oversight

Fighter Aircraft: Better Cost Estimates Needed for Extending the Service Life of Selected F-16s and F/A-18s

Published by the Government Accountability Office on 2012-11-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office

GAO             Report to Congressional Committees




November 2012
                FIGHTER AIRCRAFT

                Better Cost Estimates
                Needed for Extending
                the Service Life of
                Selected F-16s and
                F/A-18s




GAO-13-51
                                               November 2012

                                               FIGHTER AIRCRAFT
                                               Better Cost Estimates Needed for Extending the
                                               Service Life of Selected F-16s and F/A-18s
Highlights of GAO-13-51, a report to
congressional committees




Why GAO Did This Study                         What GAO Found
Fighter aircraft are important to              The Air Force plans to upgrade and extend the service life of 300 F-16 aircraft and
achieve and maintain air dominance             the Navy 150 F/A-18 aircraft, at a combined cost estimated at almost $5 billion in
during combat operations as well as to         fiscal year 2013 dollars.
protect the homeland. DOD plans to
replace many of its current fighter fleet        •   The Air Force plans to extend the service life of selected F-16s by 2,000 flying
with the F-35; however, the F-35                     hours each as well as install capability upgrades such as an improved radar.
program has experienced numerous                     The Air Force estimates that it will complete this work by 2022 at a cost of
delays and cost increases. To maintain               $2.61 billion. About 28 percent of the projected costs are included in the Air
fighter capabilities and capacity, the Air           Force’s spending plans through 2017, with the remainder expected to be
Force and Navy have decided to                       incurred in 2018-2022.
upgrade and extend the service life of           •   The Navy plans to extend the service life of selected F/A-18s by 1,400 flying
selected F-16 and F/A-18 aircraft. In                hours each and may install capability upgrades on some of the 150 aircraft—
this context, two subcommittees of the               such as adding the ability to integrate with newer aircraft. The Navy projects
House Armed Services Committee                       that it will complete the life extension by 2018 at a cost of $2.19 billion, with
asked GAO to (1) describe the Air                    most of these costs included in its spending plans through 2017, but costs
Force and Navy plans to upgrade and                  associated with any upgrades are not included in the Navy estimate or in its
extend the service life of selected F-16             spending plans.
and F/A-18 aircraft; and (2) assess the
extent to which cost estimates for             Air Force and Navy officials told GAO that they could ultimately extend the service life
these upgrades and life extensions             of up to 650 F-16s and 280 F/A-18s if needed to attain desired inventory levels.
exhibit characteristics of a high-quality
cost estimate. GAO obtained
documentation of the plans and                 The Air Force’s and Navy’s cost estimates to upgrade and extend the service life of
estimates, compared the estimates to           selected fighter aircraft exhibit some characteristics of a high-quality cost estimate but
best practices outlined in the GAO             do not reflect all potential costs. The estimates were: well-documented since they
Cost Estimating Guide, and assessed            identified data sources and methodologies; accurate since they accounted for
factors that could affect total costs.         inflation and were checked for errors; and mostly comprehensive since they included
                                               the work planned and identified key assumptions. However, the estimates were not
What GAO Recommends                            fully credible in part because they did not assess the extent to which the total costs
                                               could change if additional work is done or more aircraft are included in the programs.
GAO recommends that the Air Force
                                               For example, Air Force leaders indicated in March 2012 that they intend to upgrade
and Navy follow all best practices to
                                               and extend the service life of 50 additional F-16s beyond the original 300, but the Air
enhance the credibility of the cost
                                               Force has not assessed how much the cost might increase if more aircraft are added
estimates for the F-16 and F/A-18
                                               to the program. In addition, the Navy plans to upgrade the capabilities of some
upgrades and life extensions including
                                               aircraft at the same time as the service-life extension, but this cost is not included in
an assessment of the potential range
                                               the Navy estimates. Also, the Navy may extend the life of or replace other aircraft
of costs and seeking independent cost
                                               components that are becoming obsolete, but these costs—which could add an
estimates. DOD agreed with all four
                                               average cost of $5.64 million per aircraft—were also not included in the original $2.19
recommendations.
                                               billion estimate. Another factor affecting the credibility of the estimates is that they
                                               have not been compared to an independently developed estimate. GAO’s past work
                                               has shown that such an independent cost estimate is one of the best validation
                                               methods since an independent cost estimate tends to be higher and more accurate
                                               than a program office estimate. Air Force and Navy officials told GAO that they use
                                               Department of Defense and military department guidance that allows for some
                                               variation in how the estimates are developed depending on the dollar value and
                                               maturity of the program. However, these programs--which are critical to maintain
                                               fighter capability and capacity as current inventory ages--total almost $5 billion and
View GAO-13-51. For more information,          the costs will increase if program quantities and scope increase. Without fully credible
contact John H. Pendleton at 404-679-1816 or   cost estimates, including an analysis of how much total costs may increase, decision
pendletonj@gao.gov.                            makers will not have visibility into the range of potential costs, which could hinder
                                               their ability to formulate realistic budgets and make informed investment decisions.
                                                                                           United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   4
               Air Force and Navy Programs Would Extend the Service Life of 450
                 Aircraft at a Cost of Nearly $5 billion                                    5
               Air Force and Navy Cost Estimates Exhibit Many Characteristics of
                 a High-Quality Cost Estimate but Do Not Reflect Some
                 Significant Potential Costs                                              10
               Conclusions                                                                14
               Recommendations for Executive Action                                       15
               Agency Comments and Our Evaluation                                         16

Appendix I     Scope and Methodology                                                      18



Appendix II    Air Force Cost Estimates for Upgrading and Extending the Service Life
               of Selected F-16 Aircraft in Then-Year Dollars                        20



Appendix III   Comments from the Department of Defense                                    21



Appendix IV    GAO Contact and Staff Acknowledgments                                      24



Figures
               Figure 1: Air Force F-16 and Estimated Costs to Upgrade and
                        Extend the Service Life for 2,000 Hours (Fiscal Year 2013
                        Dollars in Billions)                                                7
               Figure 2: Navy F/A-18 A-D and Estimated Costs to Extend the
                        Service Life for 1,400 hours (Fiscal Year 2013 Dollars in
                        Billions)                                                           9




               Page i                                               GAO-13-51 Fighter Aircraft
Abbreviation

    DOD                    Department of Defense




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Page ii                                                          GAO-13-51 Fighter Aircraft
United States Government Accountability Office
Washington, DC 20548




                                   November 15, 2012

                                   The Honorable J. Randy Forbes
                                   Chairman
                                   The Honorable Madeleine Z. Bordallo
                                   Ranking Member
                                   Subcommittee on Readiness
                                   Committee on Armed Services
                                   House of Representatives

                                   The Honorable Roscoe G. Bartlett
                                   Chairman
                                   The Honorable Silvestre Reyes
                                   Ranking Member
                                   Subcommittee on Tactical Air and Land Forces
                                   Committee on Armed Services
                                   House of Representatives

                                   Fighter aircraft are important to achieving and maintaining air dominance
                                   during combat operations as well as protecting the homeland. These
                                   aircraft operate during the first days of a conflict to penetrate enemy air
                                   space and defeat air defenses, which allows follow-on forces freedom to
                                   operate. Overall, the Air Force and Navy have about 3,500 fighter aircraft
                                   in inventory as of fiscal year 2012, including about 1,020 Air Force F-16s
                                   and about 624 Navy F/A-18 A-Ds. 1 Many of the Department of Defense’s
                                   (DOD) current fighter aircraft are more than 20 years old on average, and
                                   although DOD plans to replace much of the existing inventory by
                                   procuring 2,443 new F-35s, the department has experienced numerous
                                   delays and cost increases in the F-35 program. Therefore, the Air Force
                                   and the Navy have considered several alternatives to maintain desired
                                   fighter inventory levels at an acceptable level of risk and to maintain
                                   fighter capabilities and capacity as a “bridge” until replacement F-35
                                   aircraft enter service in sufficient numbers. The Air Force has decided to
                                   upgrade and extend the service life of selected F-16s and the Navy has




                                   1
                                    The Navy figure includes aircraft that are used by the United States Navy and Marine
                                   Corps.




                                   Page 1                                                         GAO-13-51 Fighter Aircraft
decided to extend the service life of selected F/A-18s. 2 These programs
are estimated to cost several billion dollars at a time when DOD is
simultaneously facing the competing demands of developing and
procuring F-35s at a cost approaching $400 billion, supporting ongoing
operations, and implementing $487 billion of reductions over the next 10
years, which the department has estimated that it needs to cut in order to
comply with the Budget Control Act of 2011. 3

We previously have reported that the F-35 program has experienced
numerous delays in development and production, including program
restructuring, which has added time for development. 4 As a result, DOD
has deferred procurement of 410 F-35s until after fiscal year 2017. 5
Considering that further slips in the F-35 program may occur and could
increase the scope and cost of the services’ plans for upgrading and
extending the service life of current aircraft, you asked us to (1) describe
the Air Force and Navy plans to upgrade and extend the service life of
selected F-16 and F/A-18 aircraft, and (2) assess the extent to which cost
estimates for these programs exhibit characteristics of a high-quality cost
estimate. This report reviewed estimates of costs projected for fiscal
years 2011 through 2022.

To describe the Air Force’s and the Navy’s plans to upgrade and extend
the service life of selected F-16s and F/A-18s, we reviewed the services’
documentation of the programs’ purpose and scope including the
underlying analysis of alternative approaches. We also obtained cost
estimates for these programs and obtained any updates to these
estimates. Since the service cost estimates were developed in different


2
 The Navy also decided to buy an additional 41 F/A-18 E/F aircraft. This report focuses
on the services’ plans to upgrade and extend the service life of current aircraft and does
not include an evaluation of buying new aircraft.
3
Department of Defense, “Defense Budget Priorities and Choices” (January 2012).
4
 GAO, Joint Strike Fighter: DOD Actions Needed to Further Enhance Restructuring and
Address Affordability Risks, GAO-12-437 (Washington, D.C.: June 14, 2012).
5
 GAO, Joint Strike Fighter: Restructuring Added Resources and Reduced Risk, but
Concurrency Is Still a Major Concern, GAO-12-525T (Washington, D.C.: Mar. 20, 2012)
and Joint Strike Fighter: DOD Actions Needed to Further Enhance Restructuring and
Address Affordability Risks, GAO-12-437 (Washington, D.C.: June 14, 2012). The June
2012 report states that DOD has purchased 63 F-35 (Joint Strike Fighter) aircraft as of
January 2012, and, with the latest reduction, DOD now plans to buy a total of 365 aircraft
through 2017, about one-fourth of the 1,591 aircraft expected in the 2002 plan.




Page 2                                                            GAO-13-51 Fighter Aircraft
base years, all of the cost estimates in this report have been converted to
fiscal year 2013 dollars using the indexes published by the Office of the
Under Secretary of Defense (Comptroller) so that the data can be
presented in comparable terms. 6 To assess the extent to which cost
estimates exhibit characteristics of a high-quality cost estimate, we
compared how the estimates were developed to the cost-estimating best
practices outlined in the GAO Cost Estimating and Assessment Guide. 7
We analyzed the extent to which the Air Force and Navy cost estimates
were comprehensive, well-documented, accurate, and credible—the four
characteristics of a high-quality cost estimate—and assigned each
characteristic a rating of not met, minimally met, partially met,
substantially met, or met. 8 We also held detailed discussions with service
officials and reviewed program documentation to identify key factors that
could affect the potential total costs such as changes in aircraft quantities
or additional work to maintain aircraft mission effectiveness that may not
have been included in the estimates. We shared our cost guide, the
criteria against which we evaluated the program’s cost estimates, and our
preliminary findings with program officials. When warranted, we updated
our analyses based on the agency response and additional
documentation provided to us. Finally, we corroborated our analyses in
interviews with service officials responsible for developing the cost
estimates. See appendix I for a complete description of our scope and
methodology.

We conducted this performance audit from May 2011 to November 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our



6
 App. II shows the Air Force cost estimates for upgrading and extending the service life of
selected F-16 aircraft in then-year dollars. The Navy estimate was reported as a cost per
aircraft in fiscal year 2011 dollars. Therefore, there is not comparable data for showing
the Navy estimate in then-year dollars.
7
 GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and
Managing Capital Program Costs, GAO-09-3SP (Washington, D.C: March 2009).
8
 Not met means the military service provided no evidence that satisfies any of the
criterion; minimally met means the military service provided evidence that satisfies a small
portion of the criterion; partially met means the military service provided evidence that
satisfies about half of the criterion; substantially met means the military service provided
evidence that satisfies a large portion of the criterion; and met means the military service
provided complete evidence that satisfies the entire criterion.




Page 3                                                           GAO-13-51 Fighter Aircraft
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             The Air Force and the Navy plan to replace many of their current fighter
Background   aircraft with the Joint Strike Fighter, also called the F-35. DOD plans to
             buy a total of 2,443 F-35s—1,763 for the Air Force and 680 for the
             Department of the Navy—between 2008 and 2037. However, we have
             reported on F-35 issues since 2005 and found that the F-35 is still in
             development and the program has experienced significant delays and
             cost increases. For example, we reported that the F-35 program has
             experienced numerous delays in development and production, including
             program restructuring, which has increased time for development.
             Further, we reported that the F-35 program costs have increased 42
             percent from the 2007 baseline and unit costs have doubled since the
             start of development in 2001. 9 In addition, the DOD Fiscal Year 2011
             Annual Report on Operational Test and Evaluation stated that the F-35 is
             not on track to meet operational effectiveness or operational suitability
             requirements and that testing identified structural and maintenance
             issues. 10 Further, the DOD report also stated that aircraft produced in the
             first few production lots will need a significant number of modifications
             and upgrades in order to attain planned service life and capabilities. Due
             to delays in the F-35 program, the services have decided to extend the
             service life of some existing aircraft in order to maintain desired inventory
             levels.

             The upgrade and service-life extension programs will likely be costly and
             may be subject to further changes. Our prior work has found that a high-
             quality cost estimate is critical to the success of any program because it
             can provide the basis for informed investment decision making, realistic
             budget formulation, and proactive course correction when warranted. The
             March 2009 GAO Cost Estimating and Assessment Guide is a
             compilation of best practices that federal cost-estimating organizations
             and industry use to develop and maintain reliable cost estimates



             9
              GAO, Joint Strike Fighter: DOD Actions Needed to Further Enhance Restructuring and
             Address Affordability Risks, GAO-12-437 (Washington, D.C.: June 14, 2012).
             10
              Department of Defense, Fiscal Year 2011 Annual Report, Director, Operational Test and
             Evaluation (December 2011).




             Page 4                                                       GAO-13-51 Fighter Aircraft
                          throughout the life of a program. The GAO cost guide reported that a
                          high-quality cost estimate has four characteristics including

                          •     comprehensive when it accounts for all life-cycle costs, is sufficiently
                                detailed to ensure that costs are neither omitted nor double-counted,
                                and identifies ground rules and assumptions;
                          •     well-documented when supporting documentation explains the
                                process, sources, and methods used to create the estimate;
                          •     accurate when it is based on the assessment of the costs most likely
                                to be incurred and adjusted for inflation; and
                          •     credible when the level of confidence has been identified through a
                                risk and uncertainty analysis, and a sensitivity analysis has been
                                conducted that identified the effects on the estimate of changing key
                                assumptions. Also, a cost estimate is credible when it has been cross-
                                checked with an independent estimate. The GAO cost guide
                                describes eight types of independent cost estimate reviews which
                                vary in the depth of analysis, ranging from a document review—
                                merely assessing the estimate’s documentation—to an independently
                                developed cost estimate—conducted by an organization outside the
                                acquisition or program office. The Air Force and Navy each have
                                service cost-estimating agencies, which develop independent cost
                                estimates for major acquisition programs and other programs when
                                requested.

                          The Air Force currently plans to upgrade and extend the service life of
Air Force and Navy        300 F-16 aircraft at an estimated cost of $2.61 billion and the Navy plans
Programs Would            to extend the service life of 150 F/A-18 aircraft at an estimated cost of
                          $2.19 billion. 11 Service officials have said that if the F-35 program
Extend the Service        experiences further delays, the services have the ability to expand the
Life of 450 Aircraft at   number of aircraft that are included in these programs.
a Cost of Nearly $5
billion




                          11
                              All the cost figures in the body of this report are in fiscal year 2013 dollars.




                          Page 5                                                                 GAO-13-51 Fighter Aircraft
Air Force Program Would     In 2009, DOD and the Air Force were directed by statute and a committee
Add 2,000 Hours to 300 F-   report to provide reports on force-structure plans including alternatives
16s                         such as buying aircraft and upgrading and extending the service life of
                            selected aircraft. 12 The Air Force reported on assessments of seven
                            alternatives, which included buying between 150 and 300 new F-15Es,
                            F/A-18 E/Fs, and F-16s, and upgrading and extending the service life of
                            selected F-16s. The Air Force concluded that the cost for upgrading and
                            extending the service life of current F-16s by 2,000 hours each would be
                            10 to 15 percent of the cost of procuring new F-16s, F-15Es, or F/A-18s.
                            Extending the life of existing aircraft would provide 6 to 8 years of
                            additional service and, according to the Air Force, provide essentially the
                            same capability over that period as buying new legacy aircraft. In
                            reviewing these reports, GAO concluded in 2011 that the analyses done
                            were limited in part by the absence of F-16 durability and viability data. 13
                            Figure 1 below shows the Air Force’s estimated costs for the current
                            plans for capability upgrades and the service-life extension.




                            12
                              See National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84, §§
                            131, 1075 (2009); H.R. Rep. No. 111-166, at 101 (2009). One provision in the National
                            Defense Authorization Act for Fiscal Year 2010 required the Secretary of Defense to
                            submit a report on 4.5 generation fighters, while another prohibited retirement of certain
                            aircraft until the Secretary of the Air Force submitted a report regarding combat air forces
                            restructuring. See Pub. L. No. 111-84, §§ 131, 1075. In response, the Air Force provided
                            the following reports as well as a third, which we did not review as part of our current
                            report: Department of the Air Force, Fighter Force Structure Shortfalls (April 2010), and
                            Procurement of “4.5 Generation Fighter” Aircraft (April 2010). These reports are
                            classified.
                            13
                              GAO, Tactical Aircraft: Air Force Fighter Reports Generally Addressed Congressional
                            Mandates, but Reflected Dated Plans and Guidance, and Limited Analyses,
                            GAO-11-323R (Washington, D.C.: Feb. 24, 2011).




                            Page 6                                                            GAO-13-51 Fighter Aircraft
Figure 1: Air Force F-16 and Estimated Costs to Upgrade and Extend the Service Life for 2,000 Hours (Fiscal Year 2013
Dollars in Billions)




                                         a
                                          $820 million service-life extension; $1.79 billion capability upgrade.


                                         The Air Force estimates to upgrade capabilities and extend the service
                                         life of selected F-16 aircraft included research, development, test and
                                         evaluation, and procurement costs. The capability upgrades, Air Force
                                         officials explained, are needed to maintain mission effectiveness and will
                                         include, for example, an improved radar and data-link enhancements.
                                         The service-life extension will add 2,000 flight hours, or about 6 to 8
                                         years, depending on flying conditions, to each aircraft. Most of the $2.61
                                         billion to upgrade and extend the service life—$1.88 billion or 72
                                         percent—is planned to be incurred in fiscal years 2018 through 2022. The
                                         remaining $722 million is programmed in the fiscal year 2013-2017 Future
                                         Years Defense Program. 14

                                         Since the 2010 reports to Congress were completed, the Air Force has
                                         stated that without the service-life extension it would have to start
                                         gradually grounding some F-16s beginning in 2017. The Air Force is
                                         conducting tests to clarify the extent of the work required to extend the


                                         14
                                           The Future Years Defense Program provides information on DOD’s current and planned
                                         budget requests for a 5-year period.




                                         Page 7                                                                    GAO-13-51 Fighter Aircraft
                             service life, and plans to begin work in fiscal year 2016. Also, the Air
                             Force plans a milestone program review for the service-life extension in
                             the first quarter of fiscal year 2013 and a milestone program review for
                             the capability-upgrade program in the fourth quarter of fiscal year 2013.
                             The Air Force plans to complete all the upgrade and service-life extension
                             work by the early 2020s. Finally, Air Force officials said that they could
                             expand these programs to include up to 650 aircraft if needed to attain
                             desired inventory levels.


Navy Program Would Add       In response to a statutory requirement, in May 2011, the Navy submitted
1,400 Hours to 150 F/A-18s   the results of a cost-benefit analysis comparing extending the service life
                             of existing F/A-18 aircraft with procuring additional F/A-18 E/F aircraft. 15
                             The Navy assessed six alternatives, which included various combinations
                             of extending the service life of up to 280 F/A-18 A-D aircraft and procuring
                             up to an additional 70 F/A-18 E/Fs. The Navy concluded that extending
                             the service life of 150 F/A-18 A-D aircraft and buying 41 new F/A-18E/F
                             aircraft would provide an acceptable inventory at a manageable level of
                             risk. 16 The Navy plans to complete the service-life extension work in fiscal
                             year 2018. Figure 2 below shows the Navy’s estimated cost for the
                             service-life extension of selected F/A-18 aircraft.




                             15
                               Department of Navy, “Report to Congress on Service Life Extension of F/A-18 Aircraft”
                             (May 13, 2011). This report was developed in response to a provision in the Ike Skelton
                             National Defense Authorization Act for Fiscal Year 2011 that required the Secretary of the
                             Navy to conduct the cost-benefit analysis and submit a report prior to entering into a
                             program to extend the service life of F/A-18 aircraft beyond 8,600 hours. See Pub. L. No.
                             111-383, § 114(a) (2011). The provision required the Navy to conduct the analysis in
                             accordance with Office of Management and Budget Circular A-94. See § 114(a)(1). The
                             report included comprehensive costs for each of the alternatives assessed.
                             16
                               The Navy report stated that the 41 additional aircraft were included in the fiscal year
                             2012 President’s Budget request.




                             Page 8                                                            GAO-13-51 Fighter Aircraft
Figure 2: Navy F/A-18 A-D and Estimated Costs to Extend the Service Life for 1,400 hours (Fiscal Year 2013 Dollars in
Billions)




                                         The Navy’s estimate includes procurement costs for materials and
                                         installation to extend the service life of 150 F/A-18s for an additional
                                         1,400 hours each or about 5 years depending on flying conditions. 17
                                         Almost all the Navy’s estimated $2.19 billion is programmed in the fiscal
                                         year 2013-2017 Future Years Defense Program. Finally, the Navy’s
                                         analysis showed that the 150 aircraft selected for the service-life
                                         extension will individually be evaluated for capability upgrades—such as
                                         adding the ability to integrate with newer aircraft—as well as upgrades of
                                         other critical components reaching the end of their service life and
                                         becoming obsolete. After evaluating the aircraft, the Navy will decide
                                         whether to do this additional work. Finally, Navy officials said that they
                                         could expand their program if needed, to include up to 280 aircraft. Navy
                                         officials explained that they will review the service-life extension effort
                                         annually as part of an overall review of the F/A-18 program.


                                         17
                                           According to Navy officials, a small amount of the funding is operations and support
                                         money which will directly support the service-life extension work and is not to support
                                         aircraft operations. In addition to the procurement costs, the Navy estimated that
                                         operating and support costs for the added 1,400 hours of service life would be $5.91
                                         billion which is not a part of the estimate for procurement and installation costs to extend
                                         the service life.




                                         Page 9                                                             GAO-13-51 Fighter Aircraft
                             The Air Force’s and Navy’s cost estimates to upgrade and extend the
Air Force and Navy           service life of selected F-16 and F/A-18 aircraft exhibit many cost-
Cost Estimates               estimating characteristics and best practices of a high-quality cost
                             estimate, but do not reflect all the potential total costs that may occur. We
Exhibit Many                 assessed the Air Force estimate for capability upgrades and the Air Force
Characteristics of a         estimate for the service-life extension of selected F-16 aircraft, which
High-Quality Cost            were prepared for the fiscal year 2013 budget request; and the Navy
                             estimate for the service-life extension of selected F/A-18 aircraft. Overall,
Estimate but Do Not          we found that the Air Force and Navy followed many of the best practices
Reflect Some                 that support the four characteristics of a high-quality estimate. However,
                             both the Air Force and Navy estimates were not fully credible due to two
Significant Potential        shortcomings—the estimates did not show the range of potential costs
Costs                        that are likely to be incurred and were not validated by comparison with
                             an independently developed estimate. As a result, decision-makers do
                             not have visibility of how much the total costs will be and how they may
                             increase if program quantities increase or additional work is required on
                             some aircraft, which could hinder their ability to assess budgets and
                             affordability.


Air Force Estimates          The Air Force’s $1.79 billion estimate for capability upgrades and the
Exhibit Some                 $820 million estimate for service-life extension were well-documented,
Characteristics of a High-   accurate, and mostly comprehensive. However, the estimates were not
                             fully credible because the Air Force’s analysis did not clearly show the
Quality Estimate but Are     potential range of total costs that would occur if more aircraft are included
Not Fully Credible           in the programs and the estimates were not compared to an
                             independently developed estimate. In assessing the extent to which the
                             Air Force’s cost estimates exhibited the four characteristics of a high-
                             quality estimate, we found the following:

                             •   Comprehensive: The Air Force’s estimates were substantially
                                 comprehensive because they included all the work planned for 300
                                 aircraft, identified key cost-estimating ground rules and assumptions,
                                 and included development and procurement costs.
                             •   Well-documented: Both estimates were well-documented because
                                 they identified the source of the data, included the work that is
                                 planned, documented the cost-estimating methodologies, showed
                                 how the calculations were made, and were reviewed by management.
                             •   Accurate: Both estimates were accurate because they were adjusted
                                 for inflation, based on an assessment of most likely costs for 300
                                 aircraft, and used data from comparable programs where appropriate.
                             •   Credible: For both estimates, the Air Force cross-checked major cost
                                 elements to determine whether results were similar and conducted a



                             Page 10                                                GAO-13-51 Fighter Aircraft
     risk and uncertainty analysis that included a list of the risks assessed.
     For example, the analysis assessed the risk that more work may be
     required to extend the service life than currently planned. Also, the Air
     Force identified some cost drivers, which are the items that have the
     greatest effect on the estimated cost, such as labor rates. While the
     Air Force estimates exhibited many characteristics of a high-quality
     estimate, they had two shortcomings that lessened the estimates’
     credibility. First, the analysis did not include an estimate of the total
     costs that may occur if more than 300 aircraft are included in the
     programs up to the potential maximum of 650 aircraft. Second, the
     estimates were not compared to an independently developed
     estimate.

Regarding the first shortcoming, best practices state that a credible cost
estimate should include an assessment of how the cost estimate may
change in response to changes in key program assumptions. This is
known as a sensitivity analysis. Such an analysis helps decision makers
identify areas that could significantly affect a program’s cost, such as
changes in program quantities. According to Air Force officials, the
service may choose to upgrade and extend the service life of additional
aircraft if there are further delays in F-35 production. For example, in a
written statement, Air Force leaders testified in March 2012 that the intent
is to include 350 F-16 aircraft in the upgrade and life extension
programs 18—50 more aircraft than originally planned. Air Force officials
explained that they did not assess the range of costs that may result from
expanding the number of aircraft in the program up to the maximum of
650 since the program is currently approved for only 300 aircraft.
However, without an assessment of how much the total cost may
increase as the aircraft quantity increases, the estimate lacks
transparency on the full range of possible costs, which could be
significant. For example, we calculated that the cost to upgrade and
extend the service life of all 650 aircraft could total $5.53 billion. 19



18
  Prepared statement of Major General James M. Holmes, Assistant Deputy Chief of Staff
for Operations, Plans and Requirements and Major General John D. Posner, Director of
Global Power Programs, Office of the Assistant Secretary of the Air Force (Acquisition)
before the Subcommittee on Tactical Air and Land Forces, House Armed Services
Committee on March 20, 2012.
19
  This number is a GAO calculation based on Air Force data using the per unit cost that
the Air Force estimated for 300 aircraft. The per unit cost may change as quantities
increase due, for example, to economies of scale.




Page 11                                                        GAO-13-51 Fighter Aircraft
                             The second major shortcoming is that the Air Force did not compare the
                             estimates to independently developed cost estimates. Having an
                             independent estimate is considered one of the best and most reliable
                             estimate validation methods since an independent estimate is an
                             objective assessment of whether the program office estimate is
                             reasonable and can be achieved. Further, our past work has shown that
                             an independent estimate tends to be higher and more accurate than a
                             program office estimate. 20 Air Force officials explained that it is likely the
                             Air Force Cost Analysis Agency will be requested to develop a formal
                             independent cost estimate for upcoming program reviews, but the
                             decision to require an independent estimate has not yet been made.
                             Further, the program review for the capability-upgrade program will not be
                             held for a year—it is currently scheduled for the fourth quarter of fiscal
                             year 2013. Until the Air Force obtains an independent cost estimate,
                             decision makers will not have the assurance that the programs’ estimated
                             cost can be relied upon for making budgeting and trade-off decisions.
                             Furthermore, a program that has not been reconciled with an independent
                             estimate has an increased risk of proceeding underfunded because an
                             independent estimate provides an objective and unbiased assessment of
                             whether the program estimate can be achieved.


Navy Estimate Exhibits       The Navy’s $2.19 billion cost estimate for the service-life extension of
Characteristics of a High-   F/A-18s was comprehensive, well-documented, and accurate. However,
Quality Estimate but Does    the estimate was not fully credible because it did not include an
                             assessment of the costs for additional work on the aircraft that may be
Not Capture Costs of         done at the same time as the service-life extension and the estimate was
Additional, Nonstructural    not compared to an independently developed estimate. Since the Navy
Work                         will assess on an aircraft-by-aircraft basis whether to do this additional
                             work, the costs would be in addition to the $2.19 billion for the service-life
                             extension and most of these costs are not included in the Navy’s
                             spending plans through fiscal year 2017. In assessing the extent to which
                             the Navy’s cost estimate exhibited the four characteristics of a high-
                             quality estimate, we found the following:




                             20
                               In a previous review of DOD acquisition programs, we found that 19 of 20 independent
                             estimates developed by the Office of the Secretary of Defense office of the Director of
                             Cost Assessment and Program Evaluation were higher than the service estimate. See
                             GAO, Defense Acquisitions: A Knowledge-Based Funding Approach Could Improve Major
                             Weapon System Program Outcomes, GAO-08-619 (Washington, D.C.: July 2, 2008).




                             Page 12                                                       GAO-13-51 Fighter Aircraft
•    Comprehensive: The Navy’s estimate identified key cost-estimating
     ground rules and assumptions. Also, the Navy’s estimate included the
     costs to buy and install the materials needed to repair the airframe so
     that it can fly the additional 1,400 hours. Finally, the Navy’s analysis
     included assessing the costs for different quantities from 150 up to
     280 aircraft.
•    Well-documented: The estimate was well-documented since it
     described the methodology used and the calculations performed to
     develop the estimate so that a cost analyst unfamiliar with the
     program could replicate it. Also, the Navy’s documentation included
     steps to ensure data reliability, and the estimate was reviewed by
     management.
•    Accurate: The Navy’s estimate was accurate since it was adjusted for
     inflation, not overly conservative or optimistic, and incorporated data
     from comparable programs where appropriate.
•    Credible: Finally, the Navy’s estimate was partially credible because
     the Navy followed some, but not all, of the best practices for this
     characteristic. For example, the Navy conducted a sensitivity analysis
     which identified cost drivers, such as materiel and labor costs. Also,
     the Navy conducted a risk and uncertainty analysis which accounted
     for some risks, such as the risk that the service-life extension may
     require more work than currently planned. However, the Navy did not
     assess the potential range of costs for all work that might be done and
     focused only on the costs associated with extending the life of the
     airframe, which officials described as consistent with Navy guidance.

Specifically, the Navy told us it will assess on an aircraft-by-aircraft basis
whether the F/A-18s also need capability upgrades to maintain mission
effectiveness, such as adding the ability to integrate with newer aircraft. 21
According to the Navy, such capability upgrades could cost an average of
about $1.76 million per aircraft, but uncertainty exists about how many
aircraft the Navy will actually decide to upgrade and therefore the total
cost associated with these upgrades is uncertain. In addition, the Navy
has determined that some of the F/A-18 aircraft may also require life
extension or replacement of nonstructural parts or systems that are
becoming obsolete. The Navy estimated that this work could average
$5.64 million per aircraft. Navy officials explained that they will decide on
an aircraft-by-aircraft basis whether to do this work when the aircraft is



21
  While the capability upgrades may enhance mission effectiveness, they are not
essential for the aircraft to fly the additional 1,400 hours.




Page 13                                                       GAO-13-51 Fighter Aircraft
              inspected just prior to beginning service-life extension. Navy officials told
              us that if an aircraft needs a lot of this type of work, the Navy may decide
              not to extend the service life of that particular aircraft, but rather substitute
              another one in its place. Given the uncertainties, the costs associated
              with this additional work are not included in the Navy’s $2.19 billion
              estimate nor are they included in the Navy’s spending plans through fiscal
              year 2017. The purpose of a sensitivity analysis is to identify the effects
              on the estimate of changing key factors and to show a resulting range of
              possible costs. Further analysis could show the likelihood of the Navy
              incurring some or all of the additional costs. Without an assessment of the
              effect on the total costs that would be incurred if some of the 150 aircraft
              need additional work at an additional cost, decision makers will not know
              the full range of potential costs.

              Finally, the Navy did not compare the estimate to an independently
              developed cost estimate such as one that could have been requested
              from the Naval Center for Cost Analysis. Navy officials stated that the
              estimate was reviewed extensively within the Navy and that an
              independent estimate was not required because the service-life extension
              is a modification of an existing aircraft and is not a separate acquisition
              program. Even if not required, Navy officials said that they could have
              requested the Naval Center for Cost Analysis to develop an independent
              estimate for this program. In our prior work, we have found that an
              independent cost estimate is considered to be one of the most reliable
              validation methods. If the Navy’s estimate were validated by an
              independent cost estimate, decision-makers could place more credibility
              in the estimate.


              The Air Force and the Navy decided to upgrade and extend the service
Conclusions   life of selected F-16 and F/A-18 aircraft to provide a capability and
              capacity “bridge” until the F-35 is available in sufficient numbers. The cost
              to do so is already estimated to total almost $5 billion and likely will
              increase due to slippage in the F-35 program and increases in program
              scope. In many respects, the Air Force and Navy cost estimates we
              evaluated were developed in accordance with some best practices.
              Specifically, we found the estimates to be well-documented and accurate
              and mostly comprehensive. However, the Air Force and Navy did not
              follow some important best practices and as a result did not clearly
              identify the potential total costs that may result as the programs evolve.
              For example, without an analysis that includes the potential for increases
              in the number of aircraft in the program or that clearly identifies the cost
              for additional work that may be required on some of the aircraft, decision


              Page 14                                                  GAO-13-51 Fighter Aircraft
                      makers are not aware of how much total costs could increase if these
                      events occur. Further, unless the services reconcile the program cost
                      estimate with an independent cost estimate, there is an increased risk
                      that the actual costs will exceed the estimate. According to the GAO Cost
                      Estimating and Assessment Guide, independent estimates are usually
                      higher and more accurate than program estimates and therefore if a
                      program estimate is close to an independently developed estimate, one
                      can be more confident that the estimate is credible. The guide further
                      explains that there are various types of independent cost estimate
                      reviews that can be performed, including seeking an independent
                      estimate. Since these are multibillion-dollar investments that are critical to
                      maintaining fighter capacity, an independent review of service estimates
                      or an independently-developed estimate—which could be performed by
                      the respective service cost-estimating agencies—would provide
                      assurance about the likely full costs. Without fully credible cost estimates,
                      service and congressional decision-makers will not have reasonable
                      confidence of knowing the potential range of costs to upgrade and extend
                      the service life of selected F-16 and F/A-18 aircraft as they make
                      resource and trade-off decisions, develop and review budget requests,
                      and assess the programs’ affordability.


                      To improve future updates of Air Force and Navy cost estimates for
Recommendations for   upgrading and extending the service life of selected F-16s and F/A-18s
Executive Action      and to improve the ability of decision-makers to assess the potential total
                      costs, we recommend that the Secretary of Defense take the following
                      four actions:

                      Direct the Secretary of the Air Force to update its cost estimates, and in
                      doing so:

                      •   include in its sensitivity analysis an assessment of the range of
                          possible costs if the capability-upgrade and service-life extension
                          programs are expanded to more than 300 aircraft including up to the
                          maximum of 650 aircraft, and
                      •   obtain an independent review of the updated cost estimates.
                      Direct the Secretary of the Navy to update its cost estimates and in doing
                      so:

                      •   include in its sensitivity analysis an assessment of the range of
                          possible costs for extending the service life of other nonstructural




                      Page 15                                                GAO-13-51 Fighter Aircraft
                         components that are becoming obsolete and capability upgrades that
                         may be required for some of the 150 aircraft, and
                     •   obtain an independent review of the updated cost estimates.

                     We provided a draft of this report to DOD for comment. In written
Agency Comments      comments on the draft of this report, DOD agreed with all four
and Our Evaluation   recommendations. DOD’s comments are reprinted in their entirety in
                     appendix III. DOD also provided technical comments, which we
                     incorporated into the report as appropriate.

                     Regarding the first recommendation for improving future updates of the
                     Air Force cost estimates, DOD concurred, stating that the Air Force had
                     updated planned force structure requirements to upgrade and extend the
                     service life of 50 aircraft in addition to the original 300 aircraft and
                     therefore estimated costs for 350 aircraft. Also, the department stated
                     that while these programs could be expanded beyond 350 aircraft, further
                     cost excursions are premature until F-35 production has matured. The
                     department stated that it would update its cost estimates with another
                     sensitivity analysis containing an assessment of the range of possible
                     costs if force structure requirements change further. While we
                     acknowledge that estimating costs for 350 aircraft is a step in the right
                     direction, an assessment of how much the total cost may increase up to
                     the maximum of 650 aircraft is needed to provide transparency on the full
                     range of costs, which could be significant—potentially totaling up to $5.53
                     billion. DOD also noted that further cost excursions are premature until F-
                     16 structural testing is complete. However, Air Force officials explained
                     during our review that data from testing are available throughout the
                     testing period and that they could use this information to update cost
                     estimates before testing is completed in 2016. Until the Air Force
                     completes analyses to show the potential range of costs, decision makers
                     will continue to lack crucial data on how much total costs could increase
                     as they make resource and trade-off decisions.

                     Regarding the second recommendation for improving future updates of
                     the Air Force cost estimates by obtaining an independent review of the
                     updated cost estimates, DOD agreed, stating that the Air Force Cost
                     Analysis Agency had reviewed the estimates for the Air Force’s fiscal
                     year 2014 budget development process and that, if further cost
                     assessments are warranted, the Air Force would submit the estimates for
                     an independent review. An independent review of cost estimates is
                     important because a program that has not been reconciled with an
                     independent estimate has an increased risk of proceeding underfunded
                     since an independent estimate provides an objective and unbiased



                     Page 16                                              GAO-13-51 Fighter Aircraft
assessment of whether the program estimate can be achieved. As the
Air Force updates its cost estimates for these $2.61 billion programs, up-
to-date, independently validated cost estimates would provide decision-
makers assurance that the programs’ estimated cost can be relied upon
as they assess program affordability.

Regarding the two recommendations for improving future updates of the
Navy cost estimates, DOD concurred but did not explain when or what
specific actions it intends to take to implement these recommendations.
We are encouraged that the department agrees these are important, valid
steps to take and further believe that it is important for the Navy to
implement these recommendations in a timely manner to facilitate review
and implementation of these programs since the programs are estimated
to cost $2.19 billion and could increase an average of $5.64 million per
aircraft.


We are sending copies of this report to the appropriate congressional
committees, the Secretary of Defense, the Secretary of the Air Force, and
the Secretary of the Navy. The report also is available at no charge on the
GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please
contact me at (404) 679-1816 or pendletonj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Staff members making key contributions to
this report are listed in appendix IV.




John H. Pendleton
Director
Defense Capabilities and Management




Page 17                                              GAO-13-51 Fighter Aircraft
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             To describe the Air Force’s and the Navy’s plans to upgrade and extend
             the service life of selected F-16s and F/A-18s, we reviewed the services’
             documentation of the programs’ purpose and scope including the
             underlying analysis of alternative approaches. To identify the Air Force’s
             and the Navy’s estimated costs to upgrade and extend the service life of
             F-16s and F/A-18s, we obtained the services’ cost estimates for these
             programs and obtained any updates to these estimates. The Air Force
             updated its initial estimate to support development of the fiscal year 2013
             budget. The Navy’s cost estimate was reported to Congress in May 2011.
             All of the cost estimates from these sources were converted to fiscal year
             2013 dollars using the indexes published by the Office of the Secretary of
             Defense (Comptroller) in the National Defense Budget Estimates for
             Fiscal Year 2013, commonly referred to as the “Green Book”. 1

             To assess the extent to which the cost estimates exhibited characteristics
             of a high-quality cost estimate, we compared how the estimates were
             developed to the cost estimating best practices outlined in the GAO Cost
             Estimating and Assessment Guide. 2 The guide is a compilation of best
             practices that federal cost-estimating organizations and industry use to
             develop and maintain reliable cost estimates that management can use
             for making informed decisions. The guide describes 19 best practices for
             developing a comprehensive, well-documented, accurate, and credible
             cost estimate—the four characteristics of a high-quality cost estimate. We
             analyzed the extent to which the Air Force and Navy cost estimates met
             each of these four characteristics and assigned each a rating of not met,
             minimally met, partially met, substantially met, or met. 3 The overall rating


             1
              Constant dollars measure the value of purchased goods and services at price levels that
             are the same as those in the base or reference year. Constant dollars do not contain any
             adjustments for inflationary changes that have occurred or are forecast to occur outside
             the base year. Therefore, the changes in these dollar amounts will not be due to inflation.
             2
              GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and
             Managing Capital Program Costs, GAO-09-3SP (Washington, D.C: March 2009). We
             performed this comparison for the Air Force estimate for capability upgrades, the Air Force
             estimate for service-life extension, and the Navy estimate for service-life extension. We
             did not perform this comparison for the Navy estimates of average cost per aircraft for
             obsolescence work or capability upgrades.
             3
              Not met means the military service provided no evidence that satisfies any of the
             criterion; minimally met means the military service provided evidence that satisfies a small
             portion of the criterion; partially met means the military service provided evidence that
             satisfies about half of the criterion; substantially met means the military service provided
             evidence that satisfies a large portion of the criterion; and met means the military service
             provided complete evidence that satisfies the entire criterion.




             Page 18                                                          GAO-13-51 Fighter Aircraft
Appendix I: Scope and Methodology




for each characteristic was based on the average rating of the best
practices for each characteristic. We also held detailed discussions with
service officials and reviewed program documentation to identify key
factors that could affect the potential total costs such as changes in
aircraft quantities or additional work to maintain aircraft mission
effectiveness that may not have been included in the estimates. We
shared with program officials our cost guide, the criteria against which we
evaluated the program’s estimated cost, as well as our preliminary
findings. When warranted, we updated our analyses on the basis of the
agency response and additional documentation that was provided to us.
Finally, we corroborated our analyses in interviews with service officials
responsible for developing the cost estimates.

We conducted our work at the Office of the Under Secretary of Defense
for Acquisition, Technology and Logistics; Office of the Chief of Staff of
the Air Force, Directorate of Force Application; Ogden Air Logistics
Center at Hill Air Force Base; F-16 System Program Office at Wright-
Patterson Air Force Base; Air Combat Command; Air Force Cost Analysis
Agency; Air Force Fleet Viability Board; Office of the Deputy Assistant
Secretary of the Navy for Air Programs; Headquarters United States
Marine Corps; Naval Air Systems Command; and the Naval Center for
Cost Analysis.

We conducted this performance audit from May 2011 to November 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings, and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 19                                              GAO-13-51 Fighter Aircraft
Appendix II: Air Force Cost Estimates for
                                             Appendix II: Air Force Cost Estimates for
                                             Upgrading and Extending the Service Life of
                                             Selected F-16 Aircraft in Then-Year Dollars


Upgrading and Extending the Service Life of
Selected F-16 Aircraft in Then-Year Dollars
Dollars in millions

                                                                       Fiscal year
                2011    2012     2013     2014        2015         2016       2017    2018      2019        2020       2021      2022         Total
Service-life   $18.80   $0.80   $ 8.86   $12.10    $14.78 $50.59 $110.88 $167.80 $220.50 $188.10 $104.30                        $0.00      $897.51
Extension
Capability       0.00   12.00   69.70    129.50      98.20        26.50     201.85   355.90   379.70     381.30      269.00     41.20 $1,964.85
upgrades
Total          $18.80 $12.80 $78.56 $141.60 $112.98 $77.09 $312.73 $523.70 $600.20 $569.40 $373.30 $41.20 $2,862.36
                                             Source: Air Force data.

                                             Notes: The numbers in this table are in then-year dollars. The numbers in the report text are in fiscal
                                             year 2013 dollars.
                                             The Navy estimate was reported as a cost per aircraft in fiscal year 2011 dollars. Therefore, there is
                                             not comparable data for showing the Navy estimate in then-year dollars.




                                             Page 20                                                                   GAO-13-51 Fighter Aircraft
Appendix III: Comments from the
              Appendix III: Comments from the Department
              of Defense



Department of Defense




              Page 21                                      GAO-13-51 Fighter Aircraft
Appendix III: Comments from the Department
of Defense




Page 22                                      GAO-13-51 Fighter Aircraft
Appendix III: Comments from the Department
of Defense




Page 23                                      GAO-13-51 Fighter Aircraft
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  John H. Pendleton, (404) 679-1816 or pendletonj@gao.gov
GAO Contact
                  In addition to the contact named above, the following staff members
Acknowledgments   made key contributions to this report: Patricia W. Lentini, Assistant
                  Director; Brenda M. Waterfield; Benjamin D. Thompson; Joseph M.
                  Capuano; Ophelia Robinson; Karen A. Richey; Jennifer K. Echard;
                  Charles W. Perdue; