<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:81595.wais]
F-22 COST CONTROLS: HOW REALISTIC ARE PRODUCTION COST REDUCTION PLAN
ESTIMATES?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
VETERANS AFFAIRS AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
AUGUST 2, 2001
__________
Serial No. 107-101
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
JOHN J. DUNCAN, Jr., Tennessee (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on National Security, Veterans Affairs and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida DENNIS J. KUCINICH, Ohio
BENJAMIN A. GILMAN, New York BERNARD SANDERS, Vermont
ILEANA ROS-LEHTINEN, Florida THOMAS H. ALLEN, Maine
JOHN M. McHUGH, New York TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
DAVE WELDON, Florida DIANE E. WATSON,California
C.L. ``BUTCH'' OTTER, Idaho ------ ------
EDWARD L. SCHROCK, Virginia
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Lawrence J. Halloran, Staff Director and Counsel
J. Vincent Chase, Chief Investigator
Jason Chung, Clerk
David Rapallo, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on August 2, 2001................................... 1
Statement of:
Barr, Hon. Bob, a Representative in Congress from the State
of Georgia................................................. 20
Druyun, Darleen A., Principal Deputy Assistant Secretary of
the Air Force, Acquisition and Management, Department of
the Air Force, Department of Defense; Dr. George Schneiter,
Director of Strategic and Tactical Systems, Department of
the Air Force, Department of Defense; and Francis P.
Summers, Regional Director, Defense Contract Audit Agency,
Department of Defense...................................... 37
Li, Allen, Director, Acquisition and Sourcing Management,
U.S. General Accounting Office, accompanied by Robert
Murphy, Assistant Director, Acquisition and Sourcing
Management, U.S. General Accounting Office; and Donald
Springman, Senior Analyst, Acquisition and Sourcing
Management, U.S. General Accounting Office................. 6
Letters, statements, etc., submitted for the record by:
Barr, Hon. Bob, a Representative in Congress from the State
of Georgia, prepared statement of.......................... 21
Druyun, Darleen A., Principal Deputy Assistant Secretary of
the Air Force, Acquisition and Management, Department of
the Air Force, Department of Defense, prepared statement of 42
Li, Allen, Director, Acquisition and Sourcing Management,
U.S. General Accounting Office, prepared statement of...... 10
Schneiter, Dr. George, Director of Strategic and Tactical
Systems, Department of the Air Force, Department of
Defense, prepared statement of............................. 73
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut, prepared statement of............ 3
Summers, Francis P., Regional Director, Defense Contract
Audit Agency, Department of Defense, prepared statement of. 81
F-22 COST CONTROLS: HOW REALISTIC ARE PRODUCTION COST REDUCTION PLAN
ESTIMATES?
----------
THURSDAY, AUGUST 2, 2001
House of Representatives,
Subcommittee on National Security, Veterans Affairs
and International Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2154, Rayburn House Office Building, Hon. Christopher
Shays (chairman of the subcommittee) presiding.
Present: Representatives Shays, Otter, Kucinich and
Tierney.
Also present: Representative Barr.
Staff present: Lawrence J. Halloran, staff director and
counsel; Jason M. Chung, clerk; David Rapallo, minority
counsel; and Earley Green, minority assistant clerk.
Mr. Shays. A quorum being present, the Subcommittee on
National Security, Veterans Affairs and International Relations
hearing, entitled, ``F-22 Cost Controls: How Realistic are
Production Cost Reduction Plan Estimates,'' is hereby called to
order.
In less than 2 weeks the Defense Acquisition Board will be
asked to launch production of the F-22 Raptor air superiority
fighter as the Air Force's premiere tactical aircraft
modernization platform begins to roll off the assembly line.
The program faces a critical question: Can the F-22 hit
production cost targets?
The Air Force hopes to purchase 333 production aircraft
while staying within the $37.6 billion cost cap set by
Congress, but two Department of Defense DOD estimates put F-22
production costs between $2 billion to $9 billion over the
limit. A major factor contributing to the $7 billion
disagreement is the value ascribed to near- and long-term cost-
cutting plans. A difference of that magnitude signals
significant risk that current cost control strategies may not
be adequate to allow production of the right number of F-22s at
an affordable per-unit price.
This is our third hearing on F-22 production cost reduction
plans [PCRPs]. As in the past, the subcommittee asks the
General Accounting Office to analyze DOD estimates and the PCRP
evaluation to refine our understanding and increase our
confidence in the scope and validity of the production cost
savings effort. Today GAO reports some savings have been
achieved, and more can be anticipated as the airframe and
engine production programs mature, but cost pressures persist,
and it is still not at all clear there will be enough PCRP
savings to keep the F-22 on target, particularly if higher
production estimates prove more accurate.
Since we began following the formulation and implementation
of ambitions PCRP initiatives, total savings needed to address
cost growth has doubled, now totaling $26 billion. F-22
contractors told GAO half of those cost reductions are already
implemented in supply contracts or lean production processes.
To varying degrees, cost estimators credited the program with
additional savings identified but not yet implemented. So-
called challenge PCRPs represent more than $4 billion of hoped-
for, but still undefined, savings.
If those savings can be achieved, the Raptor will soar. If
gaping differences over estimating and evaluation methodologies
can be narrowed, the F-22 production cost reduction process
could represent a major weapons system acquisition reform. If
DOD fully implemented an earlier GAO recommendation to improve
the frequency and consistency of PCRP status reports, they
would be far more effective management tools. And if the
Department agreed to provide GAO and this subcommittee greater
access to the data supporting costs and savings estimates, we
would all have greater confidence in the adequacy and integrity
of the PCRP effort.
We welcome our witnesses this morning, and we look forward
to their testimony on the important issue of tactical aircraft
production cost reduction plans.
[The prepared statement of Hon. Christopher Shays follows:]
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Mr. Shays. At this time I would like to call on Mr.
Kucinich, the ranking member of the committee.
Mr. Kucinich. I thank the Chair. It's an honor to join you
this morning for this hearing and welcome the witnesses.
Over the past 2 years this subcommittee has held several
hearings on the increasing costs of developing the F-22 fighter
plane. Our previous inquiries revealed a strong potential for
the program to exceed the budgeted cap established by Congress.
It has now become necessary for this committee again to examine
the project to determine whether the Air Force can deliver on
its commitment to execute the F-22 program within the limits
Congress prescribed.
A more fundamental and perhaps more important question
concerns the Department of Defense's overall aircraft
acquisition strategy. In previous hearings GAO and others
raised the problem of aging aircraft. As aircraft get older,
they tend to break more often, they take longer to inspect and
maintain, and they are less available for operations. But the
Pentagon's current plan for acquiring replacement planes will
not reduce the average age of aircraft.
As GAO has pointed out elsewhere, the Pentagon is investing
in extremely expensive programs that will yield very few
aircraft. The F-22 program is a prime example. The original
plan was to purchase 880 planes for $40 billion. Because of the
Pentagon's inability to accurately predict costs or meet
testing hurdles, however, we now expect fewer than 333 planes.
In fact, GAO will testify today that the number most likely
will decrease by another 85 planes. Rather than updating our
fleet, the F-22 purchase will actually increase the average age
of each aircraft.
In addition, past assurances that the Air Force would stay
under the cost caps--despite those past assurances that the Air
Force would stay under the cost caps, it appears they have
missed the mark again. GAO will report that estimates by both
the Air Force and the Secretary of Defense exceed the cost gap,
the Air Force by $2 billion, and the Secretary of Defense by $9
billion.
Why is the Pentagon proceeding on this course if these
purchases result in a fleet that breaks down more and flies
less? Shouldn't we buy more aircraft that, although less
sophisticated, may be more reliable? Currently defense spending
is approaching the average levels of the cold war in the
1970's, yet the Pentagon is seeking billions more. Congress
deserves reassurance that this money is going toward a force
that is more effective, not less.
Thus, our examination of the problem of cost controls
within the F-22 program necessarily must take place in the
context of the Pentagon's overall mode of operation and
culture. Aging aircraft are a symptom of systemic issues and
needs to be addressed.
Finally, I would like to take this opportunity to thank the
Project on Government Reform and Oversight for the report they
are issuing today regarding this issue. The report further
highlights these problems. It concludes as follows, ``As long
as we keep investing in weapons systems that are highly complex
and rely on technologies that are not fully proven, we will
find ourselves spending more and more on fewer and fewer
weapons that are of questionable relevance.''
Danielle Brian, the executive director of the Project on
Government Oversight, reiterated this observation in a
statement she made when releasing the report, ``The F-22 is a
continuation of the flawed weapons-building system that allows
overpriced, undertested weapons to dominate our military
policy. As long as the Pentagon continues this trend, defense
contractors will benefit at the expense of the military and
taxpayers,'' and I might add our national security.
I thank the Chair for holding this hearing, and I look
forward to the testimony.
Mr. Shays. Thank the gentleman for his statement.
At this time I would recognize our panel, Mr. Allen Li,
Director, Acquisition and Sourcing Management, U.S. General
Accounting Office, accompanied by Mr. Robert Murphy, Assistant
Director of Sourcing Management, GAO; and Mr. Donald Springman,
Senior Analyst, Acquisition and Source Management, GAO.
And before I swear you, gentlemen, I would just like to say
for both panels my hope is that we have an honest dialog with
no games, no spin, just straight talk.
At this time I would like to administer the oath, and if
you gentlemen would stand.
[Witnesses sworn.]
Mr. Shays. Note for the record our witnesses have responded
in the affirmative.
And I also would say before, Mr. Li, you give your
testimony, I don't know if we have all of the answers, because
I'm not sure that you have all of the data submitted to you by
DOD to answer all of the questions. We don't feel that we have
all of the data, but let's give it a try and see what you have
got.
STATEMENTS OF ALLEN LI, DIRECTOR, ACQUISITION AND SOURCING
MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
ROBERT MURPHY, ASSISTANT DIRECTOR, ACQUISITION AND SOURCING
MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; AND DONALD
SPRINGMAN, SENIOR ANALYST, ACQUISITION AND SOURCING MANAGEMENT,
U.S. GENERAL ACCOUNTING OFFICE
Mr. Li. Mr. Chairman and members of the subcommittee, I'm
pleased to be here today to summarize our statement on the
impact of cost reduction plans on estimates for producing the
F-22.
We were asked by the chairman to update information we
provided last year, and have prepared a report being released
at today's hearing.
As you know, the Air Force started developing the F-22 in
1991. Development is scheduled to be completed by September
2003. The Air Force plans to procure 333 production aircraft at
a cost currently limited to $37.6 billion by the Fiscal Year
1998 Defense Authorization Act. The act does not specify the
total number of aircraft to be produced.
Before I summarize our work, allow me to provide some
background information with regards to the production of the F-
22. In 1997, the Air Force and contractors reported that the
production costs could go up substantially. Since then the
contractors and the Air Force have been developing and
implementing plans to reduce costs by enhancing production
technology, improving manufacturing techniques and improving
acquisition practices.
Cost reduction plans are categorized in three ways:
challenge, not yet implemented, and implemented. Challenge
plans are those that are not yet well defined and are not yet
close to achieving future cost reductions. Not yet implemented
plans are those that are better defined and are believed to be
sound and possible. Implemented plans are those closest to
achieving cost reductions.
I have three main points this morning. Point one, potential
cost reductions identified by contractors have increased, but
their actual impact is yet to be determined. The estimated
amount of contractor-identified cost reduction plans added up
to $26.5 billion in January 2001. The total consists of about
$4.2 billion in the challenge category, $8.5 billion in cost
reductions not yet implemented, and about $13.7 billion in cost
reductions that have been implemented.
It is clear that if the savings from cost reduction plans
are to be achieved, production costs--production contract
prices and Air Force expenditures must be lower than would have
been the case if the planes had not been implemented. However,
until contracts are negotiated, cost estimates will continue to
reflect the judgment of cost estimators about the potential
impact of cost reduction plans.
Because F-22 production is in its early stages, most of the
cost reductions associated with the cost reduction plans have
not yet been achieved. An analysis of some cost reduction plans
categorized as implemented indicates that lower costs can be
achieved.
Last year the Air Force asked the Defense Contract Audit
Agency [DCAA], to conduct a limited review of some of the
plans. DCAA is responsible for contract audits at DOD. DCAA
examined 11 cost reduction plans totaling $425 million in
estimated cost reductions. DCAA's report indicated three
things. First of all, DCAA did not take exception to the
potential cost reductions for 8 of the 11 plans it reviewed.
Second of all, the agency found potential cost reductions on
two others to be based on judgment, not discrete, measurable
events. And the third thing that it found, it has found the
documentation on one to be lacking.
Mr. Summers of DCAA will testify later and should be able
to provide the subcommittee with further details.
Point No. 2, latest F-22 production cost estimates still
exceed the congressional cost elimination. As we reported to
you last year, both the Air Force and Office of the Secretary
cost estimators projected that in late 1999 that productions
costs would exceed the congressional cost limitation.
Air Force cost estimators projected productions costs at
$40.8 billion, and those from the Office of the Secretary
estimated $48.6 billion. Even though the cost estimates
exceeded the cost limitations in effect at that time, the
Secretary of the Air Force maintained that the actual costs
would not exceed the limitation, and established the Air
Force's position on production costs at the $39.8 billion
limitation amount.
So what are the latest projections we analyzed? In
estimates made December 2000 to support the fiscal year 2002
budget request, both the Air Force and the Office of the
Secretary cost estimators continued to project that production
costs will exceed the congressional cost limitations. The Air
Force cost estimators projected that production costs were
likely to exceed the current $37.6 billion congressional cost
limitation by $2 billion. The estimate produced by the Office
of the Secretary indicates that costs will likely exceed the
limitations by $9 billion. The $7 billion difference between
those two estimates is due to such things as the Office of the
Secretary estimating higher labor costs for subcontractors, as
well as higher costs for the F-22 engines.
