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GAO-10-1020R: 

United States Government Accountability Office: 
Washington, DC 20548:  

September 15, 2010: 

The Honorable Carl Levin:
Chairman:
Committee on Armed Services:
United States Senate: 

Subject: Joint Strike Fighter: Assessment of DOD's Funding Projection 
for the F136 Alternate Engine: 

Dear Senator Levin: 

The Joint Strike Fighter (JSF) program began in 1996 with an 
acquisition strategy that called for a competitive engine acquisition 
program. The program planned to first develop and procure the F135 
primary engine and, with a few years lag time, develop the F136 second 
(or alternate) engine to compete with the F135 engine for future 
procurements and life-cycle support activities. The Department of 
Defense (DOD) requested funding for both engines annually as the JSF 
program progressed until the fiscal year 2007 budget submission, at 
which point the DOD stopped requesting funding for the F136 alternate 
engine. Defense officials believe that the operational risks of 
relying on a single engine supplier are low and do not justify the 
extra costs to maintain a second engine source. DOD further states 
that there is no guarantee that having an engine competition will 
create enough long-term savings to outweigh the up-front costs and now 
intends to acquire only the F135 primary engine. However, Congress has 
continued to fund the alternate engine development program annually 
through fiscal year 2010. 

According to the Secretary of Defense, DOD would need an additional 
$2.9 billion in funding over the next 6 years to support an alternate 
engine program up to the point where it believes it could begin 
competition in 2017. This amount includes the additional funding DOD 
says is needed with respect to the alternate engine to finish system 
development and demonstration, allow sufficient time for the 
contractor to gain production experience before DOD begins the 
competition,[Footnote 1] and create a logistics support system for the 
engine. DOD has stated that it has higher priority needs for this 
funding and has not included any funding in its fiscal year 2011 
budget request for the alternate engine. 

At your request, we reviewed the basis for DOD's $2.9 billion funding 
projection and its key assumptions. We obtained and discussed data 
from the Office of the Secretary of Defense's Cost Analysis and 
Program Evaluation office, including its assumptions and methods used 
in formulating the estimate. We reviewed DOD's 2007 cost analysis of 
the JSF alternate engine program and its 2010 update. In performing 
our review, we used data and information collected over the past 
several years from our body of work reviewing the overall JSF and 
alternate engine programs.[Footnote 2] We also relied on guidance 
provided in the March 2009 GAO Cost Estimating and Assessment Guide: 
Best Practices for Developing and Managing Capital Program Costs. We 
performed our review from July 2010 to September 2010 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Summary: 

The $2.9 billion funding projection cited by DOD as the additional 
funding required to support an alternate engine program was intended 
to provide a general sense of the funding needed. As such, the 
projection does not include the same level of fidelity and precision 
normally associated with a detailed, comprehensive estimate. DOD 
analysts relied largely on data, assumptions, and methodologies from 
an analysis done 3 years ago and have characterized the $2.9 billion 
projection as having an equal chance of being too high or too low. 
Therefore, this projection should be viewed as one point within a 
range of possible costs depending on the factors and assumptions used, 
and not as an absolute amount. 

Different assumptions and more detailed information could either 
increase or decrease the $2.9 billion funding projection. That said, 
we found two key assumptions made by DOD in developing the $2.9 
billion funding projection that have a significant impact on the 
estimated amount of upfront investment needed. These assumptions were 
(1) 4 years of noncompetitive procurements of both engines would be 
needed to allow the alternate engine contractor sufficient time to 
gain production experience and complete developmental qualification of 
the engine, and (2) the government would need to fund quality and 
reliability improvements for engine components. Past studies and 
historical data we examined indicate that it may take less than 4 
years of noncompetitive procurements and that competition may obviate 
the need for the government to fund component improvement programs. If 
these conditions hold true for the alternate engine, the funding 
projection for the alternate engine could be lower than DOD's 
projection. 

DOD's Alternate Engine Cost Projection Is Not A Detailed, 
Comprehensive Estimate: 

DOD projected that it would need $2.9 billion of additional funding to 
support the alternate engine program to the point where DOD believes 
it could begin competition in 2017. The projection was not based on, 
nor intended to be, a detailed, comprehensive estimate. DOD cost 
analysts stated the projection provides a general-level sense of the 
budget required to put the alternative engine on a competitive level 
with the primary engine. The analysts noted that DOD was in the midst 
of a complex and comprehensive restructuring of the total JSF 
acquisition program and they were unable to invest the time or 
resources that normally would be part of a more detailed, 
comprehensive estimate. Accordingly, they relied largely on data, 
assumptions, and methodologies from their 2007 analysis. Using the GAO 
Cost Estimating and Assessment Guide, DOD's estimate would be 
characterized as a "rough order of magnitude" cost analysis. This type 
of analysis is typically developed when a quick estimate is needed and 
limited information is available, and does not include the same level 
of fidelity and precision normally associated with a detailed, 
comprehensive cost estimate. Table 1 summarizes DOD's projection of 
additional development and procurement costs to enable JSF engine 
competition. 

Table 1: DOD's Projection of the Additional Funding Needed to Support 
the Alternate Engine Program (in millions of then-year dollars): 

Development total: 
Additional funding projected by DOD (FY 2011-FY 2016): $1,533. 

System Development and Demonstration: 
Additional funding projected by DOD (FY 2011-FY 2016): $1,188. 

Engine Component Improvement Program: 
Additional funding projected by DOD (FY 2011-FY 2016): $345. 

Procurement total: 
Additional funding projected by DOD (FY 2011-FY 2016): $1,381. 

Noncompetitive procurement of engines (including spares); 
Additional funding projected by DOD (FY 2011-FY 2016): $747. 

Production tooling: 
Additional funding projected by DOD (FY 2011-FY 2016): $133. 

Support: 
Additional funding projected by DOD (FY 2011-FY 2016): $500. 

Total: 
Additional funding projected by DOD (FY 2011-FY 2016): $2,914. 

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

Note: Some numbers may not add because of rounding.  

[End of table]  

The following examples help illustrate the level of fidelity and 
precision of the information used in formulating DOD's $2.9 billion 
funding projection: 

* DOD's F136 system development and demonstration cost projection, 
primarily developed in 2007, is based largely on historical analogy to 
the development of other fighter engines with some limited updating of 
data. DOD analysts emphasize that they did not conduct a detailed, 
fact finding effort to assess the current status and costs of the F136 
development for their current projection. 

* DOD's analysts chose to be methodologically consistent with their 
2007 analysis and assumed competition would not begin until after JSF 
system development was complete. This would delay the start of 
competition by 3 years, from 2014 to 2017. At the time the 2007 study 
was done, the overall JSF system development program and F136 
development efforts were scheduled to be complete at about the same 
time. However, since that time, the JSF development program has 
slipped about 3 years while projected completion of F136 engine 
development has slipped about 7 months. 

* DOD's procurement cost projection did not use actual production cost 
data for either the F135 or F136 and relied on historical data from 
the F119 engine used on the F-22. DOD's analysis also assumed the 
initial F136 engine procurement unit prices would be the same as the 
F135's initial unit prices, and that both engines would follow the 
same price curve. We note that the F136 engine is a different design 
and the contractor will likely use different manufacturing processes. 
In addition, the F136 engine development began 3 to 4 years after the 
F135 engine development and may benefit from F135 lessons learned and 
flight test results. 

* To project support costs for the alternate engine, the analysts 
applied a historical cost factor of 21 percent to the estimated F136 
flyaway procurement costs for fiscal years 2013 through 2016, and then 
equally divided the amount over this same time period for an estimated 
"level of effort."  

* DOD's analysis did not take into account $70 million of appropriated 
but unobligated F136 engine procurement funding that could potentially 
be used to offset some of the projected costs. 

