Percentages For Aegis Bmd Sm-3 (March 2007), Abl, C2bmc, And Mkv 
Were Updated In January 2008. 

[A] Aegis SM-3 (Mar 2007) represents development and initial production 
of Block 1A missiles delivered in March 2007. Aegis SM-3 (Sept 2007) 
represents the production of 20 additional Block 1A missiles, which 
began in February 2007. 

[B] Once the MKV program's Task Order 4 is baselined--planned for 
February 2008--the program office anticipates a decrease in the 
percentage of LOE. 

[End of figure] 

In December 2006, the Aegis BMD SM-3 contractor completed work to 
develop and produce initial Block 1A missiles with 73 percent of this 
work categorized as LOE--well above the 15 percent that the Aegis BMD 
SM-3 program reports as its industry standard. Although we have 
reported that the contractor completed this segment of work ahead of 
cost but slightly behind schedule, it is difficult to assess whether 
this represents the contractor's actual performance. The high 
percentage of LOE associated with this work may have limited our 
assessment and distorted whether the work completed was in all respects 
the work planned. Subsequently, the contractor initiated procurement of 
long lead materials to produce an additional 20 Block 1A missiles 
before work packages were developed. Once work packages were developed, 
only 18 percent of the work was planned as LOE. 

The C2BMC program was able to reduce the percentage of work planned as 
LOE, but the program continues to encourage further reductions. During 
fiscal year 2007, the C2BMC contractor replanned its work and reduced 
the amount of work planned as LOE from 73 to 52 percent. This change 
was implemented after two closely related reviews suggested the 
percentage of LOE work was too high. Both the program office and its 
contractor acknowledge the high level of LOE and have made plans to 
limit it in future work. 

As noted in figure 2, the MKV contractor considered all work being 
completed under two task orders--Task Orders 4 and 5--as LOE. The 
primary objective of Task Order 4 is to update the program plan and 
complete the systems engineering effort necessary to integrate the MKV 
warhead into the BMDS to the extent required for the systems 
requirements review. Both the system concept review, completed in July 
2006, and the system requirements review, scheduled for December 2008, 
are major milestones. However, the contractor did not plan these 
milestone reviews as products. According to program officials, Task 
Order 4 will be reevaluated in February 2008 to reduce the amount of 
LOE and recognize more work as discrete. The MKV program also planned 
100 percent of Task Order 5 work as LOE. Under this task order, the 
contractor was to design a prototype propulsion system, assemble and 
integrate the hardware for the prototype, and perform a static hot fire 
test of the integrated system. This effort culminates in hardware--a 
tangible end product--that is expected to exhibit certain performance 
characteristics during the static hot fire test. The contractor could 
have categorized this task order, at least in some part, as discrete 
work since the work was expected to deliver a defined product with a 
schedule that could slip or vary. Because the contractor categorized 
all of this task order as LOE, the program lost its ability to gauge 
performance and to make adjustments that might prevent contract cost 
growth. 

Prime Contractors Exceed Fiscal Year 2007 Budgeted Costs but Make Gains 
on Schedule: 

We analyzed Fiscal Year 2007 Contract Performance Reports for MDA's 10 
prime contracts and determined that collectively the contractors 
overran budgeted costs by nearly $170 million but were ahead of 
schedule by nearly $200 million. However, the percentage of work 
planned as LOE should be scrutinized before accepting this as the 
contractors' actual performance because a high percentage of LOE, as 
noted above, can potentially distort the contractors' cost and schedule 
performance. The cumulative performance of one contractor is also 
distorted because it rebaselined part of its work. Rebaselining is an 
accepted EVM procedure that allows a contractor to reorganize all or 
part of its remaining contract work, add additional time or budget for 
the remaining effort, and, under some circumstances, set affected cost 
and/or schedule variances to zero. When variances are set to zero, the 
cumulative performance of the contractor appears more positive than it 
is. 

Four of the 10 contracts we reviewed also contained some kind of 
replanning activity during fiscal year 2007. Contractors may replan 
when they conclude that the current plan for completing the effort 
remaining on the contract is unrealistic. A replan can consist of any 
of the following: reallocating the budget for the remaining effort 
within the existing constraints of the contract, realigning the 
schedule within the contractually defined milestones, and setting cost 
and/or schedule variances to zero. During the course of replanning a 
contract, the contractor must provide traceability to previous 
baselines as well as ensure that available funding is not exceeded. 

Aegis BMD Contractors Perform within Budgeted Costs: 

The Aegis BMD program awarded two prime contracts for its major 
components, the Aegis BMD Weapon System and the Standard Missile-3. 
During the fiscal year, the contractors completed all work at less cost 
than budgeted. Both contractors ended the year with positive cumulative 
cost variances, but negative cumulative schedule variances. Based on 
our analysis, we project that if the contractors continue to perform at 
the same level, the weapon system contractor could underrun its budget 
by between $8.8 million and $17.7 million, while the SM-3 contractor 
could complete its work on 20 Block 1A missiles for $7.4 million to 
$11.1 million less than budgeted. 

The weapon system contractor's fiscal year 2007 cost performance 
resulted in a positive cost variance of $7.7 million. The positive 
variance was realized as two software packages required less effort 
than anticipated and were completed earlier than expected. Combined 
with its performance from earlier periods, the contractor finished the 
year with a cumulative positive cost variance of $7 million. This 
upward trend is depicted in figure 3. 

Figure 3: Aegis AWS Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line graph showing Aegis AWS fiscal year 
2007 cost and schedule performance. 

Date: Oct. 2006;
Cumulative Cost variance: -4.728;	
Cumulative schedule variance: 0.494. 

Date: Nov. 2006; 
Cumulative Cost variance: -8.533; 
Cumulative schedule variance: 0.118. 

Date: Dec. 2006; 
Cumulative Cost variance: -6.026; 
Cumulative schedule variance: -0.096. 

Date: Jan. 2007; 
Cumulative Cost variance: -4.324;	
Cumulative schedule variance: -0.089. 

Date: Feb. 2007; 
Cumulative Cost variance: -6.197; 
Cumulative schedule variance: -0.371. 

Date: Mar. 2007; 
Cumulative Cost variance: -6.945; 
Cumulative schedule variance: -0.489. 

Date: April 2007; 
Cumulative Cost variance: -8.024; 
Cumulative schedule variance: -0.515

Date: May 2007; 
Cumulative Cost variance: -7.666; 
Cumulative schedule variance: -0.515. 

Date: June 2007; 
Cumulative Cost variance: -7.551; 
Cumulative schedule variance: -0.049. 

Date: July 2007; 
Cumulative Cost variance: -4.332; 
Cumulative schedule variance: -2.098. 

Date: Aug. 2007; 
Cumulative Cost variance: 6.963; 
Cumulative schedule variance: -2.37. 

Date: Sept. 2007; 
Cumulative Cost variance: 6.979; 
Cumulative schedule variance: -3.258

(67% of contract complete)
(40% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO presentation. 

[End of figure] 

The contractor produced a $3.8 million unfavorable schedule variance in 
fiscal year 2007. The contractor reported that the unfavorable 
cumulative variance was caused in part by a delay in receiving 
component materials for the radar's processor. 

During fiscal year 2007, the Aegis SM-3 contractor closed out work 
related to missile development and initial production of Block 1A 
missiles and began new work in February 2007 to manufacture an 
additional 20 Block 1A missiles. In performing the new work, the 
contractor underran its cost budget by $6.2 million, but failed to 
complete $4.0 million of planned work. The Aegis BMD SM-3 contractor's 
cumulative cost and schedule variances are highlighted in figure 4. 

Figure 4: Aegis BMD SM-3 Fiscal Year 2007 Cost and Schedule 
Performance: 

This figure is a combination line graph showing Aegis BMD SM-3 fiscal 
year 2007 cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: 3.61; 
Cumulative schedule variance: -6.91. 

Nov. 2006; 
Cumulative cost variance: 4.83; 
Cumulative schedule variance: -5.26. 

Dec. 2006; 
Cumulative cost variance:  6.01; 
Cumulative schedule variance: -2.39. 

Jan. 2007; 
Cumulative cost variance:  6.56; 
Cumulative schedule variance:  -1.56.	

Feb. 2007; 
Cumulative cost variance:  6.94; 
Cumulative schedule variance: -0.91. 

Mar. 2007; 
Cumulative cost variance: 7.25; 
Cumulative schedule variance: -0.46; 
Cumulative cost variance:  1.3; 
Cumulative schedule variance: -0.37. 

April 2007; 
Cumulative cost variance: 1.69; 
Cumulative schedule variance:  -0.35. 

May 2007; 
Cumulative cost variance: 3.09; 
Cumulative schedule variance: 0.79. 

June 2007; 
Cumulative cost variance: 3.37; 
Cumulative schedule variance: -0.59. 

July 2007; 
Cumulative cost variance: 4.4; 
Cumulative schedule variance: -2.77. 

Aug. 2007; 
Cumulative cost variance: 5.07; 
Cumulative schedule variance: -2.99. 

Sept. 2007; 
Cumulative cost variance: 6.15; 
Cumulative schedule variance: -3.96. 

(66% of contract complete)
(18% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

Note: In March 2007, the Aegis BMD SM-3 contractor delivered 12 Block 
1A missiles and continued work that began in February 2007 to 
manufacture an additional 20 Block 1A missiles. 

[End of figure] 

The positive cost variance can be attributed to several factors 
including cost efficiencies realized from streamlining system 
engineering resources and lower than planned hardware costs. Our 
analysis predicts that if the SM-3 contractor continues to perform as 
it did through September 2007, it will underrun its budgeted costs for 
the 20 Block 1A missiles by between $7.4 million and $11.1 million. The 
contractor's negative cumulative schedule variance of $4 million for 
the 20 missiles was primarily caused by delayed qualification testing 
and integration of hardware components. 

Despite Rebaselining, ABL's Cumulative Cost and Schedule Performance 
Remain Negative: 

In May 2007, MDA allowed ABL's contractor to rebaseline one part of its 
contract after the work associated with a key knowledge point could not 
be completed on schedule. Because the contractor did not achieve this 
knowledge point as planned, the program was forced to postpone its 
lethality demonstration until August 2009. Technical issues including 
weapon system integration, beam control/fire control software 
modifications, and flight testing discoveries, all contributed to the 
delay in completing the knowledge point for the program. To provide 
funds and time to support the delay in the lethality demonstration, the 
program extended the contract's period of performance by approximately 
1 year and increased the contract's ceiling cost by $253 million. Once 
the new baseline was incorporated, the contractor was able to complete 
fiscal year 2007 with positive cost and schedule variances of $3.7 
million and $24.2 million, respectively. Figure 5 depicts the 
contractor's cumulative cost and schedule performance. 

Figure 5: ABL Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line graph showing ABL fiscal year 2007 
cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: 3.61; 
Cumulative schedule variance: -6.91		

Nov. 2006; 
Cumulative cost variance: 4.83	
Cumulative schedule variance: -5.26		

Dec. 2006; 
Cumulative cost variance: 6.01; 
Cumulative schedule variance: -2.39. 

Jan. 2007; 
Cumulative cost variance: 6.56; 
Cumulative schedule variance: -1.56. 

Feb. 2007; 
Cumulative cost variance: 6.94; 
Cumulative schedule variance: -0.91. 

Mar. 2007; 
Cumulative cost variance: 7.25; 
Cumulative schedule variance: -0.46; 
Cumulative cost variance: 1.3; 
Cumulative schedule variance: -0.37. 

April 2007; 
Cumulative cost variance: 1.69; 
Cumulative schedule variance: -0.35. 

May 2007; 
Cumulative cost variance: 3.09; 
Cumulative schedule variance: 0.79. 

June 2007; 
Cumulative cost variance: 3.37; 
Cumulative schedule variance: -0.59. 

July 2007; 
Cumulative cost variance: 4.4; 
Cumulative schedule variance: -2.77. 

Aug. 2007; 
Cumulative cost variance: 5.07; 
Cumulative schedule variance: -2.99. 

Sept. 2007; 
Cumulative cost variance: 6.15; 
Cumulative schedule variance: -3.96. 

(83% of contract complete) 
(57% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

As shown in figure 5 above, the ABL contractor was not able to overcome 
the negative cost and schedule variances of prior years and ended the 
fiscal year with an unfavorable cumulative cost variance of $74.2 
million and an unfavorable cumulative schedule variance of $25.8 
million. We estimate that, at completion, the contract could overrun 
its budget by between $95.4 million and $202.5 million. 

C2BMC Program Incurs Negative Cumulative and Fiscal Year Variances: 

During fiscal year 2006, the C2BMC contractor did not report earned 
value because it was working on a replan of its Block 2006 increment of 
work (known as Part 4). Following the definitization of the Part 4 
replan in November 2006, the C2BMC contractor resumed full EVM 
reporting with the first submittal covering February 2007 data. As part 
of the replan, the contractor adjusted a portion of its Part 4 work and 
set cost and schedule variances to zero in an effort to establish a 
baseline commensurate with the contractor's replanning efforts. 
However, even with the adjustment, the C2BMC program ended fiscal year 
2007 with negative fiscal year cost and schedule variances of $11.1 
million and $1.5 million, respectively. Figure 6 shows the contractor's 
cumulative performance in fiscal year 2007. 

Figure 6: C2BMC Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line graph showing C2BMC fiscal year 2007 
cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: -7.56; 
Cumulative schedule variance: -4.25. 

Nov. 2006; 
Cumulative cost variance: -9.01; 
Cumulative schedule variance: -8.79. 

Dec. 2006; 
Cumulative cost variance: -16.28; 
Cumulative schedule variance: -11.39; 

Jan. 2007; 
Cumulative cost variance: -3.49; 
Cumulative schedule variance: -0.78. 

Feb. 2007; 
Cumulative cost variance: -0.44; 
Cumulative schedule variance: 2.76. 

Mar. 2007; 
Cumulative cost variance: -0.19; 
Cumulative schedule variance: 2.78. 

April 2007; 
Cumulative cost variance: -1.63; 
Cumulative schedule variance: -1.56. 

May 2007; 
Cumulative cost variance: -3.09; 
Cumulative schedule variance: -2.56. 

June 2007;  
Cumulative cost variance: -4.72; 
Cumulative schedule variance: -2.93. 

July 2007; 
Cumulative cost variance: -11.33; 
Cumulative schedule variance: -7.38. 

Aug. 2007; 
Cumulative cost variance: -15.05; 
Cumulative schedule variance: -8.28. 

Sept. 2007; 
Cumulative cost variance: -14.48; 
Cumulative schedule variance: -3.54. 

(90% of contract complete) 
(52% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

The unfavorable fiscal year cost variance was largely due to adding 
staff to support a software release; while the unfavorable fiscal year 
schedule variance was attributable to delays in hardware delivery, 
initiation of a new training system, and completing training material 
for the new system. Added to prior year negative variances, the C2BMC 
contractor reported cumulative negative cost and schedule variances of 
$14.5 million and $3.5 million, respectively. The contractor completed 
Part 4 work in December 2007 and reported an overrun of $9.9 million. 

GMD Contractor Maintained Negative Cost and Schedule Variances 
Throughout the Fiscal Year: 

The GMD prime contractor's cost performance improved significantly in 
fiscal year 2007. The contractor experienced a budget overrun of $22.1 
million for the fiscal year following budget overruns in both fiscal 
years 2005 and 2006 that exceeded $300 million. Program officials 
attribute this turnaround in performance to several factors, including 
rigorous management of the contract's estimate at completion, quality 
initiatives, and joint efforts by the contractor and program office to 
define scope, schedule, and price of change orders. The cumulative cost 
variance at the end of fiscal year 2007 was over $1 billion. We 
estimate that at completion the contract, with a target price of $15.54 
billion, could exceed its budgeted cost by between $1.06 billion and 
$1.4 billion. 

The contractor was able to complete $84.9 million more work than 
scheduled for fiscal year 2007, but could not overcome poor performance 
in earlier years and ended the year with a negative cumulative schedule 
variance of $52.9 million. Figure 7 illustrates both cost and schedule 
trends in GMD fiscal year 2007 performance. 

Figure 7: GMD Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line chart showing GMD fiscal year 2007 
cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: -1069.93; 
Cumulative schedule variance: -149.41. 

Nov. 2006; 
Cumulative cost variance: -1137.45; 
Cumulative schedule variance: -154.87. 

Dec. 2006; 
Cumulative cost variance: -1116.15; 
Cumulative schedule variance: -142.85. 

Jan. 2007; 
Cumulative cost variance: -1120.22; 
Cumulative schedule variance: -109.72. 

Feb. 2007; 
Cumulative cost variance: -1137.75; 
Cumulative schedule variance: -122.2. 

Mar. 2007; 
Cumulative cost variance: -1132.03; 
Cumulative schedule variance: -124.99. 

April 2007; 
Cumulative cost variance: -1129.22; 
Cumulative schedule variance: -106.88. 

May 2007; 
Cumulative cost variance: -1125.29; 
Cumulative schedule variance: -99.2. 

June 2007; 
Cumulative cost variance: -1129.99; 
Cumulative schedule variance: -99.89. 

July 2007; 
Cumulative cost variance: -1136.41; 
Cumulative schedule variance: -106.76. 

Aug. 2007; 
Cumulative cost variance: -1121.08; 
Cumulative schedule variance: -113.88. 

Sept. 2007; 
Cumulative cost variance: -1081.76; 
Cumulative schedule variance: -52.89. 

(77% of contract complete)
(28% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

The unfavorable fiscal year cost variance is primarily attributable to 
the EKV. During fiscal year 2007, the EKV contractor experienced 
negative cost variances as it incurred additional labor costs to 
recover delivery schedules, manufacturing schedule delays, hardware 
manufacturing problems, and embedded software development and system 
integration problems. With 18 percent of the EKV work remaining, the 
negative trends on this component could continue. 

As we reported last year, the contractor was in the process of 
developing a new contract baseline to incorporate the updated scope, 
schedule, and budget that the contractor was working toward. In 
September 2006, phase one of the new baseline, covering fiscal year 
2006-2007 efforts, had been implemented and validated through the 
Integrated Baseline Review of the prime contractor and its major 
subcontractors. Phase two of the review was completed in December 2006. 
Subsequent to the reviews, fiscal year 2007 ground and flight tests 
were replanned to reflect a contract change that added additional risk 
mitigation effort to one planned flight test and added a radar 
characterization system test. 

KEI Replan Significantly Affects Cost and Schedule Variances: 

The KEI contractor replanned its work in April 2007 when MDA directed 
the program to focus, in the near term, on two main objectives: booster 
vehicle development and the 2008 booster flight developmental test. 
Prior to the replan, the KEI program was developing a land-mobile 
capability with fire control and communications and mobile launcher 
components. Although the contractor's primary objectives are now 
focused around the booster segment of work, it is still performing some 
activities related to the fire control and communications component. 
During fiscal year 2007, the contractor incurred a positive cost 
variance of $2.1 million and a negative schedule variance of $7.5 
million. Combined with variances from earlier fiscal years, the 
cumulative cost variance is a positive $5.7 million and the cumulative 
schedule variance is a negative $12.8 million. Figure 8 illustrates 
KEI's cumulative performance over the course of the fiscal year. 

Figure 8: KEI Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line chart showing KEI fiscal year 2007 
cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: 2.72; 
Cumulative schedule variance: -3.16. 

Nov. 2006; 
Cumulative cost variance: 5.72; 
Cumulative schedule variance: -5.04. 

Dec. 2006; 
Cumulative cost variance: 5.3; 
Cumulative schedule variance: -11.65. 

Jan. 2007; 
Cumulative cost variance: 10.31; 
Cumulative schedule variance: -15.61. 

Feb. 2007; 
Cumulative cost variance: 11.84; 
Cumulative schedule variance: -22.6. 

Mar. 2007; 
Cumulative cost variance: 14.77; 
Cumulative schedule variance: -29.25. 

April 2007; 
Cumulative cost variance: 4.35; 
Cumulative schedule variance: -7.95. 

May 2007; 
Cumulative cost variance: 7.1; 
Cumulative schedule variance: -5.39. 

June 2007; 
Cumulative cost variance: 7.6; 
Cumulative schedule variance: -6.69. 

July 2007; 
Cumulative cost variance: 7.85; 
Cumulative schedule variance: -9.14. 

Aug. 2007; 
Cumulative cost variance: 8.05; 
Cumulative schedule variance: -9.72. 

Sept. 2007; 
Cumulative cost variance: 5.67; 
Cumulative schedule variance: -12.78. 

(10% of contract complete) 
(40% level of effort)

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

KEI's fiscal year favorable cost variance primarily results from 
completing work on the fire control and communications component, as 
well as systems engineering and integration with fewer staff than 
planned. We were unable to estimate whether the total contract is 
likely to be completed within budgeted cost since the contract is only 
10 percent complete and trends cannot be developed until at least 15 
percent of the contract is completed. 

Work related to the interceptor's booster and systems engineering and 
integration contributed to KEI's cumulative negative fiscal year 
schedule variance of $7.5 million. The contractor reports that the 
booster work was understaffed, which caused delays in finalizing 
designs that, in turn, delayed procurement of subcomponents and 
materials and delayed analysis and tests. While the reduction in staff 
for systems engineering and integration work reduced costs for the 
contractor, it also delayed completion of the weapon system's scheduled 
engineering, flight, and performance analysis products. 

Information Not Available to Assess All MKV Work: 

We could evaluate only two of five MKV task orders open during fiscal 
year 2007 because the contractor did not report sufficient earned value 
data to make an assessment of the other three meaningful. MDA awarded 
the MKV contract in January 2004 and has since initiated eight task 
orders through its indefinite delivery/indefinite quantity contract. 
During fiscal year 2007, the program worked on five of these task 
orders--Task Orders 4, 5, 6, 7, and 8. We evaluated the contractor's 
cost and schedule performance for Task Orders 5 and 6 only. Of the 
three task orders that we did not evaluate, the contractor began 
reporting full earned value on two so late in the fiscal year that 
little data was available for analysis. In the third case, the 
contractor's reports did not include all data needed to make a cost and 
schedule assessment. 

In June 2006, MDA issued Task Order 5 which directed the design, 
assembly, and integration of the hardware for a prototype propulsion 
system, and a static hot fire test of the integrated prototype. Because 
the contractor planned all activities for this task order as level of 
effort, the contractor reported zero schedule variance. Contract 
Performance Reports show that in preparation for the hot fire test in 
August 2007, the program discovered anomalies indicative of propellant 
contamination in the prototype's propulsion system. These anomalies led 
to multiple unplanned propellant tank anomaly investigations, which 
contributed to the unfavorable $2.3 million cost variance for the 
fiscal year. Additionally, during the hot fire test, one of the 
thrusters in the propulsion system's divert and attitude control 
component experienced anomalies due to foreign object contamination. 
This anomaly led to unplanned investigations which also contributed to 
increased costs. Figure 9 below depicts the unfavorable cumulative cost 
variance of $2.7 million and cumulative schedule variance of zero 
reported for Task Order 5. Based on our analysis, we predict the 
contractor will overrun its contract costs by between $2.6 million and 
$2.9 million. 

Figure 9: MKV Task Order 5 Fiscal Year 2007 Cost and Schedule 
Performance: 

This figure is a combination line graph showing MKV task order 5 fiscal 
year 2007 cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: -0.138; 
Cumulative schedule variance: 0. 

Nov. 2006; 
Cumulative cost variance: -0.242; 
Cumulative schedule variance: 0. 

Dec. 2006; 
Cumulative cost variance: -0.235; 
Cumulative schedule variance: 0. 

Jan. 2007; 
Cumulative cost variance: -0.793;	
Cumulative schedule variance: 0. 

Feb. 2007; 
Cumulative cost variance: -1.452; 
Cumulative schedule variance: 0. 

Mar. 2007; 
Cumulative cost variance: -2.223; 
Cumulative schedule variance: 0. 

April 2007; 
Cumulative cost variance: -2.839; 
Cumulative schedule variance: 0. 

May 2007; 
Cumulative cost variance: -3.001; 
Cumulative schedule variance: 0. 

June 2007; 
Cumulative cost variance: -3.157; 
Cumulative schedule variance: 0. 

July 2007; 
Cumulative cost variance: -3.331; 
Cumulative schedule variance: 0. 

Aug. 2007; 
Cumulative cost variance: -3.534;	
Cumulative schedule variance: 0. 

Sept. 2007; 
Cumulative cost variance: -2.681; 
Cumulative schedule variance: 0. 

(93% of contract complete) 
(100% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO presentation. 

[End of figure] 

MKV's objective for Task Order 6 is to manufacture a prototype seeker 
capable of acquiring, tracking, and discriminating objects in space. 
The program plans to demonstrate the prototype seeker, which is a 
component of a carrier vehicle, through testing in 2009. In contrast to 
Task Order 5, the contractor correctly planned the bulk of Task Order 6 
as discrete work and has been reporting the work's cost and schedule 
status since March 2007. During this time, the contractor has completed 
37 percent of the work directed by the task order at $0.3 million less 
than budgeted. The contractor was also able to complete $0.9 million 
more work than planned. See Figure 10 for an illustration of cumulative 
cost and schedule variances for this task order. 

Figure 10: MKV Task Order 6 Fiscal Year 2007 Cost and Schedule 
Performance: 

This figure is a combination line graph showing MKV task order 6 fiscal 
year 2007 cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: [Empty]; 
Cumulative schedule variance: [Empty]. 

Nov. 2006; 
Cumulative cost variance: [Empty]; 
Cumulative schedule variance: [Empty]. 

Dec. 2006; 
Cumulative cost variance: [Empty]; 
Cumulative schedule variance: [Empty]. 

Jan. 2007; 
Cumulative cost variance: [Empty]; 
Cumulative schedule variance: [Empty]. 

Feb. 2007; 
Cumulative cost variance: [Empty]; 
Cumulative schedule variance: [Empty]. 

Mar. 2007; 
Cumulative cost variance: 0.035; 
Cumulative schedule variance: -0.016. 

April 2007; 
Cumulative cost variance: 0.033; 
Cumulative schedule variance: 0.024. 

May 2007; 
Cumulative cost variance: -0.002; 
Cumulative schedule variance: 0.032. 

June 2007; 
Cumulative cost variance: 0.166; 
Cumulative schedule variance: 0.313. 

July 2007; 
Cumulative cost variance: 0.424; 
Cumulative schedule variance: 0.621. 

Aug. 2007; 
Cumulative cost variance: 0.355; 
Cumulative schedule variance: 0.528

Sept. 2007; 
Cumulative cost variance: 0.267; 
Cumulative schedule variance: 0.913

[See PDF for image] 

(37% of contract complete) 
(3% level of effort) 

Source: Contractor (date); GAO (presentation). 

[End of figure] 

The program attributes its favorable fiscal year cost and schedule 
variances for Task Order 6 to the early progress made on interface 
requirements, hardware procurements, component drawings, and the 
prototype seeker's architecture. Because detailed designs for the 
seeker are derived from models, the program is anticipating some rework 
will be needed as the designs are developed, processed, and released. 
Although program officials are expecting some degradation in cumulative 
cost and schedule variances to occur, the program does not expect an 
overrun of the contract's budgeted cost at completion. Based on the 
contractor's performance to date, we predict, at contract completion, 
the contractor will underrun costs by between $0.8 million and $2.5 
million. 

Sensors' FBX-T Contractor Remains Ahead of Cost and on Schedule: 

The Sensors contractor's performance during fiscal year 2007 resulted 
in a positive cost variance of $3.9 million and an unfavorable schedule 
variance of $8.8 million. Added to variances from prior years, the 
contractor is reporting cumulative positive cost and schedule variances 
of $24.1 million and $17.8 million, respectively. The contractor's 
performance in 2007, suggests that at completion the contract will cost 
from $22.0 million to $46.8 million less than budgeted. The variances, 
depicted below in figure 11 represent the Sensors contractor's 
cumulative cost and schedule performance over fiscal year 2007. 

Figure 11: Sensors Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line graph showing sensors fiscal year 
2007 cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: 21; 
Cumulative schedule variance: 33.65. 

Nov. 2006; 
Cumulative cost variance: 19.65; 
Cumulative schedule variance: 34.47. 

Dec. 2006; 
Cumulative cost variance: 21.69; 
Cumulative schedule variance: 33.21. 

Jan. 2007; 
Cumulative cost variance: 22.9; 
Cumulative schedule variance: 33.4. 

Feb. 2007; 
Cumulative cost variance: 23.2; 
Cumulative schedule variance: 29.22. 

Mar. 2007; 
Cumulative cost variance: 22.7; 
Cumulative schedule variance: 21.93. 

April. 2007; 
Cumulative cost variance: 22.8; 
Cumulative schedule variance: 21.23. 

May 2007; 
Cumulative cost variance: 22.53; 
Cumulative schedule variance: 20.52. 

June 2007; 
Cumulative cost variance: 20.14; 
Cumulative schedule variance: 16.66. 

July 2007; 
Cumulative cost variance: 21.02; 
Cumulative schedule variance: 17.16. 

Aug. 2007; 
Cumulative cost variance: 21.37; 
Cumulative schedule variance: 14.5. 

Sept. 2007; 
Cumulative cost variance: 24.15; 
Cumulative schedule variance: 17.83. 

(65% of contract complete) 
(28% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO presentation. 

[End of figure] 

The contractor has reported favorable schedule and cost variances since 
the contract's inception because the program was able to leverage the 
hardware design of the THAAD radar to reduce development timelines and 
it implemented manufacturing efficiencies to reduce manufacturing 
costs. However, during fiscal year 2007, the contractor experienced a 
negative schedule variance as it struggled to upgrade software expected 
to provide an increased capability for the FBX-T radar. 

STSS Contractor's Cumulative Cost and Schedule Variances Remain 
Unfavorable: 

After replanning a portion of its work in October 2006, the STSS 
contractor in fiscal year 2007 experienced an unfavorable cost variance 
of $67.7 million and a favorable schedule variance of $84.7 million. 
Combined with performance from earlier periods, the contractor is 
reporting cumulative negative cost and schedule variances of $231.4 
million and $19.7 million, respectively. Figure 12 shows both cost and 
schedule trends during fiscal year 2007. 

Figure 12: STSS Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line chart showing STSS fiscal year 2007 
cost and schedule performance. 

Sept. 2006; 
Cumulative cost variance: -163.74; 
Cumulative schedule variance: -104.35. 

Oct. 2006; 
Cumulative cost variance: -166.15; 
Cumulative schedule variance: -7.59. 

Nov. 2006; 
Cumulative cost variance: -175.54; 
Cumulative schedule variance: -7.7. 

Dec. 2006; 
Cumulative cost variance: -180.83; 
Cumulative schedule variance: -9.47. 

Jan. 2007; 
Cumulative cost variance: -189.49; 
Cumulative schedule variance: -9.15. 

Feb. 2007; 
Cumulative cost variance: -193.37; 
Cumulative schedule variance: -9.43. 

Mar. 2007; 
Cumulative cost variance: -199.3; 
Cumulative schedule variance: -9.56. 

April. 2007; 
Cumulative cost variance: -206.17; 
Cumulative schedule variance: -11.17. 

May 2007; 
Cumulative cost variance: -212.36; 
Cumulative schedule variance: -14.2. 

June 2007; 
Cumulative cost variance: -217.96; 
Cumulative schedule variance: -15.65. 

July 2007; 
Cumulative cost variance: -221.76; 
Cumulative schedule variance: -18.86. 

Aug. 2007; 
Cumulative cost variance: -227.71; 
Cumulative schedule variance: -20.19

Sept. 2007; 
Cumulative cost variance: -231.41; 
Cumulative schedule variance: -19.67. 

(49% of contract complete) 
(25% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

During the fiscal year, the contractor was able to accomplish a 
significant amount of work ahead of schedule after a replan added 
additional time for planned work efforts. However, the contractor was 
unable to overcome the negative schedule variances incurred in prior 
years. 

Delays in hardware and software testing as well as integration issues 
contributed to fiscal year 2007's negative cost variance. We did not 
estimate the cost of the STSS contract at completion. The contract 
includes not only the effort to develop and launch two demonstration 
satellites (the Block 2006 capability) but also effort that will 
benefit future blocks. Block 2006 work is about 86 percent complete, 
while work on future blocks is about 16 percent complete. 

THAAD Contractor Improves Schedule, but Costs Continue to Be a Problem: 

The THAAD contractor overran its fiscal year 2007 budgeted costs by 
$91.1 million but accomplished $19.0 million more work than scheduled. 
Cumulatively, the contractor ended the year with an unfavorable cost 
variance of $195.2 million and a negative schedule variance of $9.1 
million, as shown by figure 13. 

Figure 13: THAAD Fiscal Year 2007 Cost and Schedule Performance: 

This figure is a combination line graph showing THAAD fiscal year 2007 
cost and schedule performance. 

Oct. 2006; 
Cumulative cost variance: -115.507; 
Cumulative schedule variance: -28.965. 

Nov. 2006; 
Cumulative cost variance: -127.284; 
Cumulative schedule variance: -28.959. 

Dec. 2006; 
Cumulative cost variance: -135.696; 
Cumulative schedule variance: -28.813. 

Jan 2007; 
Cumulative cost variance: -143.392; 
Cumulative schedule variance: -26.672. 

Feb. 2007; 
Cumulative cost variance: -154.16; 
Cumulative schedule variance: -28.131. 

Mar. 2007; 
Cumulative cost variance: -164.953; 
Cumulative schedule variance: -10.699. 

April. 2007; 
Cumulative cost variance: -176.408; 
Cumulative schedule variance: -10.084. 

May 2007; 
Cumulative cost variance: -183.955; 
Cumulative schedule variance: -10.969. 

June 2007; 
Cumulative cost variance: -187.942; 
Cumulative schedule variance: -7.667. 

July 2007; 
Cumulative cost variance: -190.388; 
Cumulative schedule variance: -7.19. 

Aug. 2007; 
Cumulative cost variance: -194.889; 
Cumulative schedule variance: -7.875. 

Sept. 2007; 
Cumulative cost variance: -195.232; 
Cumulative schedule variance: -9.058. 

(86% of contract complete) 
(30% level of effort) 

[See PDF for image] 

Source: Contractor (data); GAO (presentation). 

[End of figure] 

The THAAD prime contractor's cost overrun of $91.1 million was 
primarily caused by technical problems related to the element's 
missile, launcher, radar, and test components. Missile component cost 
overruns were caused by higher than anticipated costs in hardware 
fabrication, assembly, and support touch labor as well as subcontractor 
material costs for structures, propulsion, and other sub-assembly 
components. Additionally, design issues with the launcher's missile 
round pallet and the electronics assembly that controls the launcher 
caused the contractor to experience higher than anticipated labor and 
material costs. More staff than planned was required to resolve 
hardware design issues in the radar's prime power unit, causing the 
radar component to end the fiscal year with a negative cost variance. 
The contractor also experienced negative cost variances with the system 
test component because the Launch and Test Support Equipment required 
additional set-up time at the flight test range. 

THAAD's prime contractor fared better in performing scheduled work. It 
was able to reduce its negative cumulative schedule variance over the 
course of the fiscal year because subcontracted missile items were 
delivered early and three flight tests were removed from the test 
program to accommodate target availability and budget constraints, 
allowing staff more time to work on current efforts. 

The contractor projects an overrun of $174 million at contract 
completion, while we estimate that the overrun could range from $227.2 
million to $325.8 million. To achieve its projection, the contractor 
needs to complete $1.04 worth of work for every dollar spent. In 
contrast, during fiscal year 2007, the contractor achieved an average 
of $0.82 worth of work for each dollar spent. Therefore, it seems 
unlikely that the contractor will be able to achieve its estimate at 
completion. 

MDA Relies on Award Fees to Motivate Contractor Performance: 

Like other DOD programs, MDA has not always effectively used award fees 
to encourage contractors toward exceptional performance but it is 
making efforts to revise its award fee policy to do so. Over the course 
of fiscal year 2007, the agency sometimes rolled over large percentages 
of award fee--in most cases for work that was moved to later periods 
but also for one contractor that exhibited poor performance. In 
addition, some award fee plans allow fee to be awarded to contractors 
for merely meeting the requirements of their contract. For two 
contractors, MDA awarded fee amounts that were linked to very good or 
outstanding work in the cost and/or program management performance 
elements. During their award fee periods, the contractors' earned value 
data showed declines in cost and/or schedule variances, although there 
are several other factors considered when rating contract performance. 
However, in June 2007, MDA issued a revised draft of its award fee 
guide in an effort to more closely link the amount of award fees earned 
with the level of contractor performance. 

In an effort to encourage its defense contractors to perform in an 
innovative, efficient, and effective way in areas considered important 
to the development of the BMDS, MDA offers its contractors the 
opportunity to collectively earn billions of dollars through monetary 
incentives known as award fees. Award fees are intended to motivate 
exceptional performance in subjective areas such as technical 
ingenuity, cost, and schedule. Award fees are appropriate when 
contracting and program officials cannot devise predetermined objective 
targets applicable to cost, technical performance, or schedule. 

Currently, all 10 of the contracts we assessed for BMDS elements 
utilize award fees in some manner to incentivize their contractor's 
performance. Each element's contract has an award fee plan that 
identifies the performance areas to be evaluated and the methodology by 
which those areas will be assessed. At the end of each period, the 
award fee evaluation board, made up of MDA personnel, program 
officials, and officials from key organizations knowledgeable about the 
award fee evaluation areas, begins its process. The board judges the 
contractor's performance and recommends to a fee determining official 
the amount of fee to be paid. For all BMDS prime contracts we assessed, 
the fee determining official is the MDA Director. Table 1 provides a 
summary of the award fee process. 

Table 8: MDA's General Process for Determining Award Fee Amounts: 

1; 
DOD officials provide input on the contractor's performance for the 
evaluation period just ended. 

2; 
Program officials compile data and prepare a briefing or summary for 
the award fee evaluation board. 

3; 
Award fee evaluation board convenes meeting; contractor has the option 
to submit a self-assessment and brief the board. 

4; 
Award fee evaluation board considers all inputs and recommends a fee 
rating for the contractor. 

5; 
Fee determining official makes a final determination, including whether 
to rollover unearned fee; issues final determination to contractor; and 
notifies contracting officer. 

6; 
Contracting officer processes contract modification authorizing 
payment. 

Sources: Air Force Award Fee Guide, Army Contracting Agency Award Fee 
Handbook, Navy/Marine Corp Award Fee Guide (data), MDA program 
officials; GAO (analysis). 

[End of table] 

DOD Has Not Linked Award Fees to Acquisition Outcomes: 

GAO has found in the past that DOD has not always structured and 
implemented award fees in a way that effectively motivates contractors 
to improve performance and achieve acquisition outcomes.[Footnote 26] 
Specifically, GAO cited four issues with DOD's award fee processes. GAO 
reported that in many evaluation periods when rollover--the process of 
moving unearned available award fee from one evaluation period to the 
next--was allowed, the contractor had the chance to earn almost the 
entire unearned fee, even in instances when the program was 
experiencing problems.[Footnote 27] Additionally, DOD guidance and 
federal acquisition regulations state that award fees should be used to 
motivate excellent contractor performance in key areas. However, GAO 
found that most DOD award fee contracts were paying a significant 
portion of the available fee from one evaluation period to the next for 
what award fee plans describe as "acceptable, average, expected, good, 
or satisfactory" performance.[Footnote 28] Furthermore, DOD paid 
billions of dollars in award fees to programs whose costs continued to 
grow and schedules increased by many months or years without delivering 
promised capabilities to the warfighter. GAO also found that some award 
fee criteria for DOD programs were focused on broad areas--such as how 
well the contractor was managing the program--instead of criteria 
directly linked with acquisition outcomes--such as meeting cost and 
schedule goals, and delivering desired capabilities. All of these DOD 
practices contribute to the difficulty in linking elements of 
contractor performance considered in award fee criteria to overall 
acquisition outcomes and may lessen the motivation for the contractor 
to strive for excellent performance. 

DOD Imposed Stricter Award Fee Rules: 

The Department of Defense has been working to close the gap between the 
amount of award fees earned and the level of contractor performance. In 
March 2006, the Office of the Under Secretary of Defense directed 
acquisition executives to: 

* address desired outcomes and the role that award fee should play in 
the overall acquisition strategy; 

* remind the acquisition workforce to follow existing policies that tie 
award fees closely to contractor performance; and: 

* provide guidance to the acquisition workforce on rollover that 
directs rollover be the exception rather than the rule and, when it is 
allowed, that only a portion of the rolled-over fee be awarded. 

The Under Secretary explained that while award fee arrangements should 
be structured to motivate excellent contractor performance, award fees 
must be commensurate with contractor performance over a range from 
satisfactory to excellent. The memo stated that it is appropriate to 
award a portion of the award fee pool for satisfactory performance-- 
although it should be considerably less than excellent performance--to 
ensure contractors receive an adequate fee on contracts. Performance 
less than satisfactory is not entitled to any award fee. In April 2007, 
the Under Secretary added an even more stringent policy regarding award 
fee ratings that is to be applied to contract solicitations commencing 
after August 1, 2007. This stricter provision does not allow more than 
50 percent award fee for satisfactory ratings. 

The Under Secretary also placed limitations on the use of rollover. 
Stating that rollover should be the exception rather than the rule, the 
Under Secretary directed that the decision to add an award fee rollover 
provision to a contract should include a rationale as to why it is 
appropriate. He added that if rollover is used, contractors should earn 
only a portion of the fee that was rolled over--even for subsequent 
excellent performance. Finally the memo directed that if the fee 
determining official approves the use of rollover, the official 
contract file must be documented accordingly, and the contractor must 
be notified. 

Similar Problems Found in MDA Award Fee Practices: 

We assessed all award fee plans for the BMDS elements and fiscal year 
2007 award fee letters for 9 of the 10 contractors. Our review revealed 
that during 2007 MDA experienced some of the same award fee problems 
that were prevalent in other DOD programs. MDA did not roll fee forward 
often, but when it did the contractor was, in one case, able to earn 
100 percent of that fee. Also, MDA allowed another contractor to earn 
the unearned portion of fiscal year 2007 award fee in the same period 
through a separate pool composed of the unearned fee but tied to other 
performance areas. In two other instances, MDA awarded fee amounts that 
were linked to very good or outstanding work in the cost and/or program 
management performance element. However, during the award fee periods, 
earned value data indicates that these two contractors' cost and/or 
schedule performance continued to decline. Although DOD guidance 
discourages use of earned value performance metrics in award fee 
criteria, MDA includes this as a factor in several of its award fee 
plans. MDA considers many factors in rating contractors' performance 
and making award fee determinations, including considerations of earned 
value data that shows cost, schedule, and technical trends. Table 9 
provides the award fee MDA made available to its contractors, as well 
as the fee earned during fiscal year 2007. 

Table 9: Fee Awarded during Fiscal Year 2007: 

Element: Aegis BMD AWS[A]; 
Total cost of prime contract: $1,039,858,153; 
Total fee available for the contract: $118,470,435; 
Total award fee available during fiscal year 2007: $27,231,954; 
Total award fee awarded during fiscal year 2007: $26,558,018; 
Percentage of award fee awarded during fiscal year 2007: 97.5%. 

Element: Aegis BMD SM-3[B]; 
Total cost of prime contract: 1,927,578,516; 
Total fee available for the contract: 280,787,286; 
Total award fee available during fiscal year 2007: 56,840,712; 
Total award fee awarded during fiscal year 2007: 55,105,617; 
Percentage of award fee awarded during fiscal year 2007: 96.9%. 

Element: ABL[C]; 
Total cost of prime contract: 3,627,836,954; 
Total fee available for the contract: 188,924,382; 
Total award fee available during fiscal year 2007: 32,646,465; 
Total award fee awarded during fiscal year 2007: 24,003,984; 
Percentage of award fee awarded during fiscal year 2007: 73.5%. 

Element: C2BMC; 
Total cost of prime contract: 790,997,756; 
Total fee available for the contract: 170,255,747; 
Total award fee available during fiscal year 2007: 19,584,246; 
Total award fee awarded during fiscal year 2007: 18,936,065; 
Percentage of award fee awarded during fiscal year 2007: 96.7%. 

Element: FBX-T; 
Total cost of prime contract: 1,486,984,365; 
Total fee available for the contract: 160,330,668; 
Total award fee available during fiscal year 2007: 31,052,207; 
Total award fee awarded during fiscal year 2007: 30,308,477; 
Percentage of award fee awarded during fiscal year 2007: 97.6%. 

Element: GMD; 
Total cost of prime contract: 16,953,743,541; 
Total fee available for the contract: 2,084,394,496; 
Total award fee available during fiscal year 2007: 330,560,006; 
Total award fee awarded during fiscal year 2007: 330,560,006; 
Percentage of award fee awarded during fiscal year 2007: 100.0%. 

Element: KEI; 
Total cost of prime contract: 6,697,430,000; 
Total fee available for the contract: 909,544,000; 
Total award fee available during fiscal year 2007: 31,457,055; 
Total award fee awarded during fiscal year 2007: 27,230,128; 
Percentage of award fee awarded during fiscal year 2007: 86.6%. 

Element: MKV (TO 5); 
Total cost of prime contract: 13,046,997; 
Total fee available for the contract: 1,872,051; 
Total award fee available during fiscal year 2007: 0; 
Total award fee awarded during fiscal year 2007: n/a; 
Percentage of award fee awarded during fiscal year 2007: n/ a. 

Element: STSS; 
Total cost of prime contract: 1,166,897,605; 
Total fee available for the contract: 79,101,120; 
Total award fee available during fiscal year 2007: 13,683,962; 
Total award fee awarded during fiscal year 2007: 9,102,341; 
Percentage of award fee awarded during fiscal year 2007: 66.5%. 

Element: THAAD; 
Total cost of prime contract: 5,075,908,305; 
Total fee available for the contract: 626,030,200; 
Total award fee available during fiscal year 2007: 97,219,054; 
Total award fee awarded during fiscal year 2007: 84,542,827; 
Percentage of award fee awarded during fiscal year 2007: 87.0%. 

Source: MDA (data); GAO (analysis). 

Notes: Data received from MDA program offices is as of August 2007 
except for the ABL, C2BMC, MKV TO 5, and THAAD elements, which are 
current as of January 2008. 

[A] Aegis BMD AWS includes only award fee for products being developed 
for the U.S. government (domestic product). 

[B] Aegis BMD SM-3 includes only domestic award fee. 

[C] ABL's total fee available amount is the amount of fee remaining on 
the contract. The total cost of the prime contract shown is based on 
the cost for calculating award fee, fixed fee, and direct cost 
reimbursement contractor efforts. 

[End of table] 

MDA Awards Contractor Large Percentage of Rollover: 

MDA is awarding some BMDS contractors a large percentage of the fees 
rolled over from a prior period. The agency's award fee plans allow the 
fee determining official, at his discretion, to rollover all fee that 
is not awarded during one period to a future period. For example, in 
accordance with MDA's award fee policy, the fee determining official 
may consider award fee rollover when a slipped schedule moves an award 
fee event to another period, it is the desire of the fee determining 
official to add greater incentive to an upcoming period, and when the 
contractor improves performance to such a great extent that it makes up 
for previous shortfalls. During fiscal year 2007, MDA rolled fee 
forward for 3 of the 8 contractors for which award fee letters were 
available. Table 10 presents a synopsis of this data. 

Table 10: Amount of Fees Rolled over to Future Award Fee Periods During 
Fiscal Year 2007: 

Element: Aegis BMD AWS[A]; 
Total Fee Available during Fiscal Year 2007: 27,231,954; 
Total Unearned Fee During Fiscal Year 2007: 673,936; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 0; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 0%. 

Element: Aegis BMD SM-3[B]; 
Total Fee Available during Fiscal Year 2007: 56,840,712; 
Total Unearned Fee During Fiscal Year 2007: 1,735,095; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 
n/a; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: n/a. 

Element: ABL; 
Total Fee Available during Fiscal Year 2007: 32,646,465; 
Total Unearned Fee During Fiscal Year 2007: 8,642,481; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 
2,275,000; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 26%. 

Element: C2BMC; 
Total Fee Available during Fiscal Year 2007: 19,584,246; 
Total Unearned Fee During Fiscal Year 2007: 648,181; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 0; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 0%. 

Element: FBX-T; 
Total Fee Available during Fiscal Year 2007: 31,052,207; 
Total Unearned Fee During Fiscal Year 2007: 743,730; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 0; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 0%. 

Element: GMD; 
Total Fee Available during Fiscal Year 2007: 330,560,006; 
Total Unearned Fee During Fiscal Year 2007: 0; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 0; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: n/a. 

Element: KEI; 
Total Fee Available during Fiscal Year 2007: 31,457,055; 
Total Unearned Fee During Fiscal Year 2007: 4,227,470; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 0; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 0%. 

Element: MKV (TO 5)[C]; 
Total Fee Available during Fiscal Year 2007: 0; 
Total Unearned Fee During Fiscal Year 2007: n/a; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 
n/a; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: n/a. 

Element: STSS; 
Total Fee Available during Fiscal Year 2007: 13,683,962; 
Total Unearned Fee During Fiscal Year 2007: 4,581,621; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 
1,992,900; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 43%. 

Element: THAAD; 
Total Fee Available during Fiscal Year 2007: 97,219,054; 
Total Unearned Fee During Fiscal Year 2007: 12,676,227; 
Amount in Fiscal Year 2007 Rolled Over to Future Award Fee Periods: 
12,676,227; 
Percentage of Unearned Fee in Fiscal Year 2007 Rolled Over to Future 
Award Fee Period: 100%. 

Source: MDA (data); GAO (analysis). 

[A] Aegis BMD AWS includes only award fee for performance related to 
work for the United States government, which is termed domestic award 
fee. 

[B] Aegis BMD SM-3 includes only domestic award fee. We did not include 
rollover for the SM-3 contractor because a shipboard anomaly - outside 
the control of the contractor - limited the contractor's ability to 
complete three fee-bearing events during one fiscal year 2007 award fee 
period. 

[C] Award fee was not available for the MKV contractor's work on Task 
Order 5 during 2007. 

[End of table] 

As noted in table 10, MDA rolled over a large percentage of the fee 
that was not earned by the THAAD contractor during fiscal year 2007. 
During its last award fee period in fiscal year 2007, the THAAD 
contractor did not earn any of the fee associated with cost management. 
The award fee letter cited unfavorable cost variances and a growing 
variance projected at completion of the contract as the reasons for not 
awarding any of the fee for cost management. However, the fee 
determining official decided to roll 100 percent of that portion of the 
unearned fee to a rollover pool tied to minimizing cost overruns. Fee 
will be awarded from this pool at the end of the contract. By rolling 
the fee forward, MDA provided the contractor an additional opportunity 
to earn fee from prior periods. Rolling over fee in this instance may 
have failed to motivate the contractor to meet or exceed expectations. 

The award fee plan for the GMD contract allowed the contractor to not 
only rollover fee, but to earn all unearned fee in the same period. 
During the fiscal year, the GMD contractor earned 97.7 percent of the 
$330 million dollars in award fees tied to performance areas outlined 
in the award fee plan. However, the award fee plan made provisions for 
the contractor to earn the unearned $7.5 million by creating a separate 
pool funded solely from this unearned portion and awarding the fee for 
performance in other areas. In this instance, the contractor did not 
have to wait to earn rolled over fees in later award fee periods--it 
was able to receive the unearned portion in the same period despite not 
meeting all of the criteria for its original objectives. GMD officials 
told us that this fee incentivized the contractor to achieve added 
objectives. 

In contrast, the fee determining official handled rollover of fee on 
the ABL contract in accordance with DOD's new policy. According to 
ABL's award fee plan, MDA was to base its 2007 award fee decision 
primarily on the outcome of three knowledge points. During this period, 
the contractor completed two of the knowledge points, but could not 
complete a third. To encourage the contractor to complete the remaining 
knowledge point in a timely manner, the fee determining official rolled 
over only 35 percent of the fee available for the event. 

MDA Award Fee Plans Allow Contractors to Earn Fee for Satisfactory or 
Lower Performance: 

All of the award fee plans we assessed allowed MDA to award fees for 
satisfactory ratings--that is, work considered to meet most of the 
requirements of the contract. Some award fee plans even allow fee for 
marginal performance or performance considered to meet some of the 
requirements of the contract. By paying for performance at the minimum 
standards or requirements of the contract, the intent of award fees to 
provide motivation for excellence above and beyond basic contract 
requirements is lost. While the definitions of satisfactory or marginal 
differed from element to element, the award fee plans allotted roughly 
more than 50 percent award fee to contractors performing at these 
levels.[Footnote 29] According to the award fee plans, MDA allows 
between 51 and 65 percent of available fee for work rated as marginal 
for the C2BMC and KEI contractor and no less than 66 percent of 
available fee for satisfactory performance by the ABL contractor. MDA's 
practice of allowing more than 50 percent of available fee for 
satisfactory or, even, marginal performance illustrates why DOD in 
April 2007 directed that no more than 50 percent of available fee be 
given for satisfactory performance on all contract solicitations 
commencing after August 1, 2007. 

Not All Award Fees Reflect Performance as Reported by the Earned Value 
Management System: 

Earned value is one of several factors that according to the award fee 
plans for the ABL and Aegis BMD Weapon System contractors will be 
considered in rating the contractors' cost and program management 
performance. During a good part of fiscal year 2007, earned value data 
for both contractors showed that they were overrunning their fiscal 
year cost budgets. In addition, the ABL contractor was not completing 
all scheduled work. Even considering these variances, MDA presented the 
contractors with a significant portion of the award fee specifically 
tied to cost and/or program management. In contrast, the THAAD 
contractor also experienced downward trends in its cost variance during 
its last award fee period in fiscal year 2007, but was not paid any of 
the award fee tied to cost management. 

The ABL and Aegis BMD Weapon System contractors received a large 
percentage of the 2007 award fee available to them for the cost and/or 
program management element. According to ABL's award fee plan, one of 
several factors that is considered in rating the contractor's 
performance as "very good" is whether earned value data indicates that 
there are few unfavorable cost, schedule, and/or technical variances or 
trends. During the award fee period that ran from February 2006 to 
January 2007, MDA rated the contractor's cost and program management 
performance as very good and awarded 88 percent of the fee available 
for these areas of performance. Yet, earned value data indicates that 
the contractor overran its budget by more than $57 million and did not 
complete $11 million of planned work. Similarly, the Aegis BMD weapon 
system contractor was to be rated in one element of its award fee pool 
as to how effectively it managed its contract's cost. Similar to ABL's 
award fee plan, the weapon system contractor's award fee plan directs 
that earned value data be one of the factors considered in evaluating 
cost management. During the fee period that ran from October 2006 
through March 2007, MDA rated the contractor's performance in this area 
as outstanding and awarded the contractor 100 percent of the fee tied 
to cost management. Earned value data for this time period indicates 
that the contractor overran its budget by more than $6 million. MDA did 
not provide us with more detailed information as to other factors that 
may have influenced its decision as to the amount of fee awarded to the 
ABL and Aegis BMD contractors. 

In another instance, MDA more closely linked earned award fee to 
contractor performance. The THAAD contractor continued to overrun its 
2007 cost budget, and was not awarded any fee tied to the cost 
management element during its last award fee period in fiscal year 
2007. The award fee decision letter cites several examples of the 
contractor's poor cost performance including cost overruns and an 
increased projected cost variance at contract completion. These and 
other cost management issues led the fee determining official to 
withhold the $9.8 million to be awarded on the basis of cost 
management. 

MDA Is Making Changes to Its Award Fee Policy: 

MDA has made efforts to comply with DOD policy regarding some of GAO's 
recommendations and responded to the DOD issued guidance by releasing 
its own revised award fee policy in February 2007. According to the 
policy, every contract's award fee plan is directed to include: 

* a focus on developing specific award fee criteria for each element of 
contractor performance, 

* an emphasis on rewarding results rather than effort or activity, and: 

* an incentive to meet or exceed MDA requirements. 

Additionally, the directive calls for using the Award Fee Advisory 
Board, established to make award fee recommendations to the fee 
determining official, to biannually review and report to the Director 
on the consistency between MDA's award fees and DOD's Contractor 
Performance Assessment Report--which provides a record, both positive 
and negative, on a given contract for a specific period of time. MDA's 
directive also requires program managers to implement MDA's new award 
fee policy at the earliest logical point, which is normally the 
beginning of the next award fee period. 

MDA is currently constructing a revised draft of its award fee guide 
that addresses the rollover and rating scale issues from DOD's March 
2006 and April 2007 memorandums. In the latest draft, MDA limits 
rollover to exceptional cases and adopts the Under Secretary's 
limitation of making only a portion of award fee available for 
rollover. MDA's latest draft of the guide also makes use of the latest 
ratings scale, referencing the Under Secretary's April 2007 direction, 
and applies the usage of the new scales to contract solicitations 
beginning after July 31, 2007. 

MDA Tightens Controls on Unpriced Changes and Task Orders: 

MDA sometimes finds that events such as funding changes, technology 
advances, and concurrent development and deployment of the BMDS arise 
that make changes to the contract's provisions or terms necessary. MDA 
describes contract changes that are within the scope of the contract 
but whose final price, or cost and fee, the agency and its contractor 
have not agreed upon as unpriced changes. MDA has followed the FAR in 
determining how quickly the agency should reach agreement on such 
unpriced changes' price, or cost and fee. According to the FAR, an 
agreement should be reached before work begins if it can be done 
without adversely affecting the interest of the government. If a 
significant cost increase could result from the unpriced change, and 
time doesn't permit negotiation of a price, the FAR requires the 
negotiation of a maximum price unless it is impractical to do 
so.[Footnote 30] In 2007, MDA began applying tighter limits on 
definitization of price. 

MDA also issues unpriced task orders. MDA uses this term to describe 
task orders issued under established contract ordering provisions, such 
as an indefinite delivery/indefinite quantity contract, for which a 
definitive order price has not yet been agreed upon. MDA has followed 
the FAR requirements that task orders placed under an indefinite 
delivery/indefinite quantity contract must contain, at least, an 
estimated cost or fee. 

During Block 2006--January 1, 2006 through December 31, 2007--MDA 
authorized 137 unpriced changes and task orders with a value of more 
than $6 billion. Consistent with the FAR requirements noted above, of 
the total 137 unpriced changes and unpriced task orders, 61 percent of 
these--totaling $5.9 billion--were not priced for more than 180 days. 
Agreement on the price of several was not reached for more than a year, 
and agreement on the price of one was not reached for more than two and 
a half years. Table 11 below shows the value of unpriced changes and 
task orders issued on behalf of each BMDS element and the number of 
days after the contractor was authorized to proceed with the work 
before MDA and its contractor agreed to a price, or cost and fee, for 
the work. 

Table 11: MDA's Block 2006 Unpriced Changes and Unpriced Task Orders 
from January 1, 2007 to September 26, 2007: 

Element: Aegis BMD; 
Total number of unpriced changes and task orders: 0; 
Number unpriced more than 180 days before reaching price agreement: 0; 
Percentage unpriced more than 180 days before reaching price agreement: 
0%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $0. 

Element: ABL; 
Total number of unpriced changes and task orders: 0; 
Number unpriced more than 180 days before reaching price agreement: 0; 
Percentage unpriced more than 180 days before reaching price agreement: 
0%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $0. 

Element: C2BMC; 
Total number of unpriced changes and task orders: 23; 
Number unpriced more than 180 days before reaching price agreement: 4; 
Percentage unpriced more than 180 days before reaching price agreement: 
17%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $389.3. 

Element: GMD; 
Total number of unpriced changes and task orders: 70; 
Number unpriced more than 180 days before reaching price agreement: 52; 
Percentage unpriced more than 180 days before reaching price agreement: 
74%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $5,100.9. 

Element: KEI; 
Total number of unpriced changes and task orders: 1; 
Number unpriced more than 180 days before reaching price agreement: 0; 
Percentage unpriced more than 180 days before reaching price agreement: 
0%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $12.3. 

Element: MKV [A]; 
Total number of unpriced changes and task orders: 4; 
Number unpriced more than 180 days before reaching price agreement: 3; 
Percentage unpriced more than 180 days before reaching price agreement: 
75%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $89.6. 

Element: Sensors; 
Total number of unpriced changes and task orders: 16; 
Number unpriced more than 180 days before reaching price agreement: 6; 
Percentage unpriced more than 180 days before reaching price agreement: 
38%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $171.0. 

Element: STSS; 
Total number of unpriced changes and task orders: 4; 
Number unpriced more than 180 days before reaching price agreement: 2; 
Percentage unpriced more than 180 days before reaching price agreement: 
50%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $161.6. 

Element: THAAD[ B]; 
Total number of unpriced changes and task orders: 19; 
Number unpriced more than 180 days before reaching price agreement: 16; 
Percentage unpriced more than 180 days before reaching price agreement: 
84%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $172.8. 

Element: Total [C]; 
Total number of unpriced changes and task orders: 137; 
Number unpriced more than 180 days before reaching price agreement: 83; 
Percentage unpriced more than 180 days before reaching price agreement: 
61%; 
Total dollar value of unpriced change and task orders (Dollars in 
millions): $6,097.3. 

Source: MDA (data); GAO (analysis). 

[A] Total for the MKV element does not include one unpriced change or 
task order whose amount was not available as of September 26, 2007. 

[B] The THAAD element's data is current as of January 28, 2008. 

[C] Total may not be exact due to rounding. 

[End of table] 

Realizing that unpriced changes and unpriced task orders may greatly 
reduce the government's negotiation leverage and typically result in 
higher cost and fee for the overall effort, MDA, in February 2007, 
issued new contract guidance that required tighter limits on the 
timeframes for reaching agreement on price, or cost and fee. The agency 
now applies some of the Defense Federal Acquisition Regulation 
Supplement guidelines established for undefinitized contract actions to 
unpriced changes and unpriced task orders.[Footnote 31] Undefinitized 
contract actions are different from MDA's unpriced changes or unpriced 
task orders in that they are contract actions on which performance is 
begun before agreement on all contract terms, including price, or cost 
and fee, is reached. A contract modification or change will not be 
considered an undefinitized contract action if it is within the scope 
and under the terms of the contract. MDA has elected to follow some of 
the stricter undefinitized contract action guidelines because the 
agency believes the guidelines will lead to better cost results. 
Similar to the undefinitized contract action guidelines, the agency's 
new guidelines require that MDA's unpriced changes and unpriced task 
orders be definitized within 180 days, that the contractor be given a 
dollar value that it cannot exceed until price agreement is reached, 
and that approval for the unpriced change or task order be obtained in 
advance. MDA's new policy also, to the maximum extent practicable, 
limits the amount of funds that a contractor may be given approval to 
spend on the work before agreement is reached on price to less than 50 
percent of the work's expected price. 

Support Contracts: 

MDA officials maintain that support contracts provide necessary 
personnel and are instrumental in developing the BMDS quickly. The 
agency contracts with 45 different companies that provide the majority 
of the personnel who perform a variety of tasks. Table 12 illustrates 
the broad categories of job functions that MDA support contractors 
carry out. 

Table 12: MDA Support Contractor Job Functions: 

Acquisition Management; 
International Affairs. 

Administrative Services; 
Legal Services. 

Advanced Technology Development; 
Legislative Affairs. 

BMDS Information Assurance; 
Logistics. 

Business & Financial Management & Cost; 
Operations Support. 

Command & Staff; 
Personnel Services. 

Contracts; 
Public Affairs. 

Director; 
Safety, Quality & Mission. 

Facility Services & Supplies; 
Security. 

Information Assurance Certification; 
Test. 

Information Technology Support; 
Total Engineering. 

Intel and Counter Intel; 
Worldwide Deployment Support. 

Internal Review; 
[Empty]. 

Source: MDA (data); GAO (presentation). 

[End of table] 

Last year we reported that MDA had 8,186 approved personnel positions. 
This number has not changed appreciably in the last year. According to 
MDA's manpower database, about 8,748 personnel positions--not counting 
prime contractors--currently support the missile defense program. These 
positions are filled by government civilian and military employees, 
contract support employees, employees of federally funded research and 
development centers (FFRDC), researchers in university and affiliated 
research centers, as well as a small number of executives on loan from 
other organizations. MDA funds around 95 percent of the total 8,748 
positions through its research and development appropriation. Of this 
95 percent, 2,450, or about 29 percent, of the positions are set aside 
for government civilian personnel. Another 60 percent, or 5,005 
positions, are allotted for support contractors. The remaining 11 
percent are positions either being filled, or expected to be filled, by 
employees of FFRDCs and university and affiliated research centers that 
are on contract or under other types of agreements to perform missile 
defense tasks. MDA officials noted that nearly 500 of the 8,748 
personnel positions available were currently vacant. Table 13 shows the 
staffing levels within the BMDS elements. 

Table 13: Program Office Full-time Equivalent Staffing Levels: 

[See PDF for image] 

Source: MDA (data). 

Note:The table includes positions that may be presently vacant. 

[A] A detailee is a non-Missile Defense Agency position that is 
temporarily assigned, for a specified period of time, to the Missile 
Defense Agency for duties and responsibilities other than its permanent 
component position. During the detail, employee costs such as salary, 
leave, and other benefits are charged to the component where his or her 
permanent position is located. 

[B] Intergovernmental Personnel Act (IPA) positions provide for the 
temporary assignment of positions between the federal government and 
state and local governments, colleges and universities, federally 
funded research and development centers, and other eligible 
organizations " to facilitate cooperation between the federal 
government and the non-state entity." Typically only senior executive 
level positions will be filled by an IPA agreement for 2 years. The 
recipient of the appointment will continue to be paid by his or her 
parent organization at full salary and benefits; the parent 
organization will receive a negotiated reimbursement from the federal 
government. 

[C] Liaison positions are those that require its representative to 
serve as an intermediary and coordinate activities between two 
different organizations. 

[D] This one ABL full-time equivalent civilian government position is 
an MDA employee who will be relocated to another category. 

[E] The GMD manpower total will be adjusted to 869 full-time 
equivalents with confirmation for transfer of 95 full-time equivalents 
from GMD to Sensors for X-band radars and upgrades to early-warning 
radars. 

[F] The KEI manpower total will be adjusted to 37 full-time equivalents 
for changes in FFRDC and contractor support services. 

[End of table] 

Support contractors in MDA program and functional offices may perform 
tasks that closely support those tasks described in the FAR as 
inherently governmental.[Footnote 32] According to the FAR, tasks such 
as determining agency policy and approving requirements for prime 
contracts should only be performed by government personnel.[Footnote 
33] Contract personnel that, for example, develop statements of work, 
support acquisition planning, or assist in budget preparation are 
carrying out tasks that may closely support tasks meeting this 
definition.[Footnote 34] Having support contractors perform these tasks 
may create a potential risk that the contractors may influence the 
government's control over and accountability for decisions. MDA 
officials told us that when support contractors perform tasks that 
closely support those reserved for government employees the agency 
mitigates its risk by having knowledgeable government personnel provide 
regular oversight or final approval of the work to ensure that the data 
being generated is reasonable. 

[End of section] 

Appendix III: Incremental Funding: 

Incremental Versus Full-funding of BMDS Assets: 

In the tables below we provide more information comparing the cost of 
purchasing THAAD and Aegis BMD assets incrementally versus fully- 
funding the assets. Table 14 presents MDA's incremental funding plans 
for THAAD fire units 3 and 4, 48 Aegis BMD (SM-3) missiles to be 
produced during Blocks 2012 and 2014, and 19 shipsets intended to 
improve the performance of Aegis BMD ships. Tables 15 through 17 
present our analysis of the cost of purchasing these same assets with 
procurement funds and following Congress' full-funding policy. 

Table 14: MDA's Incremental Funding Plan for THAAD and Aegis BMD 
Assets: 

(Dollars in thousands). 

BMDS element: THAAD; 
(Asset: Fire units 3 and 4 (launchers, battle manager, radars, and 48 
missiles); 
Fiscal year 2009: 64,815; 
Fiscal year 2010: 409,973; 
Fiscal year 2011: 354,870; 
Fiscal year 2012: 259,254; 
Fiscal year 2013: 84,434; 
Fiscal year 2014: [Empty]; 
Fiscal year 2015: [Empty]; 
Total: $1,173,346. 

BMDS element: Aegis BMD; 
Asset: 48 SM-3 IB missiles for Blocks 2012 and 2014; 
Fiscal year 2009: 86,400; 
Fiscal year 2010: 144,000; 
Fiscal year 2011: 144,000; 
Fiscal year 2012: 119,000; 
Fiscal year 2013: 25,600; 
Fiscal year 2014: [Empty]; 
Fiscal year 2015: [Empty]; 
Total: $519,000. 

BMDS element: [Empty]; 
Asset: 19 4.0.1 shipset procurement and installs[A]; 
Fiscal year 2009: : 61,400; 
Fiscal year 2010: : 83,600; 
Fiscal year 2011: : 101,410; 
Fiscal year 2012: : 108,880; 
Fiscal year 2013: : 111,060; 
Fiscal year 2014: : 22,660; 
Fiscal year 2015: : 23,110; 
Total: : $512,120. 

Total; 
Asset: [Empty]; 
Fiscal year 2009: 212,615; 
Fiscal year 2010: 637,573; 
Fiscal year 2011: 600,280; 
Fiscal year 2012: 487,134; 
Fiscal year 2013: 221,094; 
Fiscal year 2014: 22,660; 
Fiscal year 2015: 23,110; 
Total: $2,204,466. 

Source: MDA (data); GAO (analysis). 

Note: Inflation factors were applied to estimate future costs. Factors 
for 2014 and 2015 were estimated based on factors provided for prior 
years as these factors are not yet available from DOD. DOD currently 
provides factors through the current Future Years Defense Plan which 
ends in 2013. 

[A] Under the Aegis BMD program incremental funding plan, 4.0.1 
shipsets are purchased in one year and installed 2 years later. 
According to program officials, there is no need for long lead 
procurement for the 4.0.1 shipsets because all components can be 
purchased, assembled, and installed within the 3-year life of a 
procurement appropriation. 

[End of table] 

Table 15: Full Funding Alternative for THAAD Fire Units versus MDA 
Incremental Funding Plan: 

(Dollars in thousands). 

THAAD activity: Purchase Long-lead items; 
Fiscal year 2008: -; 
Fiscal year 2009: 218,800; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $218,800. 

THAAD activity: Purchase Fire Unit (launchers, Battle Manager, and 48 
missiles); 
Fiscal year 2008: -; 
Fiscal year 2009: -; 
Fiscal year 2010: 392,486; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $392,486. 

THAAD activity: Purchase Radars; 
Fiscal year 2008: -; 
Fiscal year 2009: -; 
Fiscal year 2010: 458,200; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $458,200. 

Total cost for fire units 3 and 4; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $1,069,486. 

Total MDA incremental funding cost for fire units 3 and 4; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $1,173,346. 

Total full funding savings; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $ 103,860. 

Source: GAO analysis: 

Note: According to the THAAD Program Office, to avoid obsolescence, 
production gaps, and a less economical production rate, THAAD fire 
units 3 and 4 should be purchased together. 

[End of table] 

Table 16: Full Funding Alternative for Aegis BMD Standard Missile-3s 
versus MDA Incremental Funding Plan: 

(Dollars in thousands). 

Aegis BMD SM-3 Activity: Purchase long-lead items for 24 Block 2012 SM-
3 IBs; 
Fiscal year 2008: 24,100; 
Fiscal year 2009: -; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $24,100. 

Aegis BMD SM-3 Activity: Fully fund remaining cost of 24 Block 2012 SM-
3 IBs; 
Fiscal year 2008: -; 
Fiscal year 2009: 223,900; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $223,900. 

Aegis BMD SM-3 Activity: Purchase long-lead items for 24 Block 2014 SM-
3 IBs; 
Fiscal year 2008: -; 
Fiscal year 2009: 24,700; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $24,700. 

Aegis BMD SM-3 Activity: Fully fund remaining cost of 24 Block 2014 SM-
3 IBs; 
Fiscal year 2008: -; 
Fiscal year 2009: -; 
Fiscal year 2010: 228,900; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Total: $228,900. 

Total full funding cost of 48 SM-3 IBs; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $501,600. 

Total MDA incremental funding cost of 48 SM-3 IBs; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $519,000. 

Cost savings reaped from full funding; 
Fiscal year 2008: [Empty]; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Total: $ 17,400. 

Source: GAO analysis. 

[End of table] 

Table 17: Full Funding Alternative for Aegis BMD Shipsets versus MDA 
Incremental Funding Plan: 

Aegis BMD Ship Activity: Procure and install 3 BMD 4.0.1 Shipsets; 
Fiscal year 2009: 76,700; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Fiscal year 2014: -; 
Fiscal year 2015: -; 
Total: $76,700. 

Aegis BMD Ship Activity: Procure and install 4 BMD 4.0.1 Shipsets; 
Fiscal year 2009: -; 
Fiscal year 2010: 104,600; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: -; 
Fiscal year 2014: -; 
Fiscal year 2015: -; 
Total: $104,600. 

Aegis BMD Ship Activity: Procure and install 4 BMD 4.0.1 Shipsets; 
Fiscal year 2009: -; 
Fiscal year 2010: -; 
Fiscal year 2011: 106,800; 
Fiscal year 2012: - ; 
Fiscal year 2013: -; 
Fiscal year 2014: -; 
Fiscal year 2015: -; 
Total: $106,800. 

Aegis BMD Ship Activity: Procure and install 4 BMD 4.0.1 Shipsets; 
Fiscal year 2009: -; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: 108,900; 
Fiscal year 2013: -; 
Fiscal year 2014: -; 
Fiscal year 2015: -; 
Total: $108,900. 

Aegis BMD Ship Activity: Procure and install 4 BMD 4.0.1 Shipsets; 
Fiscal year 2009: -; 
Fiscal year 2010: -; 
Fiscal year 2011: -; 
Fiscal year 2012: -; 
Fiscal year 2013: 111,000; 
Fiscal year 2014: -; 
Fiscal year 2015: -; 
Total: $111,000. 

Aegis BMD Ship Activity: Total full funding cost of 19 4.0.1 shipsets; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Fiscal year 2014: [Empty]; 
Fiscal year 2015: [Empty]; 
Total: $508,000. 

Aegis BMD Ship Activity: Total MDA incremental funding cost of 19 4.0.1 
shipsets; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Fiscal year 2014: [Empty]; 
Fiscal year 2015: [Empty]; 
Total: $512,120. 

Aegis BMD Ship Activity: Total full funding savings; 
Fiscal year 2009: [Empty]; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: [Empty]; 
Fiscal year 2013: [Empty]; 
Fiscal year 2014: [Empty]; 
Fiscal year 2015: [Empty]; 
Total: $4,120. 

Source: GAO analysis. 

[End of table] 

[End of section] 

Appendix IV: Scope and Methodology: 

To examine the progress MDA made in fiscal year 2007 toward its Block 
2006 goals, we examined the accomplishments of nine BMDS elements. The 
elements included in our review collectively accounted for 77 percent 
of MDA's fiscal year 2007 research and development budget request. We 
evaluated each element's progress in fiscal year 2007 toward Block 2006 
schedule, testing, performance, and cost goals. In assessing each 
element we examined Program Execution Reviews, test plans and reports, 
production plans, Contract Performance Reports, and MDA briefing 
charts. We developed data collection instruments that were completed by 
MDA and each element program office. The instruments gathered detailed 
information on completed program activities including tests, prime 
contracts, and estimates of element performance. To understand 
performance issues, we talked with officials from MDA's Deputy for 
Engineering and Program Director for Targets and Countermeasures, each 
element program office, as well as the office of DOD's Director, 
Operational Test and Evaluation. To assess each element's progress 
toward its cost goals, we reviewed Contract Performance Reports and, 
when available, the Defense Contract Management Agency's analyses of 
these reports. We applied established earned value management 
techniques to data captured in Contract Performance Reports to 
determine trends and used established earned value management formulas 
to project the likely costs of prime contracts at completion. We also 
interviewed MDA officials within the Deputy for Acquisition Management 
office to gather detailed information regarding BMDS prime contracts. 
We reviewed 10 prime contracts for the 9 BMDS elements and also 
examined fiscal year 2007 award fee plans, award fee letters, and 
gathered data on the number of and policy for unpriced changes and 
unpriced task orders. We became familiar with sections of the Federal 
Acquisition Regulation and Defense Federal Acquisition Regulation 
Supplement dealing with contract type, contract award fees, and 
undefinitized contract actions. To develop data on support contractors, 
we held discussions with officials in MDA's Office of Business 
Operations. We also collected data from MDA's Pride database on the 
numbers and types of employees supporting MDA operations. 

In assessing MDA's accountability, transparency, and oversight, we 
interviewed officials from the Office of the Under Secretary of 
Defense's Office for Acquisition, Technology, and Logistics and Joint 
Staff officials. We also examined a Congressional Research Service 
report, U.S. Code, DOD acquisition system policy, the MDEB Charter, and 
various MDA documents related to the agency's new block structure. 

In determining whether MDA would save money if it fully funded THAAD 
and Aegis BMD assets rather than funding them incrementally, we used 
present value techniques to restate dollars that MDA planned to expend 
over a number of years to the equivalent number of dollars that would 
be needed if MDA fully funded the assets in the fiscal year that 
incremental funding was to begin. We also considered whether MDA would 
need to acquire long lead items for the assets and stated those dollars 
in the base year that their purchase would be required. We then 
compared the total cost of incrementally funding the assets, as shown 
in MDA's funding plans, to the fully funded cost that our methodology 
produced. 

To ensure that MDA-generated data used in our assessment are reliable, 
we evaluated the agency's management control processes. We discussed 
these processes with MDA senior management. In addition, we confirmed 
the accuracy of MDA-generated data with multiple sources within MDA 
and, when possible, with independent experts. To assess the validity 
and reliability of prime contractors' earned value management systems 
and reports, we interviewed officials and analyzed audit reports 
prepared by the Defense Contract Audit Agency. Finally, we assessed 
MDA's internal accounting and administrative management controls by 
reviewing MDA's Federal Manager's Financial Integrity Report for Fiscal 
Years 2003, 2004, 2005, 2006, and 2007. 

Our work was performed primarily at MDA headquarters in Arlington, 
Virginia. At this location, we met with officials from the Aegis 
Ballistic Missile Defense Program Office; Airborne Laser Program 
Office; Command, Control, Battle Management, and Communications Program 
Office; BMDS Targets Office, and MDA's Agency Operations Office. We 
also met with DOD's Office of the Director, Operational Test and 
Evaluation and the Office of the Under Secretary of Defense for 
Acquisition, Technology and Logistics in Washington, DC. In addition, 
in Huntsville, Alabama, we met with officials from the Ground-based 
Midcourse Defense Program Office, the Terminal High Altitude Area 
Defense Project Office, the Kinetic Energy Interceptors Program Office, 
the Multiple Kill Vehicle Program Office, and BMDS Tests Office. We 
also met with Space Tracking and Surveillance System officials in Los 
Angeles, California. 

We conducted this performance audit from May 2007 to March 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Paul Francis (202) 512-4841 or FrancisP@gao.gov: 

Acknowledgments: 

In addition to the individual named above, Barbara Haynes, Assistant 
Director; LaTonya Miller; Sigrid McGinty; Michele R. Williamson; 
Michael Hesse; Steven Stern; Meredith Allen Kimmett; Kenneth E. Patton; 
and Alyssa Weir made key contributions to this report. 

[End of section] 

Footnotes: 

[1] National Defense Authorization Act for Fiscal Year 2002, Pub. L. 
No. 107-107, § 232(g) (2001); National Defense Authorization Act for 
Fiscal Year 2006, Pub. L. No. 109-163, § 232 (2006); the John Warner 
National Defense Authorization Act for 2007, Pub. L. No. 109-364, § 224 
(2006) recently extended the requirement for GAO assessment. 

[2] We did not assess MDA's progress in fiscal year 2002 as the agency 
did not establish goals for that fiscal year. We delivered the 
following reports for fiscal years 2003 through 2006: GAO, Missile 
Defense: Actions Are Needed to Enhance Testing and Accountability, GAO-
04-409 (Washington, D.C.: Apr. 23, 2004); Defense Acquisitions: Status 
of Ballistic Missile Defense Program in 2004, GAO-05-243 (Washington, 
D.C.: Mar. 31, 2005); Defense Acquisitions: Missile Defense Agency 
Fields Initial Capability but Falls Short of Original Goals, GAO-06-327 
(Washington, D.C.: Mar.15, 2006;), Defense Acquisitions: Missile 
Defense Acquisition Strategy Generates Results but Delivers Less at a 
Higher Cost, GAO-07-387 (Washington, D.C. : Mar.15, 2007). 

[3] The BMDS also includes a 10th element, Patriot Advanced Capability- 
3 (PAC-3), which has been transferred to the Army for production, 
operation, and sustainment. This report does not evaluate PAC-3 because 
its initial development is complete and is now being managed by the 
Army. 

[4] MDA's new block construct is discussed in detail later in this 
report. 

[5] GAO, Defense Acquisitions: Missile Defense Acquisition Strategy 
Generates Results but Delivers Less at a Higher Cost, GAO-07-387 
(Washington, D.C.: Mar.15, 2007). 

[6] Earned Value Management (EVM) is a program management tool that 
integrates the technical, cost, and schedule parameters of a contract. 
During the planning phase, an integrated baseline is developed by time 
phasing budget resources for defined work. As work is performed and 
measured against the baseline, the corresponding budget value is 
"earned". Using this earned value metric, cost and schedule variances 
can be determined and analyzed. From these basic variance measurements, 
the program manager can identify significant cost and schedule drivers, 
forecast future cost and schedule performance, and construct corrective 
action plans to get the program back on track. EVM therefore 
encompasses both performance measurement (the status of the program) 
and performance management (what can be done to bring the program back 
on track). EVM is program management that provides significant benefits 
to both the Government and the contractor. 

[7] MDA employs 10 prime contractors to develop the 9 BMDS elements. 
There is one prime contractor for each element except Aegis BMD, which 
has 2 prime contractors. One Aegis BMD contractor is responsible for 
the weapon system component and another for the SM-3 missile. 

[8] Work under the Aegis BMD contract is divided into contract line 
items. The contractor initially was directed, under two separate 
contract line items, to develop, flight test, and deliver 12 Block 1A 
missiles. When this work was completed, the contractor was directed, 
under a third contract line item, to initiate the production of 20 
additional missiles. The MKV program uses task orders issued under an 
indefinite delivery/indefinite quantity contract to direct its 
contractor to accomplish certain work. More than one task order may be 
under way at any one time during the contract's life. 

[9] Atmospheric compensation is performed by the ABL's beam control 
system. It measures atmospheric disturbance between ABL and the target 
so that the laser beam can be shaped, preventing the atmosphere from 
scattering and weakening the beam's energy. 

[10] thermal vacuum test verifies that the temperature control design 
will maintain the spacecraft and all its elements within allowable 
flight temperature ranges while operating over the environmental 
extremes expected for the mission. 

[11] BMDS performance goals included a numerical goal for the 
probability of a successful BMDS engagement, a defined area from which 
the BMDS would prevent an enemy from launching a ballistic missile, and 
a defined area that the BMDS would protect from ballistic missile 
attacks. 

[12] GAO-06-327. 

[13] he National Defense Authorization Act for Fiscal Year 2008; Pub. 
L. No. 110-181, § 223. 

[14] GAO-07-387. 

[15] GAO-07-387. 

[16] MDA expects to initially develop budget baselines and report 
variances to this baseline for Blocks 1.0, 2.0, and a portion of 3.0. 

[17] The Defense Acquisition Board advises the Under Secretary of 
Defense for Acquisition, Technology, and Logistics on critical 
acquisition decisions. 

[18] MDA is subject to a requirement enacted in section 234(e) of the 
Fiscal Year 2005 National Defense Authorization Act, Pub. L. No. 108- 
375 that requires the Director, MDA, to establish and report annually 
to Congress a cost, schedule, and performance baseline for each block 
configuration being fielded. The National Defense Authorization Act for 
2008 extended this to include all MDA elements that have entered the 
equivalent of System Development and Demonstration or are produced and 
acquired for operational fielding. Modification to the baseline and 
variations against the baseline must also be reported. MDA is also 
subject to a statutory requirement that life-cycle costs be considered. 
MDA asserts that DOD's independent Cost Analysis Improvement Group has 
completed independent cost analyses of three BMDS Component Program 
Offices. In a February 2002 memorandum, the Under Secretary of Defense 
delegated to the Director, MDA, the full responsibility and authority 
for baselining each BMDS capability and configuration. In addition, 
Section 223 of the Fiscal Year 2008 National Defense Authorization Act 
contains requirements for unit cost reporting and independent cost 
estimates for certain MDA elements. 

[19] 10 USC § 2399 requires completion of initial operational test and 
evaluation of a weapon system before a program can proceed beyond low- 
rate initial production. According to DOD policy, low-rate initial 
production is intended to result in completion of manufacturing 
development in order to ensure adequate and efficient manufacturing 
capability and to produce the minimum quantity necessary to provide 
production or production-representative articles for operational test 
and evaluation, establish an initial production base for the system; 
and permit an orderly increase in the production rate for the system, 
sufficient to lead to full-rate production upon successful completion 
of operational (and live-fire, where applicable) testing. 

[20] Joint Capabilities Integration and Development System (JCIDS) is 
the formal DOD procedure that defines acquisition requirements and 
evaluation criteria for future defense programs. JCIDS was created to 
replace the previous service-specific requirements generation system, 
which allegedly created redundancies in capabilities and failed to meet 
the combined needs of all US military services. In order to correct 
these problems, JCIDS is intended to guide the development of 
requirements for future acquisition systems to reflect the needs of all 
four services (Army, Navy, Marines, and Air Force) by focusing the 
requirements generation process on needed capabilities as requested or 
defined by one of the US combatant commanders. In the JCIDS process, 
regional and functional combatant commanders give feedback early in the 
development process to ensure that their requirements are met. 

[21] The National Defense Authorization Act for Fiscal Year 2008, Pub. 
L. No. 110-181, § 223. 

[22] Congressional Research Service, Defense Procurement: Full Funding 
Policy--Background, Issues, and Options for Congress (Oct. 20, 2006). 

[23] As with most cost reimbursement research and development 
contracts, BMDS contractors are responsible to put forth their best 
efforts on the development of the BMDS capability. If, given that 
effort, the BMDS capability falls short of needs, the government has 
the option of stopping the effort or allowing the contractor to 
continue with no additional fee. 

[24] Key Performance Events measure the contractor's timely and 
effective completion of those events essential to successful 
development of the planned capabilities. 

[25] The Standard for Earned Value Management Systems Intent Guide was 
created by the National Defense Industrial Association Program 
Management Systems Committee to provide additional insight into some of 
the EVMS guidelines included in the American National Standards 
Institute/Electronic Industries Alliance Standard-748-A Standard for 
Earned Value Management Systems. 

[26] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, D.C.: Dec. 19, 2005). 

[27] GAO-06-66. 

[28] According to the Federal Acquisition Regulation (FAR) 16.405- 
2(a)(2), a cost plus award fee contract should include an award amount 
that is sufficient to provide motivation for excellence in such areas 
as quality, timeliness, technical ingenuity, and cost-effective 
management. 

[29] We reviewed the award fee plans for all 10 BMDS contracts. All 
except for one identified the percentage of award fee that would be 
provided for satisfactory performance. GMD's plan was silent as to the 
percentage of fee that would be awarded for this level of performance. 

[30] FAR 43.102(b). The Federal Acquisition Regulation also requires 
change orders-a type of contract modification that is included in MDA's 
"unpriced changes"--to have an agreed upon price in "the shortest 
practicable time." FAR 43.204. 

[31] The Defense Federal Acquisition Regulation Supplement is DOD's 
supplement to the FAR. 

[32] The Federal Acquisition Regulation provides guidance to federal 
executive agencies on acquiring goods and services with appropriated 
funds. 

[33] FAR 7.503(c)(5), (12)(iii). 

[34] FAR 7.503(d)(1),(6),(9). 

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