Air Force officials advise us that their estimates consider
the same cost reduction means as those by the Office of the
Secretary, but that they reflect differing judgments regarding
the viability of the plans and potential amounts of cost
reductions applied.
At this time we cannot advise you on which estimate will
prove to be more accurate, but what if the higher estimate
turns out to be true? If the Office of the Secretary's higher
estimate is correct, and additional cost reduction plans are
not developed and implemented, we project that the Air Force
would have to buy about 85 fewer F-22s than the 333 aircraft
now planned to stay within the cost limitation.
My final point. DOD has not completed action on our prior
recommendations to reconcile the number of F-22s with the cost
limitation and report to the Office of the Secretary on the
status of cost reduction plans. We made two recommendations
last year to the Secretary of Defense, namely that he reconcile
the number of F-22s that need to be procured with the cost
limitation and report to the Congress on the implications of
procuring fewer F-22s because of potentially higher costs. And
the second recommendation was to report to the Under Secretary
of Defense on the status of the cost reduction plans each
quarter.
Regarding our first recommendation, DOD partially agreed,
stating that affordability of the F-22 would be evaluated
during QDR. More recently, DOD indicated that a review of DOD
programs directed by the President must be completed before it
can comment further on this recommendation.
Regarding our second recommendation, we note that in the
Air Force's March 2001 quarterly review to the Under Secretary,
the information reported included only summary information on
the total estimated cost reductions.
DOD, in commenting on the draft of our report being
released today, indicated the information reported in the last
quarterly review in June 2001 contained more detailed
information. We have examined documentation supporting that
review and agreed that it contains more information on cost
reduction plans than previous reviews; however, the information
reported is still not consistent with what we recommended.
Specifically, information was not reported regarding the
total number of cost reduction plans identified, the number
implemented, cost reductions realized to date, and any
additions or deletions in the plans included in the prior
report. Such information would be useful.
And, Mr. Chairman, your statement with regards to getting
more information is--I am referring to that point. For example,
the quantification of cost reductions realized to date would
allow us to
identify what the baseline cost estimate is prior to including
the impact of implemented end-cost reduction plans.
Mr. Chairman, that concludes my statement. I would like to
answer any questions that you have at this time.
Mr. Shays. Thank you.
[The prepared statement of Mr. Li follows:]
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Mr. Shays. I would like to recognize that we have Mr. Barr
as the vice chair, and Mr. Tierney, who has sometimes served as
the ranking member of this committee, to help Mr. Kucinich. So
you have four Members who are very interested in the committee.
And at this time I recognize Mr. Barr. You have your time.
STATEMENT OF HON. BOB BARR, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF GEORGIA
Mr. Barr. Thank you very much, Mr. Chairman. I thank you
for allowing me to participate in this important hearing today
on the air superiority fighter that will maintain our
superiority and consequently lead directly to our superiority
on the battle field well into the 21st century.
Mr. Chairman, I have a more complete statement that I would
appreciate unanimous consent to insert into the record.
Mr. Shays. If I could at this time just take care of that
business. I ask unanimous consent that all members of the
subcommittee be permitted to place an opening statement in the
record, and that the record remain open for 3 days for that
purpose. Without objection, so ordered.
I would ask further unanimous consent that all witnesses be
permitted to include their written statement in the record.
Without objection, so ordered.
Mr. Barr. Thank you, Mr. Chairman.
Mr. Chairman, during the past year the F-22 Air Force
Industry Team has achieved a number of significant
accomplishments, among them: Completed all production release
criteria required for a low-rate initial production go-ahead.
Completed initial measurements of the F-22's in-flight stealth
characteristics. These measurements confirmed that the F-22 is
meeting or exceeding its stealth requirements; demonstrated in-
flight fusion of sensor data from the F-22's integrated
avionics system; completed engine life testing representing the
equivalent to 8 years of operational use; validated the
detection range of the F-22's radar. These measurements
confirmed the radar is capable of detecting targets at greater
than ranges of the F-22's specification requirements; completed
static strength testing of critical aircraft structure. These
tests confirmed the F-22 meets operational strength
requirements with a 50 percent safety margin.
Additionally, the team has currently accomplished over
1,250 hours of flight testing during 500 flights since flight
tests began.
Mr. Chairman, by any measure the F-22 is on range to be an
outstanding aircraft which exceeds even the very, very high
goals set for it earlier on. The F-22 program has met all
calendar year double 00 LRIP DAB performance criteria. One
thing, though, that concerns me, Mr. Chairman, is congressional
action over the last several years which has eroded because of
uncertainty over continuation of the program and size of the
program, eroded supplier confidence.
[The prepared statement of Hon. Bob Barr follows:]
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Mr. Barr. I would like to ask Mr. Li, does superior
uncertainty add to overall production cost?
Mr. Li. I understand that the Air Force has identified
that. I have not looked at that particular issue to verify that
was the case. I would need to talk to the individual
subcontractors that were involved and to identify whether or
not that was indeed the case. But I do understand that the Air
Force has raised that as an issue, sir.
Mr. Barr. Thank you. I would appreciate that.
Mr. Li, with the majority of the development program now
complete, should the remaining effort principally involving
testing move on to the testing phase?
Ms. Li. When we are talking about the engineering,
manufacturing and development phase of the program, our
position has been that as of our last report which we issued
last March, which was before some of the progress that you
mentioned today, sir, our position has been that a lot of
testing still needed to be performed, and that was the reason
why we had made the recommendation that, because of the
uncertainty with regards to how the testing was going--if it
was going to be completed in time, we recommended not to
accelerate production.
However, in direct response to your question, sir, I
believe that the remainder of the time that is associated with
the engineering, manufacturing and development program is
indeed for testing, and I would support that testing being
completed.
Mr. Barr. With regard to the significant cost investment
that both the government and Lockheed Martin has had to put
into place at their facility in Marietta, GA, to conduct the
assembly, would moving that assembly to any other location
involve substantial cost both to the government and to Lockheed
Martin?
Mr. Li. I have not looked at that particular issue. I do
understand that discussions have been going on with regards to
the possibility of either moving facilities or building. The
facility currently at Martin Marietta that they are utilizing
is a government-owned--part of it is a government-owned
facility.
Mr. Barr. Would not common sense tell you, though, that if
there has been significant investment at a facility, in this
case Air Force plant No. 7 at the Lockheed Martin facility in
Marietta, in order to get to the point where the aircraft can
be assembled there, and is there being assembled, to pick all
of that up and have to invest, make that investment elsewhere
would involve necessarily additional cost; would it not?
Mr. Li. Yes. That is a very good point. That would be one
of the factors that Lockheed and the Air Force would have to
consider.
Mr. Barr. Thank you.
Mr. Shays. At this time, I would recognize Mr. Kucinich. We
are going to do 5 minutes and then allow a longer time for the
second time if we need it.
Mr. Kucinich. I thank the Chair.
To Mr. Li. You indicated in your report that the under
Secretary of Defense cost estimate, the Pentagon will be forced
to cut 85 more aircraft. How many airplanes do you expect will
be acquired in this program? About 248.
Mr. Li. The statement that we are making was to try to put
a sense of magnitude as to what would happen if the Office of
the Secretary's estimate was proven to be accurate and true. In
other words, in the current cost limitation and the current
plans, the Air Force currently plans to procure 333 aircraft.
What we are saying, sir, was, if the higher estimate was proven
to be true, and they could not develop any additional cost
reductions, they would be--in essence--only be able to buy 200
something--85 less. That was our analysis.
Mr. Kucinich. How many were originally envisioned?
Mr. Li. Over 700.
Mr. Kucinich. And some cost estimates were $40 billion for
project development; is that right?
Mr. Li. Yes.
Mr. Kucinich. What is the current total under the Secretary
of Defense estimate?
Mr. Li. The engineering, manufacturing, development
congressional cost cap is around $20 billion, and the current
production cost cap is at $37.6.
Mr. Kucinich. Isn't it closer to $46 billion plus another
$19 billion or so for development equals about $66 billion?
Mr. Li. If you take those new--the other estimates into
account.
Mr. Murphy, do you have anything?
Mr. Kucinich. That is satisfactory actually.
So that the number of planes keep dwindling, and the cost
keeps escalating. Do you have the ability to project out at
least those rates?
Mr. Li. Excuse me?
Mr. Kucinich. Do you have the ability to project out at
these rates the increase--cost escalating, the means
guidelines; have you tracked the rate of decline for the number
of aircraft and the rate of increase for cost so you estimate
where we might be in 2 years or 3 years according to these
trends?
Mr. Li. We have not.
Mr. Kucinich. You know, can you see something in the future
where we have like one plane for, you know, $1 trillion?
Mr. Li. I know, Mr. Augustine has indicated that with his
theory, that soon we will only be able to buy one weapons
systems for the billions of dollars investment. I don't have
that projection, sir.
Mr. Kucinich. That is what I was wondering. Can you do that
projection?
Mr. Li. I think it would depend upon the particular weapons
systems itself.
Mr. Kucinich. What about the average age of aircraft? Even
if the Air Force procures all of the F-22s it wants as well as
all of the Joint Strike Fighters, for that matter, won't the
current planes leave our fleet even older, sir?
Mr. Li. Absolutely, sir. We issued a report on this same
subject, on the problem of aging aircrafts, and we did indicate
that for the tactical fleet, using the current plans for
modernization, that indeed, that after all is done, the average
age of the Air Force fleet would be higher than what it was
before its modernization started.
Mr. Kucinich. Colonel Riccioni from the Project on
Government Reform and Oversight submitted a report today that
criticizes the Pentagon's aircraft procurement program. He
cites exactly these kinds of cost and age problems. Essentially
he finds, as a fighter pilot himself, that the Pentagon is
engaged in what he calls a course of unilateral disarmament.
What do you think? Could you comment on that?
Mr. Li. I wouldn't go that far. I do think that it is of
concern that individual aircraft programs that we have right
now for modernization may not reach those particular goals in
terms of allowing DOD to have the average age of aircraft that
it currently enjoys.
Obviously there are a lot of other factors, too, beside
that age that come into play in terms of capabilities, that Mr.
Barr was talking about, the increased capabilities that the F-
22, for example, would have. So many other factors would have
to be----
Mr. Kucinich. One final question before we go back. By
permitting the reduction of the number of planes, does this
actually reward cost overruns and put the burden for overruns
on the taxpayers, not the contractors, rewarding
inefficiencies, the taxpayers get less for more money? They are
the ones that have to suffer because they are promised X amount
of planes and they get far less.
Doesn't it seem like a game of bait and switch?
Mr. Li. Mr. Kucinich, I think that one of the problems that
are associated with weapons systems is the difficulty to
project out and to do cost estimating in the first place.
Mr. Kucinich. I understand.
Mr. Chairman, as I go over this material, you know, I'm
here on behalf of people in my district who are taxpayers, and
I have to tell you I feel that people are really being cheated
on this. They are being cheated. They are being ripped off, and
the national security is suffering adversely. And part of these
hearings, you know, we go through these hearings, and I think
in order for them to have the kind of meaning which they are
meant to have, I think it's appropriate for us to call into
accounting this rotten system, because it's very clear that the
contractors are the last ones to lose, and the taxpayers are
the first ones to lose.
Thank you.
Mr. Shays. Thank you.
At this time, I recognize Mr. Tierney.
Mr. Tierney. Thank you.
Thank you, sir, for joining us. I'm going to ask that we
put up a slide, and maybe you can help me with some
calculations.
See if we can get this done before we go down to vote on
that.
He is going to give you a written copy of that because if
your eyes are as challenged as mine, on the wall, that won't
help you too much.
Now, supposedly the congressional cost cap currently stands
at $37.6 billion?
Mr. Li. That's correct.
Mr. Tierney. In your report you said that both the Air
Force and the Office of the Secretary came up with estimates
that exceed that cap.
Mr. Li. That is correct.
Mr. Tierney. They were $39.6 billion and $46.9 billion; is
that correct?
Mr. Li. That's correct, sir.
Mr. Tierney. On the issue of production cost reduction
plans, PCRPs, my argument is that these savings are somehow not
returned to the government, so they must be compensating for
cost overruns in other areas. I'm trying to determine now how
much those costs have escalated, and that is what this chart is
all about. We asked the staff to help us with some tallying.
First, we can determine how much money is saved through
those so-called PCRPs, the production cost reduction plans. On
page 8 of your report you stated that some PCRPs have been
implemented, and others have not. You provided the amounts for
those that are not yet implemented, which I listed on the
chart, at $7.6 million under the Air Force estimate and $5.3
billion--sorry, $7.6 billion under the Air Force estimate, and
$5.3 billion under the OSD; is that right?
Mr. Li. That's correct.
Mr. Tierney. Your report did not list amounts for PCRPs
that are already implemented, but during a meeting yesterday
the staff asked the Air Force about this. The Air Force said
that 87 percent of the contractors' projections are already
implemented. So, according to your report, the contractors
predicted $13.7 billion in reductions; is that right?
Mr. Li. Yes. When we did our work, we tried to make that
breakout of what was the effect of those PCRPs that were
already implemented within the cost baseline, and they were
unable to do so when we asked them.
Mr. Tierney. So they have $13.7 billion in reductions, and
they say 87 percent of the contractors' projections are already
implemented. This apparently means that the Air Force has
already implemented $11.9 billion worth of production cost
reduction plans. Does that generally meet your calculations?
Mr. Li. Yes.
Mr. Tierney. So if you add the PCRPs that have already been
implemented to those that have not, that comes to around $19\1/
2\ billion, as the chart indicates. When you add these to the
Air Force estimate, you get about $59.1 billion, right?
Mr. Li. Yes.
Mr. Tierney. So the bottom line is that this amount somehow
exceeds the congressional cost cap by $21.5 billion. And my
question is, where did it go?