Different assumptions and more detailed information could either 
increase or decrease the $2.9 billion funding projection accordingly. 
DOD analysts have characterized the projection as being at a 50 
percent confidence level--meaning that it is equally likely to be too 
low as too high. In addition, the DOD analysts stated that they did 
not conduct a sensitivity analysis that looked at different scenarios 
with alternative assumptions, uncertainty, and risks levels, instead 
choosing to stay largely consistent with their 2007 analysis. Based on 
the GAO Cost Estimating and Assessment Guide, providing decision 
makers with a range of costs around a point estimate would be more 
useful, particularly when information on cost, schedule, and technical 
risks is limited. DOD believes any additional costs for continuing the 
alternate engine program are an unwarranted use of resources and that 
conducting a sensitivity analysis would not fundamentally change that 
position. 

Two Key Assumptions Significantly Affect Projected Funding Needs: 

Two key assumptions made by DOD in developing the $2.9 billion funding 
projection have a significant impact on the estimated amount of up- 
front investment needed. These two assumptions alone account for more 
than one-third of DOD's projection. First, DOD's funding projection 
reflects the assumption that 4 years of noncompetitive annual 
procurements of both engines are needed to allow the alternate engine 
contractor sufficient time to gain the production experience and 
learning necessary for competitive procurement and to complete 
developmental qualification of the alternate engine. DOD estimates 
additional costs of $747 million to the U.S. government for procuring 
both primary and alternate engines (including spares) over these four 
years.[Footnote 3] Second, DOD assumes that $345 million of additional 
funding will be required through fiscal year 2016 to maintain the 
alternate engine's currency and improve its reliability once fielded. 
However, if different assumptions are made, such as (1) competition 
beginning 2 years earlier than DOD assumes, and (2) competition 
driving increased quality and reliability into the contractors' 
designs and processes reducing the need to fund engine component 
improvement programs,[Footnote 4] the amount of additional funding to 
support the alternate engine program could potentially be lower. 

Amount of Time Needed for Noncompetitive Procurements: 

Some period of noncompetitive procurements of both engines may be 
needed to ensure that the alternate engine has a mature design and can 
be efficiently produced, but how long a period can be debated. The 4 
years assumed by DOD may not all be necessary. Historical data 
provided by DOD show that during the "Great Engine War,"[Footnote 5] 
the price of the alternate contractor's engine actually became 
competitive with the price of the initial contractor's engine after 
only 1 year of noncompetitive procurements. Assuming 2 years of 
noncompetitive procurement of JSF engines instead of 4 years could 
significantly reduce DOD's projection of $747 million because 
competition would start 2 years sooner (see fig.1).[Footnote 6] 

Figure 1: Comparison of 4-Year and 2-Year Noncompetitive Procurement 
Options:  

[Refer to PDF for image: illustration]  

Scenario 1: 4 years, noncompetitive procurements: 
Alternative engine development: FY 2007-2014; 
Noncompetitive procurement, F123 only (183 engines): FY 2007-2012; 
Noncompetitive procurement. F135 and F136 (743 engines): FY2013-2016; 
Annual competition, 2,723 engines: FY 2016 and beyond.  

Scenario 2: 2 years, noncompetitive procurements: 
Alternative engine development: FY 2007-2014; 
Noncompetitive procurement, F123 only (183 engines): FY 2007-2012; 
Noncompetitive procurement. F135 and F136 (292 engines): FY2013-2014; 
Annual competition, 3,174 engines: FY 2014 and beyond.  

Source: DOD (data), GAO (analysis).  

Note: Based on the number of U.S, international, and spare engine 
procurements used in DOD's analysis.  

[End of figure]  

Given the alternate engine contractor's current schedule, 2 years of 
noncompetitive procurements could still allow sufficient time to 
complete the alternate engine development and qualify the engine. 
According to DOD analysts, they did not assess any scenarios other 
than 4 years of noncompetitive procurements, but stated that they 
believe a scenario in which there is less than 4 years would require 
the alternate engine provider to accept more risk in order to offer a 
competitive price. 

Funding for Engine Component Improvements: 

Competition could drive increased quality into the contractors' 
designs and processes, and decrease or eliminate the need for DOD to 
fund component improvement programs for both engines. A key tenet of 
competition identified in studies on competition benefits is that it 
typically results in increased contractor responsiveness and 
technological innovation leading to better and more reliable products. 
A 2002 program management advisory group study examined the JSF 
alternate engine program and concluded that competition has the 
potential to incentivize the F135 and F136 contractors to invest their 
own resources in durability and reliability improvements, thereby 
eliminating or offsetting the need for government-funded component 
improvement programs. Also, the Great Engine War was able to generate 
significant benefits because competition gave contractors an incentive 
to improve designs and reduce costs during production and sustainment. 
If these benefits of competition are assumed, as much as $345 million 
of DOD's projected $2.9 billion up-front costs projected for a F136 
component improvement program through 2016 could potentially be 
eliminated. Similarly, funding currently planned for the F135 
component improvement program through fiscal year 2016 could become 
available to further offset the additional cost projected to support 
the F136 engine program. According to DOD analysts, they did not 
assume that competition would result in both significant price 
decreases and improved product quality. While they agree that 
competition could motivate the contractors to invest their own 
resources to improve product quality, they assumed that the 
contractors would also increase their engine unit prices to cover the 
additional investment. 

Agency Comments and our Evaluation: 

DOD provided us written comments on a draft of this report (enclosed). 
In its comments, DOD further explains the rationale for the 
assumptions and methods it used in developing its projection. DOD also 
cites our previously-reported concerns about excessive concurrency 
with the JSF aircraft program as indirectly supporting its assumption 
that 4 years of non-competitive procurements are needed for the 
alternate engine. Our concerns, however, have focused on the degree of 
concurrency with the overall JSF aircraft program, not with the F136 
alternate engine program specifically. We note that the projected 
completion of the JSF aircraft development program has slipped about 3 
years while projected completion of F136 engine development has 
slipped about 7 months. Therefore, we believe the risks of concurrency 
in this situation would be considerably lower than that of the overall 
JSF program. 

Also, DOD comments that our analysis focused solely on describing 
factors that could drive alternate engine funding requirements lower 
than its projection and that we were generally silent with respect to 
a number of plausible scenarios where costs could be higher. DOD 
believes this may mislead readers to assume that the $2.9 billion is 
at the high end of the range of possible funding needs, which it 
states is not the case. We do point out in our report that different 
assumptions and more detailed information could either increase or 
decrease the funding projection accordingly. The two key assumptions 
we highlight in our report--the number of years of noncompetitive 
procurements and the need for government funded component improvement 
programs--are examples where past studies and historical data provide 
evidence that the funding requirements could be lower than DOD's 
projection. In its comments, DOD agrees that there are a number of 
plausible scenarios that could impact its projection and reiterates 
that it is equally likely that their $2.9 billion projection will be 
either too high or too low, but does not provide a potential range of 
how high or low. As result, we believe DOD's $2.9 billion projection 
should be viewed as one point within a range of possible costs. Given 
the number of plausible scenarios and the limited amount of data 
available, providing a range of costs, which include the consideration 
of different assumptions, uncertainty and risk levels, may be more 
useful to decisionmakers. 

We are sending copies of this report to the Secretary of Defense; 
Secretary of the Air Force; Secretary of the Navy; and Director of the 
Office of Management and Budget. The report is also available at no 
charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Staff members making key 
contributions to this report were Bruce Fairbairn, Matthew Lea, and 
Travis Masters. 

Sincerely yours,  

Signed by:  

Michael J. Sullivan, Director:
Acquisition and Sourcing Management: 

Enclosure:  

[End of section]  

Enclosure: 

Comments from the Department of Defense: 

Office Of The Secretary Of Defense: 
Cost Assessment And Program Evaluation: 
1800 Defense Pentagon: 
Washington, D.C. 20301-1500:  

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

Dear Mr. Sullivan:  

This is the Department of Defense (DoD) response to the GAO Draft 
Report, GAO-10-1020R, Joint Strike Fighter: Assessment of DoD's 
Funding Projection for the F136 Alternate Engine, dated September 15, 
2010 (GAO Code 120927).  

Thank you for the opportunity to review this draft report. We 
understand that your report contains no recommendations and therefore 
DoD comments are optional; however, we would like to take this 
opportunity to comment on your findings. Our detailed response is 
enclosed.  

I appreciate the healthy dialogue and interaction between our staffs. 
It is an important element of providing visibility and transparency 
into critical national security topics such as this.  

Signed by:  

Christine H. Fox: 
Director:  

Enclosure:  

[End of letter]  

Enclosure: DoD Comments to GAO Draft Report, GAO-10-1020R:  

Department of Defense (DoD) Comments on Draft GAO-10-1020R, Joint 
Strike Fighter: Assessment of Don's Funding Projection for the FI36 
Alternate Engine, dated September 15, 2010 (GAO Code 120927).  

GAO Finding: (Page 2) "DoD'S Alternate Engine Cost Projection is Not a 
Detailed, Comprehensive Estimate"  

DoD Comment: The DoD cost projection was prepared to inform the 
Department's senior leadership on resources necessary to make the 
alternate engine competitive if a decision were made to fully fund the 
F 136 alternate engine program to support a competitive acquisition 
strategy. This spans 2011 to 2016. The two largest components of this 
cost estimate are the costs to complete development of the F136 
engine, and costs to initiate non-competitive procurement of engines 
during a period of "directed buys." The cost estimates for these two 
activities are derived from previously prepared, detailed, and careful 
analyses of costs based on empirical data from these and prior 
tactical fighter propulsion programs. The strength and validity of 
these cost estimates is proven by the fact that subsequent actual cost 
return information from the F135 and F136 engine programs is 
consistent with the DoD forecasts. As a result, we continue to believe 
that the Department's $2.9 billion cost estimate to complete F136 
development activities and prepare the vendor for competition is built 
upon a solid foundation.  

GAO Finding: (Page 4) "Two Key Assumptions Significantly Impact 
Projected Funding Needs"  

DoD Comment: The GAO points out two scenarios in which less than $2.9 
billion would be required to fund the alternate engine program 
throughout the FYDP: 1) if the period of directed buys is less than 
the four years assumed by the Department; and 2) if the incentives 
introduced through competition encourage the contractors to employ 
their own corporate resources to fund product improvements, obviating 
the need for a separate government-funded component improvement 
program (C1P) during the competition.  

-Period of Directed Buys: The Department's cost estimate assumes four 
years of directed buys are necessary, consistent with the analytic 
assumptions used in the Department's 2007 Congressionally-mandated 
study on the alternate engine program. More importantly, a period of 
four years offers the appropriate balance of risk in planning for the 
conduct of concurrent engine and aircraft development, test, and 
production activities. We note that GAO itself has consistently 
expressed concern about the potential for introduction of excessive 
concurrency into the Joint Strike Fighter program.[Footnote 1]  

A period of four years of directed buys would enable the alternate 
engine contractor to complete engine qualification activities; 
establish a production line; and achieve a competitive footing to 
begin production. The assumption that these activities can be 
successfully accomplished in less than four years would impose 
additional risks on the JSF propulsion and aircraft programs. As of 
April 2010, the alternate engine had completed only 700 hours of a 
planned 10,000-hour test program. The bulk of the planned testing for 
the alternative engine is planned to occur in FY 2012 thru FY 2014. 
Also, no flight testing of the F 136 engine has occurred to date. 
Qualification activities for the JSF aircraft program are now planned 
to extend into FY 2015. With this JSF program schedule, the 
Department's assumption of four years of directed buys for the JSF 
engine competition would incorporate two years of concurrency with 
development and qualification activities for the second engine (i.e., 
FY 2013-14), and would allow the two years following (i.e., FY 2015-
16) for the second engine vendor to mature production processes to 
enable engine price offers that are comparable to those of the lead 
engine vendor.  

- Government Funded Component Improvement Program: As the GAO points 
out, the Department's estimate includes $345 million for a discrete 
Component Improvement Program (CIP) for the F136 engine. DoD did not 
assume that competition itself would incentivize the contractor to 
bear the full burden of the costs of a CIP program, while 
simultaneously offering dramatic reductions in engine prices during 
procurement competitions. The Department's analysis of the alternative 
engine accounted for the benefits of competition through projected 
price reductions beginning in FY 2017, together with the assumption 
that some level of government funding is required to maintain a 
standard CIP for the alternate engine during the competition. In 
reality, the benefits of competition would be driven by the incentives 
the government chose to emphasize during annual competitions, whether 
focus on reduced acquisition prices, design and reliability 
improvements, or some combination of the two. Using the terms of 
competition to drive design improvements would tend to reduce the 
direct benefits realized from price reductions offered during a 
competitive procurement phase.  

GAO Finding: (Page 4) "Based on the GAO Cost Estimating and Assessment 
Guide, providing decision makers with a range of costs around a point 
estimate would be more useful, particularly when information on cost, 
schedule and technical risks is limited."  

DoD Comment: The purpose of the Department's $2.9 billion cost 
projection was to inform decision-making on resourcing of the 
alternative engine program in the President's Budget request and the 
Future Years Defense Program (FYDP). A point estimate is most 
appropriate for this decision since the FYDP, as well as the 
President's budget request, requires a single estimate of required 
resources for a given program in each specific fiscal year.  

General DoD Comments: Based on the rigor in methods used in building 
estimates, the collection and use of historical cost information from 
the F135, F136, and other tactical aircraft propulsion programs, and 
the review of applied assumptions, we project that it is about equally 
likely that our $2.9 billion cost projection to prepare the F136 for 
competition would prove too low or too high. The GAO analysis is 
focused solely on describing factors that would drive funding 
requirements for the alternative engine to be lower than our $2.9 
billion figure (i.e., directed buys and discrete funding of CIP). 
Also, GAO's assessment (i.e., page 4) identifies other factors that 
may generate lower prices, specifically a different design that 
results in a different cost improvement curve, or the ability of the 
F136 engine to take advantage of lessons-learned from the F135 
experience. The benefits of these two items are ambiguous: it may be 
that the design of the F136 results in a higher, rather than a lower 
initial price and production cost improvement curve. Also, issues 
associated with sharing contractor proprietary information during 
competition could reduce the benefits of lessons-learned that could be 
shared between two engine providers.  

GAO's assessment is generally silent with respect to a number of 
plausible scenarios in which the estimate of the cost of preparing the 
alternate F 136 engine for competition would be higher than the $2.9 
billion figure. Instead, the focus of the report is on scenarios in 
which costs could be reduced. This may mislead readers to assume that 
$2.9 billion is at the high end of the range of possible outcomes for 
the F136 program. This is not the case. 

Footnote:  

[1] For example, Mr Sullivan, in GAO-10-478T (Testimony Before the 
Subcommittees on Air and land Forces and Seapower and Expeditionary 
Forces, Committee on Armed Services, House of Representatives), stated 
the following regarding the JSF program: "A recurring theme in our 
work has been concern about what we believe is undue concurrency of 
development, test, and production activities and the heightened risks 
it poses to achieving good cost, schedule, and performance outcomes."  

[End of section]  

Footnotes:  

[1] This refers to a period of time for noncompetitive procurement of 
both engines, providing the alternate engine contractor an opportunity 
to gain production experience and learning before DOD begins 
competitive engine procurements. 

[2] Our latest testimony on this subject is GAO, Joint Strike Fighter: 
Significant Challenges and Decisions Ahead, [hyperlink, 
http://www.gao.gov/products/GAO-10-478T] (Washington, D.C.: Mar. 24, 
2010). 

[3] According to DOD officials, noncompetitive procurements reduce the 
number of engines any one contractor would produce, affecting 
manufacturing efficiencies and increasing prices for both during the 
period that DOD buys the engines noncompetitively.  

[4] Engine component improvement programs typically begin with the 
delivery of the first production engine and are intended to improve 
engine component quality and reliability, and resolve problems 
encountered after the engines are fielded. 

[5] The competition between Pratt & Whitney and General Electric to 
supply military engines for the F-16 and other fighter aircraft 
programs which began in the 1980s is known as the "Great Engine War."  

[6] DOD estimated that a total of $317 million in additional U.S. 
government funding would be needed to procure F135 and F136 engines 
and initial spares through the last 2 years of noncompetitive 
procurements (fiscal year 2015 and fiscal year 2016). 

[End of section]  

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