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Testimony before the Subcommittee on Air and Land Forces, Committee on 
Armed Services, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Tuesday, March 27, 2007: 

Defense Acquisitions: 

Decisions on Future Combat System Risks Underscore the Importance of 
Oversight: 

Statement of Paul L. Francis, Director: 
Acquisition and Sourcing Management: 

GAO-07-672T: 

GAO Highlights: 

Highlights of GAO-07-672T, a testimony before the Subcommittee on Air 
and Land Forces, Committee on Armed Services, House of Representatives 

Why GAO Did This Study: 

The Army’s Future Combat System (FCS) is a program characterized by 
bold goals and innovative concepts—transformational capabilities, 
system-of-systems approach, new technologies, a first-of-a-kind 
information network, and a total investment cost of more than $200 
billion. As such, the FCS program is considered high risk and in need 
of special oversight and review. 

Today’s testimony is based on work conducted over the past year in 
response to (1) the National Defense Authorization Act for Fiscal Year 
2006, which requires GAO to report annually on the FCS acquisition; and 
(2) the John Warner National Defense Authorization Act for Fiscal Year 
2007, which requires GAO to report on the role of the lead systems 
integrator in the Army’s FCS program. Accordingly, this statement 
discusses (1) the business case for FCS to be successful and (2) the 
business arrangements for the FCS program. 

What GAO Found: 

The Army has far less knowledge about FCS and its potential for success 
than is needed to fulfill the basic elements of a business case. Those 
elements are not new to the Army, nor to the Department of Defense 
(DOD), which addresses such criteria in its weapon system acquisition 
policy. The Army has made improvements to the program, such as 
lengthening time frames for demonstrating capabilities and for 
providing capabilities to current forces. While the Army has also made 
progress, what it still lacks in knowledge raises doubts about the 
soundness of the FCS business case. The Army has yet to fully define 
FCS requirements; FCS technologies that should have been matured in 
2003, when the program started, are still immature; key testing to 
demonstrate FCS performance will not be completed and maturity of 
design and product will not be demonstrated until after production 
starts in 2013; and an independent cost estimate from the Office of the 
Secretary of Defense is between $203 billion and $234 billion, a far 
higher figure than the Army’s cost estimate. 

To achieve its goals for the FCS program, the Army decided to employ a 
lead systems integrator (LSI) to assist in defining, developing, and 
integrating the FCS. This decision reflected the fact that not only 
were FCS goals ambitious, but also that the Army had limited capacity 
to manage the undertaking. Boeing Corporation is the LSI. Its 
relationship with the Army on FCS breaks new ground for collaboration 
between the government and a contractor. The close working relationship 
has advantages and disadvantages. An advantage is that such a 
relationship allows flexibility in responding to shifting priorities. A 
disadvantage is an increase in risks to the Army’s ability to provide 
oversight over the long term. The contract itself is structured in such 
a way as to enable the LSI to be paid over 80 percent of its costs and 
fees by completion of the critical design review in 2011—a point after 
which programs typically experience most of their cost growth. This is 
consistent with the Army’s desire to provide incentives for the 
development effort. On the other hand, this contract, as with many cost-
reimbursable research and development contracts, makes the contractor 
responsible for providing its best efforts, but does not assure a 
successful FCS. 

The foregoing underscores the important role of the Office of the 
Secretary of Defense in providing oversight on the FCS program. To 
date, the Office of the Secretary of Defense has largely accepted the 
Army’s approach to FCS, even though it runs counter to DOD’s policy for 
weapon system acquisition. GAO believes the Office of the Secretary of 
Defense needs to hold the FCS program accountable to high standards at 
the congressionally directed decision in 2009 on whether to proceed 
with FCS. Financial commitments to production will grow rapidly after 
that point. The Office of the Secretary of Defense should also be 
mindful of the department-wide implications of the future use of LSIs 
as well as the system-of-systems approach to developing weapon 
acquisitions. 

What GAO Recommends: 

GAO has recently recommended that the Secretary of Defense (1) 
establish specific criteria for evaluating the FCS program at a key 
2009 decision and (2) analyze alternative courses of action in the 
event FCS is unlikely to deliver needed capabilities. DOD concurred 
with GAO’s recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-672T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Paul L. Francis at (202) 
512-4841 or francisp@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Department of the Army's 
Future Combat System (FCS), a networked family of weapons and other 
integrated systems. FCS is in the forefront of efforts to help the Army 
transform itself into a lighter, more agile, and more capable combat 
force by using a new concept of operations, new technologies, and a new 
information network linking whole brigades together. This is an 
extraordinary undertaking that will involve a total investment cost on 
the order of $200 billion over the next few decades. 

My statement today is based on the work that we have conducted over the 
past year in response to (1) the National Defense Authorization Act for 
Fiscal Year 2006, which requires GAO to report annually on the product 
development phase of the FCS acquisition;[Footnote 1] and (2) the John 
Warner National Defense Authorization Act for Fiscal Year 2007, which 
requires GAO to report on the role of the lead systems integrator in 
the Army's FCS program.[Footnote 2] Accordingly, I will focus my 
statement on the business case and the business arrangements for the 
FCS program. 

Summary: 

We look at a business case as comprising those elements that are key to 
making an acquisition likely to result in a product that performs as 
required for the time and money promised. A sound business case 
includes firm requirements; mature technologies; an acquisition 
strategy that demonstrates design and production maturity; and adequate 
funding to cover a realistic cost estimate. When FCS was approved to 
begin in May 2003, it was far from having a sound business case, 
especially given its unprecedented size and complexity. Specifically, 
requirements were not well defined; technologies were very immature; 
the acquisition strategy was aggressive and did not allow for 
demonstrating design and production maturity until after the production 
decision; and despite the insufficient basis for good cost estimates, 
providing the resources at the estimated costs was a great challenge. 
Since then, there have been a number of improvements in the program. 
The schedule was doubled to allow for more demonstrations and to spin 
capabilities out to the current forces; requirements are better 
understood, even to the system level; technologies have gotten more 
mature; cost estimates have grown substantially, making them more 
realistic. Still, it is 4 years later, and progress should be expected. 
The Army, doing well by its own measures, is well behind business case 
measures. Requirements are still being defined; technologies are years 
away from needed maturity levels; key demonstrations of design and 
production will still come after the production decision; and 
independent cost estimates are significantly higher than the Army's. 

To achieve its goals for the FCS program, in 2003 the Army decided to 
employ a lead systems integrator (LSI) to assist in defining, 
developing, and integrating the FCS. The Army's decision to employ a 
lead systems integrator for the FCS program was framed by two factors: 
(1) the ambitious goals of the FCS program and (2) the Army's limited 
capacity to manage it. In the case of the FCS, the Army has structured 
a contract with Boeing as the LSI to define a partner-like relationship 
and provide incentives for performance. Evaluating the use of an LSI on 
FCS involves consideration of several interwined factors which are not 
separable, such as the system-of-systems scope and the technical 
challenges. Our concerns about the executability of the program aside, 
the contract provisions and relationship with the LSI are both 
consistent with the Army's vision for FCS and candid with respect to 
its workforce limitations. On the other hand, the limits and risks of 
the contractual arrangements must also be recognized. The Army has 
forged a partner-like relationship with the LSI which at the same time 
involves the Army more with decisions the LSI makes and involves the 
LSI more with decisions the Army makes. When coupled with the scope and 
significance of the program, this situation poses risks for the Army's 
ability to provide oversight over the long term. The current FCS 
contract provides for a relatively high level of compensation for the 
LSI, over 80 percent of which can be earned by completion of the 
critical design review. This is significant because most key 
demonstrations occur after this review and, historically, most cost 
growth also occurs after the review. Because of the technical and other 
uncertainties, as a research and development contract, it is possible 
for the LSI to perform satisfactorily and earn its fees even if the FCS 
is unable to deliver the required performance. 

The foregoing underscores the important role the Office of the 
Secretary of Defense (OSD) can play in providing oversight on the FCS 
program. While the Army works to manage the program, OSD must work to 
oversee the program. To date, OSD has largely accepted the Army's 
proposals for approving, planning, and restructuring FCS, even when 
they run counter to OSD's own policies and independent assessments. For 
a program with the unique arrangements, risks, and significance of the 
FCS, OSD's role in overseeing FCS requires more than milestone 
decisions at the beginning and end of development, with annual reviews 
in between. OSD needs to hold the FCS program accountable to high 
standards, which are not necessarily the standards the Army adheres to. 
The go/no-go decision OSD will hold in 2009 will be important to 
defining its role in the program. We believe the use of an LSI on FCS 
is more significant than a contracting arrangement for a single 
program. It breaks new ground in collaborative relationships and 
increasing contractor responsibilities. Accordingly, we also believe 
OSD should put itself not only in a position to oversee the progress of 
the FCS program, but to evaluate the DOD-wide implications of the LSI 
and system--of--systems approach to developing weapons. 

Background: 

The FCS concept is designed to be part of the Army's Future Force, 
which is intended to transform the Army into a more rapidly deployable 
and responsive force--one that differs substantially from the large 
division-centric structure of the past. The Army is reorganizing its 
current forces into modular brigade combat teams, each of which is 
expected to be highly survivable and the most lethal brigade-sized unit 
the Army has ever fielded. The Army expects FCS-equipped brigade combat 
teams to provide significant warfighting capabilities to DOD's overall 
joint military operations. 

Fundamentally, the FCS concept is to replace mass with superior 
information--that is, to see and hit the enemy first rather than to 
rely on heavy armor to withstand a hit. This solution attempts to 
address a mismatch that has posed a dilemma to the Army for decades: 
the Army's heavy forces had the necessary firepower needed to win but 
required extensive support and too much time to deploy while its light 
forces could deploy rapidly but lacked firepower. If the Future Force 
becomes a reality, then the Army would be better organized, staffed, 
equipped, and trained for prompt and sustained land combat, qualities 
intended to ensure that the Army would dominate over evolving, 
sophisticated threats. The Future Force is to be offensively oriented 
and will employ revolutionary concepts of operations, enabled by new 
technology. The Army envisions a new way of fighting that depends on 
networking the force, which involves linking people, platforms, 
weapons, and sensors seamlessly together in a system-of-systems. 

In 2006, Congress mandated that the Secretary of Defense conduct a 
milestone review for the FCS program, following the preliminary design 
review scheduled for early 2009.[Footnote 3] Congress stated that the 
review should include an assessment of (1) whether the requirements are 
valid and can be best met with the FCS program, (2) whether the FCS 
program can be developed and produced within existing resources, and 
(3) whether the program should continue as currently structured, be 
restructured, or be terminated. The Congress required the Secretary of 
Defense to review specific aspects of the program, including the 
maturity of critical technologies, program risks, demonstrations of the 
FCS concept and software, and a new cost estimate and affordability 
assessment and to submit a report of the findings and conclusions of 
the review to Congress. 

Congressional Defense Committees have asked GAO on numerous occasions 
to report and testify on FCS activities. This statement report is 
primarily based on that work, much of which was conducted between March 
2006 and March 2007 and in accordance with generally accepted 
government auditing standards. 

Status of FCS Business Case: 

In our March 2007 report,[Footnote 4] we found that despite the 
investment of $8 billion already made in the FCS program, it still has 
significantly less knowledge--and less assurance of success--than 
required by best practices or DOD policy. By early 2009, enough 
knowledge should be available about the key elements of the FCS 
business case to make a well-informed decision on whether and how to 
proceed with the program. If significant doubts remain regarding the 
program's executability, DOD will have to consider alternatives to 
proceeding with the program as planned. Central to the go/no-go 
decision will be demonstrable soundness of the FCS business case in the 
areas of requirements, technology, acquisition strategy, and finances. 
Our specific findings in the areas of requirements, technologies, 
acquisition strategy, and finances are summarized below. 

Requirements Definition: 

The Army has made considerable progress in defining system-of-systems 
level requirements and allocating those requirements to the individual 
FCS systems. This progress has necessitated significant trade-offs to 
reconcile requirements and technical feasibility. A key example of this 
has been the decision to allow a significant increase in manned ground 
vehicle weight to meet survivability requirements that in turn has 
forced trade-offs in transportability requirements. The feasibility of 
FCS requirements still depends on key assumptions about immature 
technologies, costs, and other performance characteristics like the 
reliability of the network and other systems. As current assumptions in 
these areas are replaced with demonstrated performance, more trade-offs 
are likely. At this point, the Army has identified about 70 high-level 
risks to be resolved to assure the technical feasibility of 
requirements. A challenge for the Army in making these trades--which 
are practical necessities--is determining the cumulative effect of an 
individual decision on overall requirements. For example, a decision to 
discontinue a munition technology could result in less lethality, 
possibly less survivability if our vehicles have to shoot more than 
once to defeat an enemy, and less responsiveness due to the weight 
added by carrying more ammunition and fuel. 

As it proceeds to the preliminary design review and the subsequent go/ 
no-go milestone, the Army faces considerable challenges in completing 
the definition of technically achievable and affordable system-level 
requirements, an essential element of a sound business case. The Army 
will have to complete definition of all system-level requirements and 
the network as well as the preliminary designs for all systems and 
subsystems. By the time of the review, it should be able to demonstrate 
that the FCS will satisfy key performance parameters and the Army's 
user community with a program that is as good as or better than what is 
available with current forces. To do this, the Army will have to 
mitigate FCS technical risks to significantly lower levels and make 
demonstrable progress toward meeting key FCS goals including weight 
reduction, reliability improvement, and average unit production cost 
reduction. 

Maturity of Technology: 

The Army has made progress in the areas of critical technologies, 
complementary programs, and software development, but it will take 
several more years to reach the level of maturity needed in 2003. 
Program officials report that the number of critical technologies they 
consider as mature has doubled in the past year. While this is good 
progress by any measure, FCS technologies are far less mature at this 
point in the program than they should be, and they still have a long 
way to go to reach full maturity. The Army only sees the need to reach 
a technology readiness level that requires demonstration of 
capabilities in a relevant environment by 2011. This does not assure 
that these capabilities will actually perform as needed in a realistic 
environment, as required by best practices for a sound business case. 
We also note that last year, technology maturity levels had been the 
result of an independent assessment, while the current levels have been 
determined by the FCS program office. The Army has made some difficult 
decisions to improve the acquisition strategies for some key 
complementary programs, such as Joint Tactical Radio System and 
Warfighter Information Network-Tactical, but they still face 
significant technological and funding hurdles. Finally, the Army and 
the LSI are attempting to utilize many software-development best 
practices and have delivered the initial increments of software on 
schedule. On the other hand, most of the software development effort 
lies ahead, and the amount of software code to be written--already an 
unprecedented undertaking--continues to grow as the demands of the FCS 
design becomes better understood. The Army and the LSI have recognized 
several high-risk aspects of that effort and mitigation efforts are 
underway. 

As it approaches the preliminary design review and the subsequent go/ 
no-go milestone review, the Army should have made additional progress 
in developing technologies and software as well as aligning the 
development of complementary programs with the FCS. The Army faces many 
challenges, such as demonstrating that critical technologies are mature 
and having this maturity independently validated. The Army will need to 
mitigate the recognized technical risks and integrate the technologies 
with other systems. It will also need to address cost, schedule, and 
performance risks related to software and mitigate those risks to 
acceptable levels. Finally, the Army must settle on the set of 
complementary programs that are essential for FCS success, ensure 
adequate funding for these systems, and align their schedules with the 
FCS schedule. 

Knowledge-Based Acquisition Strategy: 

The FCS acquisition strategy and testing schedule has become more 
complex as plans have been made to spin out capabilities to current 
Army forces. The strategy acquires knowledge later than called for by 
best practices and DOD policy, although the elongated schedule of about 
10 years provides a more realistic assessment of when capabilities can 
be delivered. Knowledge deficits for requirements and technologies have 
created enormous challenges for devising an acquisition strategy that 
can demonstrate the maturity of design and production processes. Even 
if setting requirements and maturing technologies proceed without 
incident, FCS design and production maturity are not likely to be 
demonstrated until after the production decision is made. The critical 
design review will be held much later on FCS than other programs, and 
the Army will not be building production-representative prototypes to 
test before production. The first major test of the network and FCS 
together with a majority of prototypes will not take place until 2012. 
Much of the testing up to the 2013 production decision will involve 
simulations, technology demonstrations, experiments, and single-system 
testing. Only after that point, however, will substantial testing of 
the complete brigade combat team and the FCS concept of operations 
occur. However, production is the most expensive phase in which to 
resolve design or other problems found during testing. Spin-outs, which 
are intended to accelerate delivery of FCS capabilities to the current 
force, also complicate the acquisition strategy by absorbing 
considerable testing resources. 

As the Army proceeds to the preliminary design review in 2009, it faces 
a number of key challenges in the remaining portions of the acquisition 
strategy. It must complete requirements definition and technology 
maturity. The spin-out capabilities must be demonstrated before 
committing to production. System integration must be completed and the 
Army should be preparing to have released at least 90 percent of the 
engineering drawings by the time of the critical design review, a best 
practice. Finally, the program schedule must allocate sufficient time, 
as needed, to test, fix and retest throughout the FCS test program. 
Each FCS system, the information network, and the FCS concept should be 
thoroughly tested and demonstrated before committing to low rate 
initial production in 2013. 

Program Costs and Funding: 

In 2006, we reported that FCS program acquisition costs had increased 
to $160.7 billion--76 percent--since the Army's original estimate of 
$91.4 billion (figures adjusted for inflation). While the Army's 
current estimate of $163.7 billion is essentially the same, an 
independent estimate from the Office of the Secretary of Defense puts 
the acquisition cost of FCS between $203 billion and $234 billion. The 
comparatively low level of technology and design knowledge at this 
point in the program portends future cost increases. Our work on a 
broad base of DOD weapon system programs shows that most developmental 
cost increases occur after the critical design review, which will be in 
2011 for the FCS. Yet, by that point in time, the Army will have spent 
about 80 percent of the FCS's development funds. Further, the Army has 
not yet fully estimated the cost of essential complementary programs 
and the procurement of spin-out items to the current force. The Army is 
cognizant of these resource tensions and has adopted measures in an 
attempt to control FCS costs. However, some of these measures do 
involve reducing program scope in the form of lower requirements and 
capabilities, which will have to be reassessed against the user's 
demands. Symptomatic of the continuing resource tension, the Army 
recently announced that it was restructuring several aspects of the FCS 
program, including reducing the scope of the program and its planned 
annual production rates to lower annual funding demands. 

I do want to point out the significance of the financial commitments 
the Army will make in the next few years. The fiscal year 2008 request 
includes $99.6 million in FCS procurement funds. Those funds are to 
procure long lead items for production of (1) non-line-of-sight cannon 
and other manned ground vehicles, and (2) the initial set of FCS spin- 
out kits. The fiscal year 2008 request will also fund plant 
facilitization to support FCS production beginning in fiscal year 2009. 
Procurement funds rise quickly thereafter, growing from $328.6 million 
to $1.27 billion to $6.8 billion in fiscal years 2009, 2011, and 2013, 
respectively. 

By the time of the preliminary design review and the congressionally 
mandated go/no-go milestone in 2009, the Army should have more of the 
knowledge needed to build a better cost estimate for the FCS program. 
The Army should also have more clarity about the level of funding that 
may be available to it within the long-term budget projections to fully 
develop and procure the FCS program of record. Also, by that time, the 
Army will need to have developed an official Army cost position that 
reconciles the gap between the Army's estimates and the independent 
cost estimate . In the cost estimate, the Army should clearly establish 
if it includes the complete set and quantities of FCS equipment needed 
to meet established requirements. Based on this estimate, the Army must 
ensure that adequate funding exists in its current budget and future 
years to fully fund the FCS program of record including the development 
of the complementary systems deemed necessary for the FCS as well as to 
procure the FCS capabilities planned to be spun out to the current 
forces. 

Actions Recommended in Our March 2007 Report: 

In our March 2007 report, we noted that it was important that specific 
criteria--as quantifiable as possible and consistent with best 
practices--be established now to evaluate the sufficiency of program 
knowledge. We recommended specific criteria that should be included in 
the Secretary of Defense's evaluation of the FCS program as part of the 
go/no-go decision following the preliminary design review in 2009. DOD 
agreed with this recommendation and noted that the decision will be 
informed by a number of critical assessments and analyses, but was 
unspecific as to criteria. We agree that while it is necessary that 
good information--such as that included in DOD's response--be presented 
at the decision, it is also necessary that quantitative criteria that 
reflect best practices be used to evaluate the information. 

-67We also noted that in view of the great technical challenges facing 
the program, the possibility that FCS may not deliver the right 
capability must be acknowledged and anticipated. We therefore 
recommended that the Secretary of Defense analyze alternative courses 
of action DOD can take to provide the Army with sufficient 
capabilities, should the FCS be judged as unlikely to deliver needed 
capabilities in reasonable time frames and within expected funding 
levels. DOD agreed with this recommendation as well, citing it would 
rely on ongoing analyses of alternatives. We believe that it is 
important to keep in mind that it is not necessary to find a rival 
solution to FCS, but rather the next best solution should the program 
be judged unable to deliver needed capabilities. 

FCS Program Recently Restructured: 

The Army recently made a number of key changes to FCS to keep program 
costs within available funding levels. Core program development and 
production costs were reduced by deleting or deferring four of the 
original systems, but these savings were offset by adding funding for 
spin-outs and ammunition, which had previously not been funded. The 
program's cost estimate reflecting the adjustment is now $161.2 
billion, a slight decrease from $163.7 billion that we previously 
reported. Highlights include: 

² Four systems deleted or deferred: the Class II and III unmanned 
aerial vehicles, the intelligent munitions system, and the armed 
robotic vehicle. The munitions system will continue outside of FCS, 
while the robotic vehicle will continue in the science and technology 
environment. 

² Quantity changes: Class I unmanned aerial vehicle quantities will be 
cut in half. Quantities of non-line-of-sight launch systems and 
precision attack missiles were also reduced. The Army will buy eight 
additional Class IV unmanned aerial vehicles for each brigade combat 
team. 

² Production rate reduction: Annual FCS production will be reduced from 
1.5 to 1 brigade combat team. This change will extend FCS production by 
about 5 years to 2030. 

² Consolidation of spin-outs: Spin-outs will be reduced from four to 
three and the content of the spin-outs have changed. The Army has now 
funded procurement of the spin-outs that had previously been unfunded. 

² Schedule extension: Initial FCS production has been delayed 5 months 
to February 2013 and initial and full operational capabilities dates 
have been delayed 6 months to June 2015 and June 2017, respectively. 

According to Army officials, the Army's initial assessment found little 
difference between 14 and 18 systems on the capabilities of the FCS 
brigade combat team. When the program was approved in 2003, it also had 
14 systems. In 2004, when it was restructured, 4 systems were added 
back in, bringing the total to 18, plus the network. It is not clear 
how the overall performance of the system can be insensitive to the 
changes in the composition of the FCS systems. Similarly, we do not yet 
have an understanding on why FCS production costs have not increased 
because of the lower production rates and consequent additional years 
of production. Generally, slowing down the production rate increases 
costs as the fixed costs of production facilities must be incurred for 
more years. 

FCS Business Arrangements: 

To achieve the Army's goals for the FCS program, in 2003 the Army 
decided to employ a lead systems integrator (LSI) to assist in 
defining, developing, and integrating FCS. In the past few years, DOD 
and other agencies have applied the LSI concept in a variety of ways. 
In the case of the FCS program, the LSI shares program management 
responsibilities with the Army, including defining the FCS solution 
(refining requirements), selecting and managing subcontractors, and 
managing testing. Evaluating the use of the LSI on FCS involves 
consideration of several intertwined factors, which collectively make 
the LSI arrangement in the FCS context unique. Some, like the best 
efforts nature of a cost reimbursable research and development 
contract, are not unique to the LSI or to FCS. Other factors differ not 
so much in nature, but in degree from other programs. For example, FCS 
is not the first system-of-systems program DOD has proposed, but it is 
arguably the most complex. FCS is not the first program to proceed with 
immature technologies, but it has more immature technologies than other 
programs. FCS is not the first program to employ an LSI, but the extent 
of the partner-like relationship between the Army and the LSI breaks 
new ground. these factors: 

Army Use of an LSI Framed by Scope of Program and Workforce 
Limitations: 

The Army's decision to employ a lead systems integrator for the FCS 
program was framed by two factors: (1) the ambitious goals of the FCS 
program and (2) the Army's capacity to manage it. As envisioned in 2003 
when the program started, FCS presented a daunting technical and 
management challenge: the concurrent development of multiple weapon 
systems whose capabilities would be dependent on an information network 
also to be developed. All of this was to take place in about 5½ years-
-much faster than a single weapon system typically takes. Army leaders 
believed the Army did not have the workforce or flexibility to manage 
development of FCS on its own within desired timelines. The Army saw 
its limitations in meeting this challenge as (1) cultural: difficulty 
in crossing traditional organizational lines; (2) capability: shortage 
of skills in key areas, such as managing the development of a large 
information network; and (3) capacity: insufficient resources to staff, 
manage, and synchronize several separate programs. In addition to the 
complexity and workforce implications of FCS, the Army saw an 
opportunity with an LSI to create more incentives for a contractor to 
give its best effort in development and to create more competition at 
lower supplier levels. Thus, they employed a contractor--a lead 
system's integrator-with significant program management 
responsibilities to help it define and develop FCS and reach across 
traditional Army mission areas. In May 2003, the Army hired the Boeing 
Corporation to serve as the LSI for the FCS system development and 
demonstration phase. Boeing subcontracted with Science Applications 
International Corporation, another defense contractor, to assist in 
performing the LSI functions. 

Close Working Relationship Increases the Burden of Oversight: 

The relationship between the Army and the LSI is complicated. On the 
one hand, the LSI plays the traditional role of developing a product 
for its customer, the Army, and on the other hand the LSI acts like a 
partner to the Army in ensuring the design, development, and prototype 
implementation of the FCS network and family of systems. In forging a 
partner-like relationship with the LSI, the Army sought to gain 
managerial advantages such as maintaining flexibility to deal with 
shifting priorities. A partner-like relationship also poses long-term 
risks for the government. Depending on the closeness of the working 
relationship, the government's ability to provide oversight can be 
reduced compared with an arms-length relationship; more specifically, 
the government can become increasingly vested in the results of shared 
decisions and runs the risk of being less able to provide oversight 
compared with an arms-length relationship, especially when the 
government is disadvantaged in terms of workforce and skills. In the 
case of FCS, these risks are present. The Army is more involved in the 
selection of subcontractors than we have seen on other programs, 
involvement that can, over time, make the Army somewhat responsible for 
the LSI's subcontracting network. On the other hand, the LSI is more 
involved with influencing the requirements, defining the solution, and 
testing that solution than we have seen on other programs. This is not 
to say that the level of involvement or collaboration between the Army 
and the LSI is inherently improper, but that it may have unintended 
consequences over the long term. 

OSD is in a position to provide this oversight, but thus far has 
largely accepted the program and its changes as defined by the Army, 
even when they are at wide variance from the best practices embodied in 
OSD's own acquisition policies. In 2003, OSD approved the FCS for 
system development and demonstration prematurely despite the program's 
combination of immature technologies and short schedule and then 
declined to follow through on plans to make a better informed decision 
18 months later. OSD has allowed the Army to use its cost estimates 
rather than OSD's own independent--and significantly higher--cost 
estimates and has agreed with the Army's determination that the bulk of 
cost increases since 2003 are the result of scope changes and thus do 
not trigger congressional reporting requirements. In the fiscal year 
2007 National Defense Authorization Act, Congress mandated that DOD 
hold a formal go/no-go decision meeting on the FCS in 2009. DOD has 
since proposed a serious approach to making that decision, a step that 
is encouraging from an oversight perspective. 

Contract Provides Incentives for Best Effort but Cannot Assure Success: 

The Army has structured the FCS contract consistent with its desire to 
incentivize development efforts and make it financially rewarding for 
the LSI to make such efforts. In that regard, the FCS contract pays 
well. According to an independent estimate from the Office of the 
Secretary of Defense, the fee payable to the LSI is relatively high 
based on the value of work it actually performs, and its average 
employee assigned to the program costs more than a federal executive. 
The business arrangement between the Army and LSI has been converted 
from an other transaction agreement to a Federal Acquisition Regulation-
based contract. Yet, there remain substantive risks on whether the 
contract can result in a successful program outcome. As with many cost-
reimbursable research and development contracts, the contractor is 
responsible for putting forth its best effort to ensure a successful 
FCS. However, if that system fails to meet expectations or requirements 
despite that effort, the LSI is not responsible. 

The Army provides incentive payments through nine program events called 
out in the current contract, for which the LSI must demonstrate 
progress in setting up and implementing various program processes. By 
the time the FCS critical design review is completed in 2011, the Army 
will have paid out over 80 percent of the costs of the LSI contract, 
and the LSI will have had the opportunity to earn more than 80 percent 
of its total fee. While the Army rationally notes that it is important 
to use fees to encourage good performance early, the experiences of 
previous weapon systems shows that most cost growth occurs after the 
critical design review. Key demonstrations of the actual capabilities 
of FCS systems will take place after this point. The Army shares 
responsibility with the LSI for making key decisions and to some extent 
the Army's performance affects the performance of the LSI. For example, 
some of the technologies critical to the FCS are being developed by the 
Army, not the LSI. If the technologies do not perform as planned, the 
LSI may not be responsible for the consequent trade-offs in 
performance. Furthermore, the Army is responsible for all program 
changes and therefore can adjust its expectations of the LSI according 
to those changes and the LSI may still earn its full fee. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
answer any questions you or members of the subcommittee may have. 

Contacts & Staff Acknowledgments: 

For future questions about this statement, please contact Paul Francis 
at (202) 512-4841 or francisp@gao.gov. 

Staff Acknowledgments: 

For future questions about this statement, please contact me at (202) 
512-4841. Individuals making key contributions to this statement 
include William R. Graveline, William C. Allbritton, Noah B. Bleicher, 
Lily J. Chin, Brendan S. Culley, Marcus C. Ferguson, Michael D. 
O'Neill, Kenneth E. Patton, Thomas P. Twambly, Adam Vodraska, and 
Carrie R. Wilson. 

(120632): 

FOOTNOTES 

[1] Pub. L. No. 109-163 §211 

[2] Pub. L. No. 109-163 §115 

[3] John Warner National Defense Authorization Act for Fiscal Year 
2007, Pub. L. No. 109-364 §214 (2006). 

[4] GAO, Defense Acquisitions: Key Decisions to be Made on Future 
Combat System, GAO-07-376 (Washington, D.C.: Mar. 15, 2007).  

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