Mr. Li. The cost to the contractor and to both Lockheed and
to Pratt & Whitney, from your chart it is correct to say that
had there been no PCRPs, it would have come in at this amount,
but because of the cost reductions that both contractors have
implemented, we are able to bring it in closer to the cap.
Mr. Tierney. But, I mean, somewhere in that F-22 program,
costs are escalating pretty fast. You are saving at the end,
and you are still spending all of this money. I mean, costs are
going up like wildfire somewhere else?
Mr. Li. That's correct.
Mr. Tierney. So you look at the estimate by the Secretary
of Defense, their bottom line is even higher.
Mr. Li. Yes.
Mr. Tierney. They say under their analysis it could
potentially be $26 billion. I find it a little hard to believe
that somewhere in a $37 billion program, costs could have
escalated by as much as $26 billion. That appears to be what
they are saying.
Do you have any idea where in the program costs have gotten
so out of control?
Mr. Li. No. That is one part of the analysis that we did
not do. I think that would probably be a more appropriate
question to ask the Air Force in terms of what happened to
those particular costs.
Mr. Tierney. I think your efforts have been commendable,
but it seems like you are put in the position of always doing
it after the fact. Every time the program goes over by another
billion dollars, you go--point that out, they go out and try to
find $1 billion in efficiencies, but never really address the
inefficiencies that seem to be growing.
So my concern is that they haven't really been accrually
predicting the underlying costs to begin with, and they are not
being realistic about how these costs rise over time. That is
different than in compensating them after the fact. So I think
if we can presume the program has already implemented the
easiest efficiencies, it will be the low-hanging fruit, so to
speak, what is going to happen in the future when there are
fewer efficiencies to find, but the costs continue to escalate
somewhere else?
Mr. Li. That obviously is a concern. But, I know that with
the cost pressures associated with the program, both Lockheed,
Pratt & Whitney and the Air Force are working hard at trying to
come up with cost reductions that will enable them to meet that
cap.
You are right in terms of trying to--in terms of the low-
lying fruit, that they have--it is more challenging, obviously,
as the program goes along to find cost reductions.
Mr. Tierney. I just close with the fact that the Air Force
apparently is deeply committed to the President's faith-based
programs, but we are losing faith.
Thank you.
Mr. Shays. Which cost estimates, Mr. Li, do you consider
more accurate, the Air Force or the Office of the Secretary of
Defense?
Mr. Li. As I indicated in my short statement, I think that
it is very difficult to be able to pinpoint which one is more
accurate. I think what I can say is that in terms of program
projections that have been made in the past, the ones that have
been the lowest have been the least accurate, and that in this
particular case, OSD has made a lot of projections that have
proven to be closer to the truth.
That said, I think before I could make an assessment as to
which one is more accurate, I would have to look at more of the
individual details associated with how they did their analysis.
In terms of the Office of the Secretary, I believe that I
would have to go into greater detail into how they made their
projections, how they did their methodology to project those
savings.
Mr. Shays. Could you explain the production cost
discrepancy between the two estimates?
Mr. Li. We found that the differences are primarily--and
this is a big amount of--the biggest chunk was in the estimate
of labor costs associated with the subcontractors. There were
costs also associated--of $1.2 billions--associated with engine
cost that was a difference in the estimate; also $1 billion in
terms of the production cost reduction plans, and also $800
million difference in terms of what the Air Force's plans for--
relating to productivity investments.
Mr. Shays. What would you say the significance of the
production cost estimates discrepancy is? What is the
significance? What should we take from these two different
estimates?
Mr. Li. Those are two very respectable cost estimating
groups. I have a lot of respect for both of them. I think
obviously people can disagree, but it also points out to me,
Mr. Chairman, that the uncertainty associated with some of them
still puts it into question.
As to your initial question as to which one is more
accurate, it--there are some differences of opinion there that
underlie the fact that there is uncertainty.
Mr. Shays. OK. We have 7 minutes left to vote. Let me just
ask this question.
We are actually going to come back. Let me just ask this
last question and ask you to stay.
What would be gained by providing detailed production cost
reduction plans status reports to the Office of the Secretary
of Defense, OSD?
Mr. Li. I think it would be very helpful to both the
Congress and obviously to myself if I was asked to continue
monitoring this program.
I think that an example would be, the question that Mr.
Tierney just put up there, in terms of he was saying there was
no ability to identify what was the true impact of when they
interpreted the baseline, what is the amount associated with
what has already been implemented, and you--they never
identified that. If I had that number, it would help me. So
that is an example.
Mr. Shays. OK. What we'll do is we'll come back, and we'll
go back to Mr. Barr if he has more questions. Thank you.
I think we have one vote, a Journal. I have this concern
that there may be a procedural--a motion to adjourn, so we may
be a little longer, but we'll keep you informed. Thank you.
[Recess.]
Mr. Shays. I'll call this hearing to order.
Mr. Li, I'd like you to explain to me what information you
would like to get that you aren't getting, and I'd like to
explain why you're not getting that information. And what is
the--first off, is there some information that you are not
getting? Is there some information that you're not getting from
the Department of Defense? So they are basically saying they
won't--the Department of Defense--and who in particular is
saying they will not provide information to you?
Mr. Li. Let me give you some background on that particular
set of circumstances. To respond to your request that we update
last year's report, what we said before to do was to identify
what were the latest cost estimates from both the Air Force and
the Office of the Secretary. The specific organization that
you're asking me to identify is the CAIG, C-A-I-G, the Cost
Assessment Estimating Group. And that particular group, we
asked them in writing to provide us with some information. They
identified to us that information was predecisional and could
not be provided at that point in time, Mr. Chairman. In trying
to answer the question that you had in terms of what the
estimates were, I found an alternative source that identified
what that top number was. I took that number, and I went back
to the Office of the Secretary, because I wanted to corroborate
and to say, is this indeed the number that the Office of the
Secretary had identified? And they confirmed that. So for the
purposes of my work, I was able to complete my work in the
report.
Had you asked me to provide additional details on assessing
such things as the accuracy, I would have to start at the point
of perhaps doing a greater sample of the PCRPs, something
similar to what the DCAA did in terms of looking at the
methodologies involved in each one and the reasonableness of
the rates. I would need greater information from that
standpoint, and I did not have that information to do that.
Mr. Shays. Is the information that you requested, was that
made available under the previous administration?
Mr. Li. We did not do this type of work on the F-22, so we
did not--I can't comment on that.
Mr. Shays. And the justification for not providing it being
predecisional is that they were not basically going to
acknowledge that they had come to a conclusion or that--in
other words, let me understand. Is predecisional meaning that
there is evaluation, judgment that had not been made, or was
there raw data that you wanted? Do you see the difference?
Mr. Li. Yes, I wanted the raw data. I did--was not looking
for the decision. It is DOD's position, however, that the
information that I was requesting was not yet acted on by the
highest levels which would in essence, the Defense Acquisition
Board, and that information was performed at their request for
them. And their position was since it had not been acted on, I
could not get access to it.
Mr. Shays. And when did they say it would be ``acted on?''
Mr. Li. They did not identify that.
Mr. Shays. So they didn't say give us 2 weeks?
Mr. Li. I'm sorry. I'd like for Mr. Springman to add
something.
Mr. Springman. If I might interject.
Mr. Shays. Is your mic on, Mr. Springman?
Mr. Springman. I believe so.
Mr. Shays. Tap the mic just so I have confidence. Thank
you.
Mr. Springman. They did indicate that after the DAB was
completed, that ``the cost estimate remains predecisional until
the DAB'' are their exact words.
Mr. Shays. Until the what?
Mr. Springman. Until the Defense Acquisition Board meeting,
the upcoming Defense Acquisition Board.
Mr. Shays. Did they say when that board would be meeting?
Mr. Springman. At this time the letter back from them was
dated March 28th. At that point I don't remember what date the
DAB was actually scheduled for, but it is currently scheduled,
as I understand, for----
Mr. Shays. So even if you wanted this information today,
you wouldn't get it; is that what you're saying?
Mr. Li. That's correct. The board is not scheduled to meet,
as Mr. Springman said, until August 14th.
Mr. Springman. August 14th.
Mr. Li. And that would be the earliest time at which they
would provide that information.
Mr. Shays. Mr. Kucinich.
Mr. Kucinich. I would like to review with Mr. Li, if I may,
some questions regarding cost control measures. Can you tell us
about this new category of production cost reduction measures
called challenge measures? What are they exactly?
Mr. Li. Challenge plans are those that are not yet well
defined, and they are different from those that are not yet
implemented because of the lack of firm definition. In our
report that we're releasing today, Mr. Kucinich, we actually
have a diagram on page 6 that gives you a pictorial with
regards to the progression, and it shows that--it gives you an
example that--for example, if--for a challenge plan currently
that is being identified is being characterized as the
potential cost reductions by buying rather than making selected
components. While there is a dollar value added to that, it is
not very specific, and I wanted to contrast how each one gets
better defined as you go along.
Mr. Kucinich. I appreciate that. I had the chance to review
it, but I'm wondering if contractors haven't fully developed
their ideas about these challenge measures, how in the world
can they estimate the amount they hope to save by implementing
them? In other words, on page 5 of the report.
Mr. Li. I can't address specifically and I can't answer for
the contractor----
Mr. Kucinich. Well, I just wonder if you go to page 5,
where do contractors get that $4.2 billion?
Mr. Li. I did not go into seeing how they estimate it.
However, I do want to add, sir, that both the Air Force and the
CAIG did not consider challenge PCRPs when they did their
estimates.
Mr. Kucinich. Now, the Air Force has argued on occasion
that cost increases are really Congress' fault. They say
contractors suffer from uncertainty about the government's
commitment to the program and that this causes cost to
increase. Specifically they say contractor prices have gone up,
because there has been no production decision. Let me ask you,
when the Air Force originally went to these contractors for
estimates, they didn't have a production decision then, did
they?
Mr. Li. No.
Mr. Kucinich. And they don't have one now either, do they?
Mr. Li. No.
Mr. Kucinich. So are things really that different?
Mr. Li. I will ask Mr. Murphy to answer, give you some more
specifics, but this is the same point that Mr. Barr brought up
earlier. I think the subcontractor--the Air Force has
identified the fact that the lack of certainty associated with
making the production decision has--that delay has, according
to them, caused some concern and perhaps been viewed as a lack
of commitment on the part of the government.
Mr. Kucinich. So if I may, contractors could argue that
they feel uncertain because a production decision was postponed
at the beginning -.
Mr. Li. That's right.
Mr. Kucinich [continuing]. Of the year? Have you heard
that?
Mr. Li. Yes. I have heard that from the Air Force.
Mr. Kucinich. But as you stated on page 7 of your report,
the estimates you cited in your report were from December of
last year. Isn't that right?
Mr. Li. That's correct.
Mr. Kucinich. So that argument doesn't explain how these
new estimates increased, does it?
Mr. Li. No, no.
Mr. Kucinich. Now, even assuming that there's something to
this contractor uncertainty argument, how does it work in
practice? I mean, 1 year the contractor provides detailed cost
estimates to the Air Force. The next year the contractor says,
you know, I'm not sure about the commitment to this program. So
my price just went up by 50 percent. Now, does the Air Force
really accept that kind of justification when dealing with
contractors?
Mr. Murphy. They have mentioned this several times. I think
as I see it, it is a generalization that they've made. If
there's some data that they have put together that shows how
the subcontractors are reacting to the current continued
extension of a production decision, we haven't seen any data
that would support that statement.
Mr. Kucinich. Mr. Li, just I want to take this in a
different direction for a moment. I just want to take this in a
different direction for a moment.
You know, I read your report and am grateful for the work
of JO on this, but if you were a Member of Congress, how in the
world would you explain to your constituents why they keep
paying more and getting less?
Mr. Li. This goes back to my point about not being able to
do good cost estimates in the first place. I think that,
perhaps, they were too optimistic in identifying what those
iterational costs were. Mr. Kucinich, I'm also associated with
reviewing all of NASA's programs, and very similar types of
issues have come up with regards to the space station, and a
lot of people are saying that--how do I explain to my
constituent it is fact that the program is getting more
expensive and the content is getting less?
Mr. Kucinich. Well, if I may, though, you know, just to
respond and then to yield back to the Chair, there is a
critical difference here. We accept NASA as an incubator of new
technologies and the price of developing alpha technologies is
something that the government has long been ready to absorb. We
don't accept the role of contractors in propelling costs of any
material. We don't accept that. And it is not up to them to
make that decision, because that is really done apart from the
government. NASA is an internal program, in the sense of some
of the cost increases have been anticipated. But for the first
time we are beginning to scrutinize some of these weapons
systems, where, you know, the taxpayer isn't ready to give the
Department of Defense a blank check on anything.
Mr. Li. My parallel was not to try to say that there is
some parallel in terms of the mission of either. My only reason
for bringing this up was to say that the issue of cost
estimating is very difficult and other agencies besides DOD are
trying to tackle this issue.
Mr. Kucinich. All right. I appreciate the gentleman's
comments. Mr. Chairman, thank you so much.
Mr. Shays. Thank you. Mr. Otter, do you have any questions
you'd like to ask?
Mr. Otter. I do, Mr. Chairman.
Mr. Shays. You've got the floor.
Mr. Otter. Thank you. My apologies to the panel for being
late. It's been kind of an exciting morning after a long night.
It sounds like I ought to be back in Idaho at the Shorty's
Country Western Lounge, but unfortunately that isn't where it
was.
You know, as a citizen and as a businessman for years and
years and years, I always heard of these horror stories of cost
overruns in the Defense Department and it was always made a big
deal for one reason or another. If you didn't like the Defense
Department, you made a big deal out of how inadequate they were
at leadership in managing their own operation. But it seems to
me that we continue to kind of aggravate the whole concept. And
I guess maybe our mechanical and out aviation technology is
outrunning our technology on accounting, because we haven't
been able to develop a system that says, this is what our
expectations of the costs are, and this is what they're going
to be.
Now, for 30 years when I worked in the private sector, if I
were going to build a potato french fry plant--and my apologies
again, Mr. Chairman, for this constant use of this analogy. But
I went out to many contractors. I went out to the contractors
that were going to pour the concrete and put the beams up who
were different contractors, and then of course all the
equipment that went through the plant, so that I could send a
potato in one end, and in exactly 22 minutes I had a french fry
for McDonald's coming out the other end.
Mr. Shays. Can we just state for the record that this
process made him a very wealthy man?
Mr. Otter. I don't think I could buy one of these
airplanes, though. Anyway, one of the things that generally--
about the only thing that we could accept is when our engineers
would come running back in to us and they'd say, Butch, we've
got a problem here, and the problem is that we underestimated
the cost of the cutter deck, and so instead of buying seven
cutter decks, we really only have the budget in place to buy
five. I go back to Milestone, who happened to be the company
that makes the cutter decks, and I say, you know, that template
that you just made, now you were prepared to amortize that
template over seven cutter decks, but now you can only do it in
five. And they'd say, well, you know what's going to have to
happen. Each cutter deck has got to go up in price in order for
us to get the amortization that--and the full economic utility
out of the template that we were going to use.
I'm reminded of that only because in the short time I've
been here I've seen how fickle and how indecisive sometimes
those who benefit from congressional decisions and how tenuous,
I think, their position can be. And I'll tell you, if--and I'm
not laying this totally to blame for that, but I do know that
your unit cost is going to go up considerably if you're not
going to build very many units. Henry Ford figured that out 100
years ago. I don't know why we can't figure that out ourselves.
But I would just ask you to be as gentle as possible on myself
and my colleagues, Mr. Li, and is sometimes the go, no-go
decision period for us of Congress where we say we're going to
cut the program or not going to cut the program, does that have
an obvious effect on the contractors and the subcontractors, in
terms of where they think they're going to have to go to get
the economic recovery back out of the equipment--the equipment
that they have to build that is uniquely for a specific piece
of defensive equipment, like the F-22?
Mr. Li. I think that I understand the point that you're
making. Where I come from is I'd like to think that I'm
advising the Congress, I'm looking out for the interests of the
Congress and the taxpayer, and the issue here is, yes, the
contractors have that particular concern, but we as taxpayers
should have confidence that whatever we're being sold that we
can afford and can meet the requirements that have been
established. Many times the confidence in both the
affordability and in the ability to meet the requirements have
not been established yet, and, therefore, I don't think it is
prudent to make a financial commitment to something where you
don't have that confidence.
Mr. Otter. That I understand, Mr. Li. But I think we ought
to have at least somewhere in all these buildings, some
institutional memory, and that institutional memory should
maybe lead us to believe that in our bid and acquisition
process, we say, well, what if--you know, before this has
happened on another piece of equipment, instead of 35, what if
we only buy 20, and what if we buy 15, and what if we buy 12,
so that we've got some sort of a predetermined course of action
and an expectation that if in fact we do decide we can't buy as
many as we thought or for some reason somebody decides in the
Pentagon that this isn't going to be able to fulfill and
execute the mission that we had hoped it would, and so we don't
need as many as we thought we did. But it seems to me that this
has gone on for a long, long, long time, and--the cost overrun,
I mean. And there has got to be some core reason for that to
happen, and the only thing--the common denominator that I can
look at is indecision, and many times in indecision, we make a
decision. And that inability of us to make a decision or go
forward with a commitment, you know, we want 35, no, we want
20, well, maybe we'll take 27, that can cause us a lot of
problems. And it just seems to me that we would prepare the
environment for being unsatisfied by saying, if you don't go
full force with this, if you don't take the 35 that you said so
that we can get a cost unit amortization out of this equipment
that you need to the construction of this piece of armor, that
your cost per unit has got to go up.
Mr. Li. I understand. The only caution I would add, sir,
that by almost acknowledging the fact that you might have
reduced quantities reduces the leverage that the government has
in terms of trying to get the contractor to sharpen his or her
pencil.
Mr. Otter. I hear that, but is your way working now?
Mr. Li. It's not my way, sir. It's the----
Mr. Otter. Is the way that we're employing now working?
Mr. Li. I would say no.
Mr. Otter. OK. Thank you, Mr. Chairman.
Mr. Shays. I thank the gentlemen. Bottom line, I have the
feeling that you probably will be staying to hear the
testimony.
Mr. Li. I will.
Mr. Shays. And you'll get your information any way you can
get it, right?
OK. So we may ask you to comment on what you've heard. And
at this time we thank this panel and we'll go to the next.
At this time we would call and ask them to remain standing
Ms. Darleen A. Druyun, Principal Deputy Assistant Secretary of
the Air Force Acquisition and Management Department of Defense;
Dr. George Schneiter, Director of Strategic and Tactical
Systems, Department of Defense; Mr. Francis P. Summers,
Regional Director of Defense Contract Audit Agency, Department
of Defense. What we'll do is we'll swear you in.
[Witnesses sworn.]
Mr. Shays. Note for the record that our witnesses responded
in the affirmative.
And if we could proceed on the basis of how I called you.
So Ms. Druyun, you will go first and then Mr. Schneiter and
then Mr. Summers. We'll help you in this process. We will have
5 minutes, and we'll wait to show it red for you just a little
bit and then we'll roll it to another 5 minutes. So you have
basically 10 minutes at the very max, each of you. So we'll go
that way. OK?
STATEMENTS OF DARLEEN A. DRUYUN, PRINCIPAL DEPUTY ASSISTANT
SECRETARY OF THE AIR FORCE, ACQUISITION AND MANAGEMENT,
DEPARTMENT OF THE AIR FORCE, DEPARTMENT OF DEFENSE; DR. GEORGE
SCHNEITER, DIRECTOR OF STRATEGIC AND TACTICAL SYSTEMS,
DEPARTMENT OF THE AIR FORCE, DEPARTMENT OF DEFENSE; AND FRANCIS
P. SUMMERS, REGIONAL DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY,
DEPARTMENT OF DEFENSE
Mr. Druyun. Thank you, Mr. Chairman, and members of the
committee for the opportunity to appear before you to discuss
the Air Force's F-22 program and the cost controls we've
implemented to deliver an affordable program.
I've been involved in the program for many years. During
that time congressional caps in production were established,
and production cost reduction plans were developed in response
to the Air Force and congressional goal to deliver 339 aircraft
within a mandated production program cap. Therefore, I am able
to describe the underlying philosophy of PCRPs that are being
implemented to meet program affordability goals and assess
progress in meeting the original affordability strategy
objectives. The F-22 team remains absolutely dedicated to the
objective to deliver 339 production aircraft to the war fighter
at an affordable cost.
In order to achieve that objective, we continue to define
and implement effective cost reduction initiatives. These
initiatives have become known as the F-22 production cost
reduction plans to drive down aircraft costs over the life of
the production program. This will ensure we can deliver the
revolutionary F-22 to guarantee air superiority well into the
21st century.
Today I'd like to discuss the status of our PCRPs and the
realism of our projected savings. I will summarize the
historical changes in production quantities as a key factor
affecting average production unit costs. Next I will describe
changes in the production program acquisition strategy mandated
by changes in funding, appropriations and delays in the LRIP
decision. I will also describe the production cost estimates
that were prepared for a scheduled DAB in December 2000. In
addition, I will summarize the elements of accounting for
production costs with flyaway cost as the preferred method to
report the production costs.
Finally, the results of PCRPs through Lot 1 will provide
evidence of results to date, and PCRP cost savings and the
metric used to assess progress in meeting program affordability
goals, which we've set through the target price commitment
curve.
In 1985, at the beginning of the Advanced Tactical Fighter
demo program, the Air Force planned to procure 750 aircraft at
a rate of 72 aircraft per year, between 1992 and 2005. The 1997
QDR established the current F-22 production baseline and
represents a 48 percent reduction in production quantity since
the start of the F-22 EMD. The reduced quantity in production
rates have been the dominant factors in increased F-22
production unit costs. Changing a total procurement of 750
aircraft at a rate of 72 aircraft per year to 339 aircraft at a
rate of 36 aircraft per year results in about a 66 percent
increase in the aircraft cost when calculated in base year 2000
dollars.
Simply stated, the average aircraft cost is higher, because
fewer aircraft are being produced.
When I was before this committee last year, the original
LRIP DAB had slipped from December 1999 to December 2000 in
response to constraints established in the fiscal year 2000
Defense Appropriation Act. As a result, we were planning on the
LRIP DAB for December 2000. The LRIP DAB would authorize full
funding of 10 Lot 1 aircraft and advance buy for 16 F-22
aircraft. The LRIP DAB was delayed pending completion of two
exit criteria and all of those criteria were completed the
first week of February.
Because a defense strategic review had been initiated, the
new Secretary of Defense elected to delay the LRIP decision. To
avoid a break in production resulting from a delayed LRIP
decision, Congress approved reprogramming the funds necessary
to extend the Lot 1 advance by contract period of performance
through September of this year.
Congress and the DOD have worked together to fund the F-22
production. However, the F-22 contractor industrial base, about
1,150 contractors total, have informed us that the greatest
threat to meeting production program affordability goals has
been the delayed LRIP decision. This lack of program commitment
is perceived as a serious risk in the procurement of 339
aircraft and the 777 engines required for those airplanes.
Unfortunately, risk in business base and future business
computations realistically translates into higher individual
lot prices. An LRIP decision will greatly benefit the program
by reaffirming DOD's commitment to current and future program
execution. The fiscal year 1998 Defense Authorization Act
established a $43 billion cost cap in the F-22 production
program. The Secretary of the Air Force on an annual basis
notifies Congress of adjustments to the caps for inflation and
any changes in law. The current production cap is $37.6 billion
for 333 airplanes. These changes resulted from the fiscal year
2000 Defense Appropriation Act, which funded the six PRTV II
aircraft with RDT&E funds, and also due to reductions in
inflation. The inflation adjustments amount to about $3.9
billion. The cap reduction of $1.5 billion created from the
transfer of the six aircraft from procurement money into R&D
money was budget neutral, but obviously it affected the total
production cap, which today is approximately $37.6 billion.
In preparation for the LRIP DAB, the Air Force and DOD
completed production cost estimates in November 2000. The
estimate focused on the annual production funding requirements
and total production program costs. The December 2000 Air Force
estimate for the F-22 production program of 333 aircraft was $2
billion above the current production cap established by the
Congress. The OSD estimate was approximately $9.1 billion above
the current production cap.
But those estimates indicating a higher probability the
program would exceed the production cost cap, the Air Force
developed a revised F-22 acquisition plan to fund additional
cost reduction initiatives. The Air Force believes that
additional investments in cost reduction will be effective in
helping to reduce the total production program cost for the 333
airplanes. A revised act plan has been formulated by the Air
Force and presented to the Office of the Secretary of Defense,
which is currently under review by the SECDEF's organization.
The PCRP program is reducing the flyaway cost for the F-22
program. The flyaway cost has decreased the first two airplanes
we bought on the Lot 1 was approximately $318 million a piece.
The next six airplanes we bought were approximately $231
million a piece. And the first Lot 1 airplanes were further
reduced to $199 million a piece.
Cost control and affordability are critical focus
priorities for the F-22 team. In June 1996, I think all of you
were aware of the fact that a Joint Estimating Team was
established. When the JET presented their findings in 1997, the
initial estimate for the F-22 production of 339 aircraft,
without benefit of cost reduction initiatives to really lean
out the production line and become efficient, was $61 billion.
Leveraging the recommendations made at that time to reduce
production costs and lean out the manufacturing line following
the principles from the Massachusetts Institute of Technology
published report, the Air Force and contractor teams initiated
a very comprehensive cost reduction program back then. The
initial PCRPs that were established included initiatives in
areas of producibility, process changes, adoption of new
manufacturing techniques and implementation of acquisition
reform. The results of the PCRPs are reviewed on a monthly
basis by the Service Acquisition Executive and at least on a
quarterly basis with the OSD staff and the Defense Acquisition
Executive.
During the most recent DAE review, the Air Force estimated
total value of PCRPs to be $21.5 billion for the airframe
vehicle and for the engine about $4.8 billion. The F-22 program
has built an efficient management structure to jointly oversee
the development and, more importantly, the implementation of
these projects. The management effort includes an online
interactive data base for real-time reporting of the status of
these PCRPs, spanning ideas from the very inception to the
actual implementation.
We agree with the GAO assessment that approximately one-
half of the then-year savings for both the airframe and the
engine are in the production cost baseline, and the remaining
PCRPs as they are actually implemented won't be incorporated
into the future production lots.
The F-22 program does enjoy extensive oversight in
evaluating cost performance and has established a standard
methodology to assess cost performance based on several tenets.
The first tenet is a methodology to establish a baseline and
then measure cost reductions to that baseline.
Mr. Shays. Let me just interrupt for a second. How much
longer do you think you have?
Ms. Druyun. I probably have, sir, about 5 more minutes, and
it really kind of gives you the summary of what was in my
detailed statement for the record.
Mr. Shays. Why don't we let you proceed?
Ms. Druyun. Thank you.
The second tenet is to update the estimate annually with
the actually cost data from the current and prior production
lots, and our third tenet is to leverage actual cost data as
the primary method to validate the cost estimates. And that
process is part of the ongoing Air Force and OSD review of the
F-22 program.
The PCRPs for the air vehicle contract that became
effective with Lot 1 totaled about $1.2 billion in savings or
cost avoidance. The cost savings per engine was about $4.8
million per engine in Lot 1. The more significant element of
the management process is the formal procedures used in the
evaluation, selection and implementation of cost savings ideas.
The process and procedures are documented and a published joint
procedure is used by Lockheed Martin, Boeing and the government
team, and I can submit that for the record.
The overall process is an iterative and a continuous
process to go through all of the projects that are actually
being implemented and then to go through the new ones as they
are being recommended and further details being attached with
each one of them. The Lockheed Martin and Boeing team
implemented an on-line data base to assist in managing the cost
savings initiative program. The management team assesses the
status of cost savings that are coming from this and watches
these very carefully on a monthly basis. I personally review
them, and the actual teams at the SPO look at these as
frequently as on a weekly basis.
The PCRP management and cost estimating process has been
reviewed by the Defense Contract Audit Agency. DCAA reviewed
the methodologies for establishing the cost savings initiatives
at Lockheed and the Boeing manufacturing sites. Their written
assessments did not take exception with the contractor
methodologies in estimating production savings. The report also
identified cases where additional information was required to
substantiate the contractor estimates, and I believe that you
should get an update on that today.
In addition to the DCAA audits, as I said before, I review
these on a monthly basis, and then on a quarterly basis we do
review this with the OSD staff. The process begins with the Air
Force and OSD working integrated product team reviews, which
are conducted on a quarterly basis, and the data from those
detailed reviews are basically summarized and presented to the
defense acquisition executive.
I think a very good way to measure the effectiveness of our
production cost reductions is in the target price curve that
was put on contract in the development contract. The target
price curve is a subset of the flyaway costs, and basically it
captures all recurring costs, which includes materiel as well
as labor to produce the aircraft. It does not include
nonrecurring costs, such as spares or auxiliary mission
equipment, for example. The target price curve establishes unit
price goals in the LRIP phase of this program.
The goals for PRTV through Lot 4 aircraft are designed to
achieve a rate of cost reduction adequate to achieve the
necessary starting point for cost reduction once we get into
high rate production. And I would tell you that if you were to
look today at the target price commitment cost performance for
the first three lots of airplanes that we currently have in
contract today, you would find that they are clearly within the
5 percent band that was established back in the 1997 timeframe.
In the case of the engines, the price for PRTV and PRTV II
engines met the targets and Lot 1 engines were slightly under
the specified TPC. Now, we laid this in as an incentive. We
felt this was very important, and we attached about $150
million worth of funds associated with achieving that to really
get them on the right point to be able to achieve the average
unit flyaway costs.
Through actions such as this, the program maintains an
aggressive and flexible management style and a challenging task
of meeting the production program affordability goals. I
believe that we do have a well-structured plan that is focused
on pursuing cost savings initiatives. We do have I think a very
good electronic data base that has been established that
provides real-time monitoring.
I was down Monday at the Fort Worth facility and went
through that data base again to see exactly what the latest
status was. And I would tell you that performance to date for
the first three lots is within the target price band
established back in 1997.
Thank you for this opportunity to provide more information
on the results of F-22 affordability initiatives, and I look
forward to responding to your questions.
[The prepared statement of Mrs. Druyun follows:]
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Mr. Shays. Thank you. Dr. Schneiter.
Mr. Schneiter. Mr. Chairman, members of the committee,
thank you for the opportunity to discuss with you again the
Department of Defense efforts to control and monitor the cost
of the F-22 aircraft program, particularly with regard to the
PCRPs.
When I was here last year, I indicated that a program as
technically challenging as the F-22 brings with it a challenge
regarding cost and schedule performance. I also noted this
challenge has been complicated by the congressional cost caps
on the engineering and manufacturing development and
production. Let me first very briefly discuss program progress.
The F-22 program continues to demonstrate technical
progress that meets or exceeds the performance measures
established for the program. Progress in the past year,
particularly in flight testing, was impeded by some delays in
the delivery of engineering and manufacturing development
aircraft. More recently, however, in the past 4 months the
program has shown a significant increase in flight testing
tempo. We now have five flight test aircraft flying at Edwards
Air Force Base.
Also earlier this year, the program successfully completed
the exit criteria for the low-rate initial production milestone
decision, including demonstration of Block 3.0 avionics
software.
However, as Ms. Druyun mentioned, the LRIP decision was
postponed to permit the new administration to review the
program, and as you know, the Department has been conducting a
comprehensive review of strategy and programs. We're now ready
to conduct the LRIP review, and the Defense Acquisition Board
will meet on the program later this month.
Ms. Druyun has covered in some detail the PCRP process.
I'll mention some of the things the Office of Secretary of
Defense is continuing to do regarding cost control on F-22. F-
22 cost control has been a key item for the Department for
sometime. Following the Defense Acquisition Executive's review
of the program in December 1998, he reiterated the importance
of seeking to execute the program within the cost caps and
directed quarterly briefings to him on the development in
production cost status. We continue to use these special
quarterly reviews to examine cost and schedule trends and track
program progress.
I described last year that the OSD cost estimates in
November 1998, December 1999 included assessments of the
effects of the PCRPs and broadly the estimates were prepared
into steps: The recurring costs incurred to date on the
engineering and manufacturing development units, including the
actual costs which reflect PCRPs that had been implemented to
date, and then a separate estimate on the savings to be
expected from the still unimplemented PCRPs.
I'll agree the PCRPs will have a significant effect on cost
and are well worth undertaking. This is not an issue. There are
disagreements about the magnitude of the reductions to be
achieved by the PCRPs and about what cost experience to date
implies for the future apart from the PCRPs. The repeated
disagreements have had to do with how rapidly the cost of
purchased materials and subsystems will decline from the levels
observed in EMD and in the first lot of the production
representative test vehicles.
Both we and the Air Force have updated our cost estimates,
and four important events in the past year have influenced
these estimates.
First, we have another year of actual costs that have been
accrued on the aircraft being built. Second, the low-rate
initial production decision was delayed. Third, the
contractor's fiscal year 2001 contract terms were negotiated.
And fourth, the Air Force's planned cost savings program has
been enlarged.
The first three of these increased the expected costs, and
the last was constructed to offset those costs. This year the
actual costs came in somewhat higher than the Air Force
expected, and as a consequence, they raised their aircraft
production cost estimate from $39.6 billion in November 1999 to
$42 billion in November 2000.
Let me talk about the differences between the cost
estimates between OSD and the Air Force, both of which are now
above the congressionally mandated production cost cap. The
difference between the OSD and Air Force estimate, as has been
stated here, is $7.2 billion, and of that, $4.7 billion is the
difference due to estimating the basic cost estimating process,
which I mentioned includes PCRPs already implemented, and $2.5
billion due to differences in savings expected from PCRPs.
The Department considers F-22 costs very important. The
Under Secretary of Defense for Acquisition, Technology and
Logistics and the Secretary of the Air Force have personally
been addressing this issue as a high priority. The result of
their review, as well as our continuing review will be an input
into the upcoming Defense Acquisition Board review. If the
outcome of the DAB review is a decision to proceed with low-
rate initial production, the Department will comply with the
current statute and send Congress the reasons for proceeding
with F-22 LRIP, the revised production plan for the F-22, and
the revised cost estimate for the remainder of EMD in
production.
Thank you very much.
[The prepared statement of Mr. Schneiter follows:]
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Mr. Shays. Thank you, Dr. Schneiter.
Mr. Summers.
Mr. Summers. Mr. Chairman, members of the subcommittee----
Mr. Shays. Is your mic on?
Mr. Summers. It's on.
Mr. Shays. Just a little closer, please.
Mr. Summers. All right.
Mr. Chairman, members of the subcommittee, as you
requested, I will describe the audit activities of the Defense
Contract Audit Agency [DCAA], as they relate to the production
cost reduction plans under the F-22 program. I am Francis
Summers, Jr., Director of the Central Region of DCAA. The
region is comprised of 13 field audit offices, geographically
dispersed throughout the central United States. One of these
field offices is located at the Lockheed Martin Aeronautics Co.
Resident Office in Fort Worth, TX. This office is responsible
for the audits of the Lockheed Martin Aeronautics Co., the
prime contractor on the F-22 program.
Before I begin, I'd like to provide a brief background
about DCAA. DCAA is a separate agency of the Department of
Defense under the direction, authority and control of the Under
Secretary of Defense, Comptroller. The DCAA mission is to
perform all necessary contractor audits for DOD and to provide
accounting and financial advisory services regarding contracts
and subcontracts to all DOD components responsible for
procurement and contract administration.
These services are provided in connection with the
negotiation, administration and settlement of contracts and
subcontracts. As Regional Director, I am responsible for the
oversight of all facets of contract audit operations and
related support services of the Central Region. This
responsibility includes the quality of audit and financial
advisory services, technical support services and litigation
support.
The F-22 program is performed by Lockheed Martin
Aeronautics Co. at its three major sites, Fort Worth, TX,
Marietta, GA and Palmdale, CA. Boeing Aircraft and Missiles
Systems, Puget Sound, WA is the major subcontractor to Lockheed
Martin. The United Technologies Corp., Pratt-Whitney, military
engines division, East Hartford, CT, provides the engines under
a separate contract. Although my direct responsibility involves
only the Lockheed Martin portion of the F-22 program in Fort
Worth, my testimony today addresses effort by DCAA at all three
contractors as it relates to the production cost reduction
plans [PCRPs].
To date, we have performed discrete evaluations addressing
11 PCRPs, which cover about $425 million in projected savings.
The objective of these evaluations was to determine the
reasonableness of the objective savings by examining the
estimating techniques, assumptions and underlying evidential
support. To put our effort into perspective, we evaluate about
2 percent of the PCRP savings. Overall, of the $425 million, we
were unable to reach a conclusion on about $71 million because
the savings were based on judgmental contractor estimates
without sufficient evidential support. In addition, during our
evaluation of the $425 million, the contractor provided more
current information, resulting in a reduction in the estimated
savings of about $4 million.
Our other involvement was significant PCRP cost savings
that occurred in late 1997 during evaluations of various F-22
proposals. This PCRP related effort primarily involved
performing procedures requested by the Air Force, including
verifying that the proposal reflected the projected PCRP
savings previously estimated by the contractor. In general, we
concluded that the contractor was including its estimated PCRP
savings and applicable proposals.
As described, our involvement has been fairly limited to
date as we have only evaluated certain aspects of a limited
number of PCRPs.
Mr. Chairman and members of the subcommittee, this
concludes my statement, and I will answer any questions you may
have. Thank you.
[The prepared statement of Mr. Summers follows:]
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Mr. Shays. Thank you. At this time, the Chair would
recognize Mr. Barr for 5 minutes, rolled over to 10.
Mr. Barr. Thank you very much, Mr. Chairman. Ms. Druyun, it
is good to see you again. We appreciate you and the other
witnesses being here today and I appreciate the chairman
allowing me to sit in as a member of the full committee on this
hearing today.
Ms. Druyun, is it not true that there have been no overruns
in the production contract for the F-22 and that these
production figures are simply estimates of what it might cost?
Mr. Druyun. Yes, sir. That is, I think, very true. The Air
Force believes that we're still very early in the production
program. To date we have two what we call production
representative test vehicle lots on contract. That is a total
of 8 airplanes and we have another 10 on contract, which is a
total of 18. And then we have a long lead contract. We're
looking at costs that go out through the year 2013. If you look
at the target price commitment curve that we set up back in
1997 to really focus in on where we need to be in the learning
curve to be able to achieve delivering 339 airplanes within the
cost cap established by the contractors, I would tell you for
PRTV I and II and for Lot 1 we are within the 5 percent band
and in some cases actually below the commitment curve that was
put on contract. And we also put some very specific incentives
in terms of money to the contractors.
The first set of investments were made by the contractors
to try to bring down the cost of these airplanes, and we
further incentivized a return on those investments if in fact
they stayed within those target price commitment curves. And
the first 3 lots show that we are currently, you know, within
that area. I would tell you for Lot 2 we have our own set of
challenges. We're in the process of negotiating that, and we're
working very hard with the primes, as well as with the
suppliers to try to bring Lot 2 in within that 5 percent band
as well.
Mr. Barr. Thank you. With regard to the location where the
aircraft is assembled, it's currently assembled at the Lockheed
Martin plant, Air Force Plant No. 7 in Marietta, GA. Given the
fact that there has already been a very substantial, in the
hundreds of millions of dollars, investment by Lockheed Martin
and certainly by the government, both directly and indirectly
in building that infrastructure to accommodate the final
assembly, would it be reasonable to expect that there will be
substantial additional costs over and above what we now see for
this aircraft if that production--if that assembly
responsibility were to be picked up and moved to another plant
where they don't have that infrastructure in place?
Mr. Druyun. Yes. I think that's a very fair statement, sir.
In fact, it was about 2 years ago, perhaps 2\1/2\ years ago
that we did actually go in and take a look at what it would
cost the program if we were to move the production facility
final assembly to Fort Worth, and our estimates ran, as I
recall, somewhere in the range of an additional $600 million to
$1 billion cost; you know, the penalty that one would incur.
But more importantly, it would be terribly disruptive to the
program. I think if you were to go today and look at the
Marietta facility, they had made tremendous investments there,
and they are building a lean production line, and, you know,
when you look at the training that has gone on with the people,
if one were to try to make some decisions to change the final
assembly, it would have a very detrimental effect on the
program in terms of our ability to meet schedule and certainly
our ability to meet costs.
Mr. Barr. Thank you. Mr. Chairman, again, I appreciate your
allowing me to be a part of this hearing, and I would urge the
chairman, who I know is very concerned about costs and is
certainly a good steward of taxpayer money, to keep a
continuing eye on these rumors that we hear and we see from
time to time some evidence of. I think this would have a very,
very--the Assistant Deputy Secretary of State has indicated
will have very significant effect, both monetarily and
otherwise on the production of this aircraft.
Thank you, Mr. Chairman.
Mr. Shays. I thank the gentlemen.
At this time the Chair would recognize Mr. Otter.
He is curious to know if there will be any more potato
analogies.
Mr. Otter. Probably so. And let me apologize in advance for
the possibility of that.
Mr. Shays. For the record, this full committee and all
future variants, you will never need to apologize.
Mr. Otter. Thank you.
Dr. Schneiter, you said in your statement that initially
the challenges that the F-22 brings with it--in fact, your
statement is the F-22 brings with it a challenge regarding cost
and scheduling performance. I also noted that this challenge
has been complicated by congressional cost caps on the
engineering and manufacturing phase, now $20.4 billion, and on
the production phase, $37.6 billion of the program.
How did Congress arrive at those caps? Surely it wasn't
congressional people. I mean, it wasn't the Congressmen and
women themselves that said they are going to put these caps on
there. They had to get information from someone to arrive at
these caps.
Mr. Schneiter. Yes. And I believe those caps were based on
the then current estimates of the program costs for the
development.
Mr. Otter. And who made those at that time, those estimate
costs that the Congress relied upon to set the caps?
Mr. Schneiter. I believe the Air Force did. Right?
Mrs. Druyun. Yes, that's correct. That was back in the 1997
timeframe.
Mr. Otter. That was back in 1997?
Mrs. Druyun. Yes.
Mr. Otter. I understand that.
How does the Department of Defense then arrive at the cost
estimates; I mean, solely from the Air Force, or is there an
independent body? Is there an independent accounting--is there
some kind of watchdog that says the Air Force may be a little
too generous here or may not be thinking about this and
thinking about that?
Mr. Schneiter. We do that independently with this group
called Cost Improvement Analysis Group, which we called the CIG
in OSD. They make an estimate. In fact, at certain milestones
they are required, I believe by statute, to make a certain
estimate of what the costs will be, and do that independently.
Mr. Otter. When these caps were set, was there oversight on
those caps? Did somebody get a chance to look at the Air
Force's caps and, say, suggestions for the caps and say, hey,
we agree with these, we disagree with these?
Mr. Schneiter. I don't recall that OSD was asked for
suggestions.
Mr. Otter. Would it be a good idea if they did that?
Mr. Schneiter. I think that we would think so, yes.
Mr. Otter. Would there be some capability, would there be a
way in which all who are going to be looking at this through
the future and working as this team that you talk about to say
we can agree or we disagree with those caps that are set?
Mr. Schneiter. I think clearly that would be the case.
There is also the question as to the wisdom of caps,
particularly on a development program. And I think the
Department is now on record at this point of requesting relief
from the engineering and manufacturing development cap, because
we think that at this point it could serve only to cause us to
not do things that we need to in completion of the development
program.
Mr. Otter. So maybe we need--philosophically we need to go
back and take a look at our beginning points. Is it a good idea
to put on caps or not?
Mr. Schneiter. Yes, sir.
Mr. Otter. What were the reasons that caps were put on in
the first place?
Mr. Schneiter. You would have to ask those who put the caps
on, which I believe was Congress.
Mr. Otter. I see. So----
Mr. Shays. Could I just ask the gentleman to yield?
You have the ability and some knowledge to explain what the
rationale was. You don't have to agree with it, but there was
rationale, and this gentleman is a new Member, and you could
give him some history as to why. So whether or not you agree
with it or not, aren't you in a position to explain why the
caps are there?
Mr. Schneiter. I can give you my views as to----
Mr. Shays. There was rationale for it, and the Air Force
bought off on it, and it would be helpful for the record at
least for us to have an understanding of--if you appreciate why
they were put in--and if you----
Mr. Schneiter. I would be pleased to do that.
Mr. Shays. Could you answer the gentleman's question there?
Mr. Otter. Thank you, Mr. Chairman.
Mr. Schneiter. My understanding is that Congress's intent
was basically to arrest growth in costs of the program. The
program had experienced some cost increases in the past, and
they wanted to stop that, and they felt a way to do that would
be to put caps on the engineering and manufacturing development
program and on the production program.
Mr. Otter. Well, I guess my time is up, Mr. Chairman.
Mr. Shays. You have another 5 minutes.
Mr. Otter. Thank you, Mr. Chairman. I'll give you another
order of french fries for that.
I'm really interested in this because in the discipline,
and I understand that maybe it isn't fair for me to always use
the discipline that I have become familiar with or that I grew
up with, that I worked with for 30 years in the private sector,
but we had kind of a cost versus benefit analysis. If we were
going to buy one forklift that could lift 4,000 pounds to load
a truck, and maybe we could get some additional utility out of
it by maybe having it perform another function, maybe we would
buy one that could lift 6,000 pounds, so that was going to cost
a little bit more, so we kind of had to factor that in.
The process that I go through in thinking about these
things is that we are going to buy a new piece of equipment
that will provide some certain national defense, but it still
has to have some kind of cost versus benefit: We can do this
with fewer people, we have a greater level of service in
national security, we can eliminate all of the F-4s, which is
the one I'm most familiar with.
But there was a cost versus benefit analysis, and so from
that we established an expectation of what we were going to get
this piece of equipment for.
Is there a cost versus benefit analysis that the--what kind
of process does the Air Force go through in order to say, we
want all of these F-22s?
Mr. Schneiter. Yes, sir, we have such a process. We
exercise it particularly at milestones in the program. For
example, when we start a program, we will do a cost-benefit
analysis. We examine alternative ways of doing the job and see
which makes the most sense. Does it make more sense to improve
our old aircraft, buy more of the old aircraft with some
updates, or buy a new aircraft?
In the case of the F-22, we decided that for assured air
superiority that we needed new aircraft, and we knew it was
going to be more expensive than other aircraft, but we
concluded that was worth what we would pay for it. And as we
proceed with the program, we continue to make that assessment.
Mr. Otter. I understand. And I understand there is mission
assessment, and the success of the mission assessment is
invisible. I mean, it is an expectation that you have, but it
is going to work to the degree and to the effectiveness that we
thought.
But is there any savings? Are we going to eliminate--for
instance, if we eliminated the F-4 and ended up with the
whatever the new aircraft was that replaced the Phantom, and we
figure, well, you know, these have been breaking down. It is an
aircraft technology from 1966, 1968, and here we are 30 years
later, and we finally decommission it. We are going to save a
lot of money because we are not going to have to maintain it
and maintain parts.
In the cost versus benefit analysis and the deciding caps
that are put on, is there a savings factor figured in?
Mr. Schneiter. We assess the costs, do the cost-benefit
analysis. We include in the cost the operating costs of our air
fleet. And so we gain the advantage in buying new aircraft of
not having to do the increasingly expensive maintenance of the
old aircraft that we replace.
And just commenting on the point, I'm sorry that, Mr.
Kucinich isn't here, but part of what we are doing here with
the F-22 is arresting the aging of our air superiority
aircraft.
Right now, until we start building the F-22, they get 1
year older every year. As the F-22 is introduced into the air
superiority fleet and replacing older F-15s, then we will see
the average age of the fleet start to come down and reach
levels which we believe are satisfactory.
Mr. Otter. How soon after employment then do we expect the
first report of success or fairly--where are the hurdles met?
Do we have a followup, this is what it was going to do? When do
we get the first report saying it is doing what we intended it
to do?
Mr. Schneiter. Really I think the first report of that sort
is what we call the initial operational test and evaluation.
And that is something, that is where the operational pilots fly
the aircraft in operationally realistic scenarios, and we see
how it performs against its requirements. And we have to
complete that process, that IOT&E process, before we begin
full-rate production of the aircraft.
This decision we are facing now is low-rate initial
production. It is the first production. We will, a few years
from now, go into full-rate production, and we must precede
that by the IOT&E program on the basis that program, the
Director of Operational Testing Evaluation submits a report to
the Secretary of Defense and to the Congress on the results of
that operational testing.
Mr. Otter. Thank you.
Mr. Schneiter. So that is the point whether we know if we
have been successful in providing a good product to the
warfighter.
Mrs. Druyun. I would also add that for the last 2 years,
the test community has been conducting operational assessments
and have reported on an annual basis, which I think Mr.
Schneiter could talk on, how well it is potentially going to
satisfy the requirements. And basically it has been very
favorable reports that have come forward.
Mr. Schneiter. That is true. As I mentioned in my
statement, the aircraft is meeting all of its technical
criteria. We have a set of so-called key performance
parameters, acceleration, speed, stealth, things of that sort,
and all of those are being, for the most part, exceeded by the
performance that we have seen in the tactical assessments so
far.
Mr. Otter. Thank you.
Mr. Chairman, might I ask that those reports that were just
referred to be part of the official record of this hearing?
Mr. Shays. Without objection, we will do that.
Mr. Schneiter. I'm not sure I understand which reports.
Mrs. Druyun. Yes. We certainly can submit that.
Mr. Otter. Thank you.
Mr. Shays. Thank you. I appreciate the gentleman's
questions. I would say besides looking at cost-benefit, we also
look at opportunity costs, which is somewhat, I think, Mr.
Kucinich's and Mr. Tierney's questions were getting at.
Although there is some limit to what we can spend, if we go
above that, we are going to be taking from other programs
within DOD. Then we say is that opportunity cost worth it?
Let me ask all three of you, does it make sense for
Congress to have caps on this program? Start with you, Mrs.
Druyun.
Mrs. Druyun. If I could start with development, I think you
recognize in development we are 95 percent complete. The phase
of development we are in right now is very detailed testing,
and I have formally recommended, as I believe the Secretary of
the Air Force and the Chief of Staff, that it is time to remove
the cap on the development portion of this aircraft, because we
need to finish the testing that is required to show very
clearly that it will satisfy the needs of the warfighter as
established in the operational requirements document.
When the cost cap was established back in the 1997
timeframe, at the time the Assistant Secretary in the Air Force
for Acquisition was Mr. Muellner. All of us basically signed on
to the cost cap as being something good to really help keep the
focus in on driving down the cost of this airplane. When that
cost cap was established, we had not laid into the program
funds, for example, to do produceability enhancements to make
this airplane more cost-effective.
And so that has been a challenge to us to find some funds
within that cost cap to make those investments. What I have
found is that if you make those investments up front, and you
go in and you redesign elements of that airplane, or you spend
money to work with subs to relayout their manufacturing
facility, you have a great return on your investment.
We had the contractors make an investment of about $170
million up front. I didn't have the money to pay for it. And I
think that----
Mr. Shays. Let me just make this request. Your answers are
very important. I'm going to ask that they be a little shorter,
and I promise you--not that I need promise, but I will give you
an opportunity to make any additional points at the end. But I
almost forget what my question is after the question. The
response is too long.
Mrs. Druyun. Yes, sir.
Mr. Shays. So what I'm hearing you tell me is that cost
caps helped drive down costs, but you're concerned on the
development side that you are getting to a point where the caps
will prevent you from making some development discoveries that
could ultimately save?
Mrs. Druyun. Well, what we need is to have additional
funds. We have testified to this before the Senate Armed
Services and House Armed Services as well as Appropriation
Committees. We need some additional funds and some additional
time to finish testing this airplane.
Mr. Shays. OK.
Mrs. Druyun. I think everyone in OSD is in agreement with
us.
With respect to the production cost cap, it served us well,
but I will also tell you that there are some things that have
changed with respect to the timeframe in which that production
cost cap was established. I think it is important for the
Congress to periodically go back and see what has changed to
ensure that you basically have kind of an equity or an apples
and apples with what was started in 1997 versus what has
happened in the last 4-year period, and I think it is important
that be looked at.
Mr. Shays. What is your answer to the question?
Mr. Schneiter. I agree with Mrs. Druyun. The EMD cost cap,
as I mentioned, should be dropped, in our view. That is also
the position of my boss, the Under Secretary for Acquisition
Technology and Logistics.
With regard to the production cost cap, at this point
everyone's estimate of what it would take for the program to
complete production is above the cost cap. It seems that it has
certainly outlived its usefulness in the present form, unless
one wishes to constrain us in the number of aircraft that we
can buy, which is a constraint at this point that we would
prefer not to have.
Mr. Shays. Mr. Summers.
Mr. Summers. Yes. Certainly we would favor cost controls.
We think that we bring cost controls to all of the Departments
in the program. We certainly assisted on that. But any comment
with caps with respect to this program I would have to defer to
the Air Force and OSD.
There is also a cost-benefit to what you do, and certainly
the Air Force and OSD would have to evaluate whether or not
those cost controls in the form of caps are impeding in some
way their performance. So I have no position on cost caps on
this program.
Mr. Shays. Now, let me understand, Ms. Druyun. The cost
caps are divided along each way, or it has it an overall cost
cap, and then the Air Froce decides how to allocate within the
different parts?
Mrs. Druyun. Today we have two separate cost caps, one for
development and one for production, and we basically have
formerly asked that the development one be removed.
Mr. Shays. With no limits as to what that would----
Mrs. Druyun. We have--I think with--I believe that the Air
Force and the OSD are pretty much in agreement as to what we
believe it will take to get through all of the testing that
needs to be done in this program, and we have laid into our
budget approximately an additional $350 million to complete the
testing of this program, which would bring development to an
end.
Mr. Shays. We had a hearing a year ago, almost a year ago--
well, actually a year ago, June 15th. And Mr. Barr asked you,
should we in the Congress have any reason to suspect the F-22
program will not be complete within the current EMD cost caps?
That is--engineering, manufacturing, development cost caps. And
your answer: No, sir.
So I said, should we in the Congress have reason to suspect
the F-22 program will not be completed within the current EMD
cost caps? Your response. No, sir. Our official position with
the Air Force is that this program will be completed, as we see
it today, within the cost caps established by Congress. Then
you went on.
You said when you look at the production cost cap
initiatives that we have laid in place, we have--and I would
invite you, sir, next time you are in Marietta, GA, to go look
at the electronic data base that contains all of the data on
every single one of these issues, and it tracks it through the
PRTV-1 unit of the Lot 2, and every single one of these
initiatives laid out, explains what the initiative is, who the
owner of the initiative is and so.
What has changed? What has changed in the last year?
Mrs. Druyun. With respect to development, it basically has
been the issue of some late delivery of aircraft that were
needed to successfully get us through the development program.
And rather than reduce the number of test hours required on
this program, we feel it was more important that we spend some
extra money to do the full testing on this program as opposed
to trying to shave off the number of test months.
So what has changed? Last year we had expected that we
would have had more aircraft available. Today I now have five
aircraft available. The productivity in our test program has
picked up significantly over the last 4\1/2\, 5-month period. I
have five aircraft today, and I'm expecting three more
aircraft, which will round up the number of airplanes that I
need for testing to be delivered by the end of December of this
year.
In looking at the actual performance to date of those three
remaining aircraft expected to be delivered, they are basically
within 1 or 2 weeks of their projected delivery date, and that
is why we have basically asked that the cost cap be shifted so
that we do not have to trim back the number of test hours
necessary to fully test out the airplane.
Mr. Shays. To be lifted again to what level?
Mrs. Druyun. We believe that IOT&E will start around April.
We have funded, or we will fund in our upcoming budget through
the end of July, a start as late as--that for the start of
IOT&E, July 2003. That amounts to about, as I recall, in the
neighborhood of I believe it has around $300, $350 million. If
you were to look in the past at the Air Force estimate for
development, as well as the OSD estimate for development, I
think Dr. Schneiter would confirm that we were always very,
very close.
Mr. Schneiter. But I would caution that there is still a
lot of testing to do in that period. There may still be
unforeseen problems which we don't factor into those numbers,
and they could take additional time and additional money.
Mr. Shays. The thing that concerns me about the cost caps
is that, we were looking at one time at a program that was
going to cost about this much, and we were going to get twice
as many planes, correct, early on? The way that we stayed
within the cost on the program was to cut the number of planes
almost in half. Obviously the per-unit costs go up.
But the bottom line to it was that is what we did. We said,
OK, we are going to make less, but we are going to stay within
the costs. In fact, we even increased the cost of the program.
We increased the cost of the program and kept reducing the
number of planes.
Now, there is a reason why we had these cost caps. If we
didn't, the program would have been killed. We weren't going
to, you know, have an $80 billion program. So I just want to
make sure this isn't a ruse to have gotten us caught up in the
program, and now we are seeing it unravel, and we are not going
to start to see people say, we need to reduce the cost.
Mrs. Druyun. I think if you were to look at the cost
schedule performance data that is reported on a monthly basis,
you would see that development is over 90 percent complete--I
think it is about 95 percent complete--and that the task, the
work to go, is basically in the test arena. We have worked very
closely with the OSD test community to reach agreement on the
number of hours we believe that it will take to complete the
test program.
Plus I asked a group of experts outside of the Department
of Defense to go in and independently look and come back and
make recommendations to us as to how much additional test time
was required, and they basically recommended we make some
changes. I have incorporated all of those changes, and we all
agreed that a start date for IOT&E of April 2003 was a moderate
risk, but that we had done everything humanly possible to
moderate that risk.
Mr. Shays. The bottom line point being what is your bottom
line point, if you could?
Mrs. Druyun. My bottom line point is that I think that we
have a very clearly handle on what the estimated costs are to
complete the operational testing required of this airplane that
will bring EMD to an end.
Mr. Shays. Now, what we are looking at is two cost
estimates, one that is $2 billion over, and one that is $9
billion over.
Mr. Druyun. That is on the production side. Yes, sir.
Mr. Shays. Right. So are you telling me that on the
engineering, manufacturing we are going to go up? And now which
estimate are you most comfortable with, the $2 billion or the
$9 billion?
Mrs. Druyun. The cost estimates itself that I have spoken
to in previous hearings was the one that was developed this
past fall. I have very good confidence in our cost estimators.
We have seen additional procedures with respect to our
subcontractors.
Mr. Shays. I mean, the Air Force's $2 billion?
Mrs. Druyun. The Air Force showed back in the November
timeframe that we were about $2 billion over the cost cap
established in this program, and our estimators have continued
to work with the OSD estimators and to continue to update their
data based on what they have seen in terms of performance under
the production side of the program.
Mr. Shays. How do you respond to Mr. Li basically saying
the more conservative estimates--in other words, the ones that
allowed for the cost--in other words, he is saying it was--the
lower estimates were the ones that were not kept; usually the
higher estimate always prove to be true? In other words, his
implication is that he is probably more comfortable that it
would be closer to the $9 billion than the $2 billion. How do
you respond to that?
Mrs. Druyun. In looking at our cost estimate, I believe
that we have done a reasonable job of developing that cost
estimate. That is done within the--a separate group who is
independent.
And I firmly believe that when you look at the target price
commitment curve that we have on contract--on the contractors'
performance to date, that the estimate that the Air Force has
looked at in the past and as they have continued to update it,
I believe that it is a reasonable estimate.
And you must realize we are on the very front-end part of
this program, and I think it is also difficult to make
projections out to the year 2013. That is why we have focused,
and we will continue to focus, this program on the first five
lots, and to bring those first five lots down that learning
curve so that we can have the ability to deliver 339 aircraft
at an affordable price.
Mr. Shays. Is there a point at which you would find this
plane is too expensive? Is there any number that you would
actually recommend pulling the switch on it?
Mrs. Druyun. I have not really considered that. I think
that you have to look very clearly at what the threat is out
there. The F-15 that we have out there today flying is not able
to meet that threat. And if you would like, we can show you
some classified data that was run on our range recently that I
think would clearly make that point.
Mr. Shays. Mr. Otter, do you have some questions?
Mr. Otter. I really only have one, Mr. Chairman. I thank
you for the opportunity to ask it.
Mrs. Druyun, you said that you have a feel now that we have
a very clear handle on this new figure for the cost of
completing the testing, and I can't remember and quote verbatim
your entire statement, but you do feel like in order to get us
to the end of testing, that you have a very clear firm figure
that you believe. And what was that figure again?
Mrs. Druyun. If I could elaborate on that for a moment,
sir. We had a separate red team go out and basically look at
what it would take for us to successfully get through testing
of this airplane to satisfy all of the requirements out there.
And basically they recommended that we slip the start of
dedicated IOT&E from December 2002 to April 2003.
I tried to build an additional factor in there when I
talked to the Secretary of the Air Force, and basically what we
have done, we have a 1\1/2\ percent cap that was granted by the
Congress. That amounted to $307 million. Slipping the start of
dedicated IOT&E, we have laid in another $250 million. We are
laying that into the budget, and that really gives me about a
3-month pad in case we are not ready to begin dedicated IOT&E.
It has a moderate risk. The reason why it is at a moderate
risk is because I only have one airplane that is instrumented
to be able to do some of the flight testing that is required to
fully open up the envelope, and that has always been a
limitation of this program. We watched that very carefully. But
we believe that what we have laid is basically a reasonable
approach to successfully complete developmental operational
testing.
Mr. Otter. So for $557 million, that is the $307 plus the
$250, so for $557 million you feel very comfortable that $557
million is a clear handle, that is what is going to be required
for resolving the testing?
Mrs. Druyun. Based on the data that I have today, yes. I
feel that is a reasonable estimate, and that is what we have
laid in to successfully complete this program. Yes, sir.
Mr. Otter. And you have gone through the analysis, and you
feel very good about that?
Mrs. Druyun. I have gone through the analysis in a fair
amount of detail, and that is why I also called in outside
experts who had many, many years of test experience, including
the chief test pilot out of NASA, to help me take a look at the
program.
And more importantly, for the first time we actually have
very detailed test sets and test sheets is basically the term
we use that spells out what the tests are that we need to
complete to buildup and get ready to enter into operational
tests and evaluation.
Mr. Otter. OK. Well, then, let me get to my bottom line,
and just yes or no.
Mr. Shays. We have 5 minutes basically to conclude. If we
can conclude, I'm not going to have you wait for us to get back
to vote. So if the answers could be concise, that would be
helpful.
Mr. Otter. Yes or no is all I would require.
Would you accept the $557 million as a cap?
Mrs. Druyun. No, sir. We do not believe it is appropriate
when we get into the final testing of this aircraft. We think
the cap has served its purpose, and that is the reason that we
want the cap removed.
Mr. Otter. OK. Thank you.
Thank you, Mr. Shays.
Mr. Schneiter. From an OSD point of view, if we may
comment, we feel the same way. I think we are not as sanguine
as Mrs. Druyun with regard to being ready to start IOT&E at
that time.
Mr. Shays. OK. We have a vote closing in about 8 or 9
minutes, and I--the clock says 7. I have five questions. If we
can get through them, then we won't come back.
Bottom line. How confident is the Air Force that the
challenged PCRPs can be achieved, the challenged ones?
Mrs. Druyun. If you look at the Air Force cost estimate, we
basically gave them zero, because there is--at the time, there
was no specificity attached to them. And as contractors develop
specific projects and programs, and they have about 1.4 billion
of specific projects and programs, we will continue to evaluate
them and update our estimate. But our estimate back in
November, and I believe even our current estimate, gave them no
credit for that.
Mr. Shays. The bottom line. You have challenged, not yet
implemented and implemented, and implemented obviously are
clear. Not yet implemented and other, but challenged are the
most difficult ones, correct?
Mrs. Druyun. The challenged, I think the contractors'
description of areas that they have specifically targeted to
develop specific projects to further bring down the cost of the
airplane.
Mr. Shays. It is hard to get a yes answer from you, you
know. I'll just have to come back. I'm sorry. We'll just come
back.
[Recess.]
Mr. Shays. I now call to hearing to order. I know we are
trying to do our best job, but I just want to say that I did
have four questions, but that was in the hope that I didn't
have to come back. And so there will be a number of other
questions.
Would any of the three of you tell me if you ever raised
with the Department or Congress that caps on engineering,
manufacturing and development were not appropriate? Did any of
you suggest that they weren't appropriate?
You are saying that now. I'm just wondering if you said it
earlier.
Mrs. Druyun. I have officially, along with, I believe, the
Secretary of the Air Force and the Chief, but I have officially
at the hearing back in July recommended that the cost cap
established by the Congress for development on F-22 be removed.
Mr. Shays. That is not what I asked. That was last year. I
asked in 1997.
Mrs. Druyun. No, that was this year, sir.
Mr. Shays. July of this year?
Mrs. Druyun. July 2001.
Mr. Shays. But these caps were initiated in 1997, and we
all basically agreed to them, and you last year, Mrs. Druyun,
said that we were right on target. I'm just asking if you all
ever made it clear to Congress that you didn't think caps on
the engineering and testing was not appropriate?
Mr. Schneiter. I did not.
Mr. Summers. No, we did not.
I would like to maybe rephrase my previous answer. We don't
have a position on caps in Defense Contract. We think that is
an Air Force position, so that is not in our charter.
Mr. Shays. Mrs. Druyun.
Mrs. Druyun. No, I don't have a recollection of that.
Mr. Shays. OK. I mean, that, you know, is probably an
interesting point, but not a crucial point.
I would like to go back to the whole issue of--I felt that
I was asking a simple question with the hope of understanding,
and obviously this must not be a simple answer.
We have three categories in our reduction plan. We have
what you call challenged, not yet implemented and implemented.
Implemented--would you make an answer--and I'll answer it,
because maybe my answer will be shorter. Implemented means that
we have already taken the cost savings and put it into place.
Would that be accurate?
Mrs. Druyun. Yes.
Mr. Shays. OK. The not yet implemented, tell me the
difference between not yet implemented and challenged. That
would be helpful for me to understand. Is not yet implemented a
potential challenged reduction plan, or is it--or--the other
way around?
Mrs. Druyun. Challenged is basically the contractors'
description, I believe, of future cost reductions that they
want to pursue. They put them into a variety of categories, and
as they identify specific projects, then they move them in to
be implemented.
Mr. Shays. What would be an example of that?
Mrs. Druyun. Well, OK. Let me give you an example. Back in
September----
Mr. Shays. Is this of challenged?
Mrs. Druyun. This is of challenged, sir.
Mrs. Druyun. Back in September 2000, they had identified
$4.1 million in challenged PCRPs. Since that time, they have
identified some specific projects. One I will give to you is
Lockheed Martin aeronautics consolidation. The company is, in
fact, moving out and consolidating some of its overhead
functions, for example, and they have attached a dollar amount
with that.
And about 2 months ago, I had a cost team from--with
representatives from DCMA, Defense Contract Management Agency,
the SPO, and a variety of other folks go out and take a look at
that to see how that was coming along, and indeed it is coming
along. So today that wouldn't be part of the challenge, it
would be moved into one of the other categories.
Mr. Shays. And the other categories would--it wouldn't be
not yet implemented?
Mrs. Druyun. Not implemented means it is defined, but it
has not been laid into the pricing, as I understand it, for Lot
2 or later.
Mr. Shays. OK.
Going back to the issue of the testing and so on.
Originally we were looking at the $350 million, and then there
was the number of $500 million. And Mr. Otter, Congressman
Otter, asked could you stay within that, and you responded that
you wouldn't stay necessarily within that cap.
Where was the $350 number and the $500, and tell me what
you say ultimately the additional amount is we need to spend.
Mrs. Druyun. If you look at the--we had a cap increase of
1.5 percent. It required, as I recall, a certification made by
OSD, I believe it was the----
Mr. Shays. That is the cost of living?
Mrs. Druyun. No, sir.
Mr. Shays. No.
Mrs. Druyun. There was in the 2001 statute that if the
Director of IOT&E certified if we needed an additional increase
in our cap, that they would grant us up to 1\1/2\ percent. The
Director of IOT&E certified that we needed an additional
increase in our development cap, the EMD cap of 1\1/2\ percent.
Mr. Shays. Of the total program or 1\1/2\ percent of the
engineering part?
Mrs. Druyun. Of the EMD cap.
Mr. Shays. Right.
Mrs. Druyun. That was $307 million.
Mr. Shays. OK.
Mrs. Druyun. As a result of the further analysis that we
have done, and the red team that I mentioned, we have added in
or will be adding into our budget an additional $250 million.
Mr. Shays. $557.
Mrs. Druyun. Which gives you up to $557 million. And that
basically delays the start of dedicated IOT&E from December
2002 until April 2002. But I put enough management reserve in
that number, I could start as late as the end of July, first
part of August and still have enough management reserve to
cover that period of time.
Mr. Shays. And how comfortable are you with this number?
With Mr. Otter, you basically said you weren't going to agree
to cap that at $557. So what does that mean? How do you
interpret that?
Mrs. Druyun. I thought that you were asking Dr. Schneiter.
Mr. Shays. Dr. Schneiter is fine. I was just throwing it
out there.
Mr. Schneiter. Well, my position is that we still have a
lot of testing to do between now and the spring of 2002, and
there may be additional problems. History would indicate that
there likely will be. I'm not sure. I think in our view, we
would not like to see a cap, for example, at that amount,
because it would not leave us adequate reserve.
Mr. Shays. OK. So but would you say that $557 million is a
conservative number, or conservative in the sense that you have
given yourself some leeway, or is it kind of at the edge?
Mr. Schneiter. I think Mrs. Druyun is saying that her
estimate is that--it is adequate. I would say it is at the
edge----
Mr. Shays. OK.
Mr. Schneiter [continuing]. If I understand your
terminology.
Mr. Shays. Yeah.
Mrs. Druyun. Yes. It is basically our best estimate with
management reserve laid in. Based on the----
Mr. Shays. By laid in, in other words you have already
included it, so you haven't left a reserve in case you have to
go up?
Mrs. Druyun. I have left some reserve in that number. I
have left about 3\1/2\ months of reserve in that number.
Mr. Shays. OK.
Mrs. Druyun. That is why it is our best estimate, and we
think it is reasonable.
Mr. Shays. How confident is the Air Force that the
challenged PCRPs can be achieved?
Mrs. Druyun. Well, as I explained to you earlier, sir, when
the service cost Air Force estimate was put together, we gave
them zero credit for the challenged PCRPs.
Mr. Shays. So you have no confidence that they can achieve
them?
Mrs. Druyun. No. As the projects are specifically
identified, we will evaluate them and see how reasonable they
are in terms of their ability to turn them into reality. And
there is cost estimation that went along with them.
Mr. Shays. So I'm trying to translate your answer. The
bottom line is you can't answer the question because you
haven't yet evaluated them?
Mrs. Druyun. No, sir. I tried to explain.
Mr. Shays. I know you are trying to explain. I'm just
trying to understand.
Mrs. Druyun. Our cost estimate did not give them any credit
for the PCRP.
Mr. Shays. That part I understand. You have given them no
credit. So what is the process? What does that mean?
Mrs. Druyun. The process is that the contractor will begin
to, and has begun to, identify specific projects that they are
going to pursue that will be included in the challenge, and
once they identify those and go through the process of clearly
defining them, laying in plans as to how they would execute
them, how they would develop the estimate of what the savings
would be associated with it, we will evaluate them and decide.
Mr. Shays. So the answer is you can't give an answer yet
now because you haven't yet evaluated them.
Mrs. Druyun. That's correct.
Mr. Shays. Why hasn't DOD fully complied with the GAO
recommendation to report cost reduction plan information in the
quarterly reviews?
Mr. Schneiter. The Air Force does in its quarterly reviews
present the status of the PCRPs.
I think part of the issue between us and the GAO view is
the amount of detail that one needs to go into with regard to
that. It is always done in a summary fashion. In some cases we
go into more detail. At the last one of our reviews, I think
something over 300 were actually shown, although certainly not
evaluated.
The Under Secretary for Acquisition, Technology and
Logistics, I believe, has a good understanding of the PCRPs.
When he visited the plant in Marietta, he spent some amount of
time going through the process that they used as well as
sampling some of those.
So we believe that we have done that adequately.
Mr. Shays. So my question, will further quarterly review
include all of the PCRP information GAO recommended you have?
Basically the answer would be that you all have a disagreement
as to whether you are complying or not, and so that would be
hard to answer? I mean, how would you answer that?
Mr. Schneiter. Well, there is something over 1,100 PCRPs. I
think it is impractical for us to go through these at each of
the quarterly reviews. We do examine how well they are doing,
and then additionally we have the Cost Analysis Improvement
Group examine these in great detail. They are our cost analysis
people, and so they examine those. They take account of those
in their estimate, and they report to the Under Secretary.
Mr. Shays. I'm going to let counsel ask a question.
Mr. Halloran. Would you at some point agree to provide the
same level of detail twice in a row? The problem, I think, we
are having is to track the progress and interpretation of PC
data when you pick and choose what goes upstairs for review, so
it is never the same twice in a row. We just can't connect the
dots. What would be wrong with settling on some consistent
level of detail from quarter to quarter?
Mr. Schneiter. If that is what the request is, I would have
to consider that and get back to you.
Mr. Halloran. That was the request last August.
Mr. Schneiter. Then that is failure on our part in
understanding exactly what you were after there. I think the
important thing in this is really what the estimate is, and not
tracking each and every PCRP. How well the PCRPs do is less
important than what the overall estimate is, taking account of
the PCRPs.
So on the OSD side, we try to not focus just solely on the
PCRPs, because the basic estimate is important, actually more
important. And over time, the PCRPs become part of the basic
estimate.
As I explained in my statement, the estimate that we do is
made of two parts, what we now call the basic estimate, which
includes a number of PCRPs, and so that now becomes part of the
basic estimating process.
Mr. Halloran. I understand.
Mr. Schneiter. But the implemented PCRs----
Mr. Halloran. But as long as you are operating under the
cost cap on the production side, the PCRP content of the
estimate is very significant, it is the measure of your chance
of getting at the cap--at or near the cap.
Mr. Schneiter. It is significant, but so are many other
aspects of the cost estimate.
Mr. Shays. Talking in general, we had the concept of cost-
benefit and opportunity cost. What concerns me in my 10 years
serving on the Budget Committee is the issue of opportunity
costs. There is only so many things that we can do. And I
basically consider myself a supporter of the F-22. When I say
basically, I just want to know it is not going to cost $80
billion.
I don't want a fair fight. In other words, I want our men
and women to basically have superior platforms. I want them to
be able to shoot and see the enemy before the enemy sees us.
I get concerned when I see the 700 number go down--750
number go down to 339, 333, and I get concerned that ultimately
a year from now we may be looking at a continued reduction of
the number of platforms, and then obviously the per-unit cost
going up, and that we won't have significant new costs.
I supported the tax cut. I voted for taking off some of the
surplus so we don't have this unlimited sum out there, and I'm
not unlike other Members of Congress. The thing that concerns
me the most, and I'll say this to you, Mrs. Druyun, I find you
a difficult witness, and that is a negative in the one sense
for me. But it is a positive, because I have a feeling that you
are difficult with the contractors, and I like that. So that is
a plus. But what starts to happen to me is when I feel that
information isn't being provided, to GAO in particular, I then
start to get nervous.
And we had made requests to the Secretary of Defense for
information, and we are basically being told that if decisions
haven't been made, then it is not available to us. With
specific reference--here is the letter that we sent to Mr.
Rumsfeld June 19th. We said, with specific reference to the F-
22 cost controls, it is certainly our impression that the
decision to pursue cost control initiatives has been made. We
conclude the bases for the decision are within the legitimate
oversight reach of the subcommittee. Cost estimate methodology
and the validity of PCRPs are not dependent on any production
milestone being relevant generally to acquisition processes and
applicable specifically to the production of 1, 339 or more in
the 700 F-22s.
And our response on that: This is in reply to your letter
to--and this is from Mr. Aldridge. This is in reply to your
letter of Secretary Rumsfeld requesting access to the F-22 cost
estimate records provided by the Office of the Secretary of
Defense, Cost Analysis Improvement Group.
Our policy to not allow access to predecisional material
continues. This is essential to allowing the Department of
Defense [DOD], to fully debate program funding internally
before making program decisions.
What I'm interested in knowing is the raw data that is
involved is also being denied us. Why would the data be denied
us and not necessarily the decisions or the interpretation of
the data?
Mr. Schneiter. I'm not sure exactly what you mean by the
raw data. The GAO has had good access to the data from the Air
Force. Mrs. Druyun can speak to that process.
I think some of what has been sought here is not what I
would call raw data, but rather data that has been processed by
our cost analysts, which includes many judgments on their part,
and we don't like to have all of that be debated publicly while
we are in the process of making internal decisions within the
Department.
The Department lawyers perhaps can tell you more about
that, but this is my understanding of why it is that we are as
unwilling as we are in the process of going up to a decision
and making a decision to provide some of that information, much
of which in this case is judgmental. The reason for a lot of
the difference between our estimate and the Air Force estimate
on this has to do with the judgments of the cost analysts in
terms of what learning curves are going to be, how much the
cost will go down as we learn more and so forth, and that is
not raw data.
Mr. Shays. The difference between the $2 billion and the $9
billion is within the Department of Defense. I mean, it is not
GAO saying $9 billion and DOD saying $2 billion. It has an
internal difference. And don't you think it is important for
Congress to understand in very real terms how we can arrive at
two different numbers, especially since both are over the cap?
I mean, both are truly over the cap.
Mr. Schneiter. The Department has not yet made a decision
as to what it thinks the cost estimate of the program is in the
context of the current program.
Mr. Shays. When will that decision be made?
Mr. Schneiter. That decision will be made, I think, within
a month. As I indicated in my statement, we have a
congressional--a statutory requirement that if we decided in
the Department to proceed with low-rate initial production,
that then we need to send Congress the reasons for proceeding
with low-rate initial production, the revised production plan.
And that is revised in the sense of revised from what we had
previously, which we now all agree will not fit within the cap.
So we have to give you a revised production plan, and the
revised cost estimate for the reminder of EMD and production.
So by law we need to provide that if we decide to proceed with
low-rate initial production. So the Department will provide a
revised cost estimate.
Mr. Shays. In other words, when you say if, the question is
when, not if, correct?
Mr. Schneiter. I would not prejudge myself that.
Mr. Shays. What would be the alternative, to stop the
program?
Mr. Schneiter. That is one alternative.
Mr. Shays. What, just stay in EMD for a while longer? Just
help me understand. What can I anticipate? In other words, not
that you know what is going to be done, but the options are to
basically begin production, stay in EMD, end EMD or stop the
program. Those will be the three potentials. Are there any
other choices?
Mr. Schneiter. None come to mind. I think there is a
general expectation that we will proceed. We have put money in
the budget for the next LRIP, but the decision is not made.
Mr. Shays. OK. So since you all haven't determined where
that number between $2 and $9 billion is, but once you
determine that, then all of the data that we have requested is
going to be made available?
Mr. Schneiter. I don't know exactly what all has been
requested.
Mr. Shays. Fair enough.
Mr. Schneiter. I think that more will be made available
once the decision is made. You have a Department position, and
I think that we will have an obligation then to explain the
basis for what our estimate is.
Mr. Shays. I would just love to have GAO take the mic and
just enlighten me as to what data we might be looking at. If
you can just lift the mic up and speak while standing.
Mr. Li. Mr. Chairman, the type of data--and I guess I would
disagree with Mr. Schneiter. When we issued our draft report,
it was commented on by DOD, and at that point in time in our
draft, in response to the words that we had, there was a
misunderstanding as to what was the level of detail.
In our final report we clarified our position in terms of
summary data, and a few minutes ago there was some responses
about the number of PCRPs and the detail that was provided.
That is not what I'm looking for.
I'm well aware of the fact that it is a very time-consuming
and labor-intensive thing to do. I'm looking at summary data. I
indicated that the summary data that--an example. When you
asked me, that question was providing summary data regarding
the dollar impact of those PCRPs that were implemented, and
that is the type of thing that I'm looking for so that I can
answer the type of questions that Mr. Tierney was raising.
I would like to note the fact that in the 60-day letter,
which is a requirement, a statutory requirement, that the
agency respond to the final report, that DOD did acknowledge
the fact that I modified my recommendations, they agreed with
those recommendations.
So they did agree with the fact that, yes, I'm going to
provide summary data in a way that you described in the draft
report.
Mr. Shays. I would just request that you stay in close
contact with the committee in terms of the future analysis of
this project, and, you know, we'll try to work this out
internally. I have never recommended that we subpoena--at least
I don't recall that this committee has, but I wouldn't be
hesitant to recommend that information about the F-22 be
provided, and if it is not, to subpoena.
And I will be very candid with you. I would have to get the
chairman's approval and the Speaker's, so that obviously gives
you the opportunity to talk to the Speaker. But I would
certainly argue very strenuously that information about this
project be provided so we have a fair analysis.
I know all of you are very sincere about this project. I
think that you are working overtime to keep it within cost. I
don't have any doubt about that, and I consider all of you very
fine public servants, and we are grateful that you are working
for the government. But these may be just tensions that exist
between three different groups.
But in the end, if information isn't provided, you have the
potential of making enemies out of friends who, you know, would
like to see this project go forward. And I also understand that
we are still dealing with estimates.
So, Ms. Druyun, when you were pretty certain that we
weren't within costs and comfortable at that a year ago, I
realize things can change, so I am not--I like definitive
statements and I like us to say how well we are able to keep
them, so I don't have complaint about that. I am just concerned
that this may be a $9 billion overrun instead of a $2 billion
overrun, and it still may be worth it. But it would be better
that we know it.
I have no questions that I want to ask.
Do you have any? Do any of you want to make a closing
comment? Then we can adjourn.
Mr. Summers. No, sir.
Ms. Druyun. No.
Mr. Schneiter. No, sir.
Mr. Shays. Thank you all very much.
This hearing is adjourned.
[Whereupon, at 12:55 p.m., the subcommittee was adjourned.]
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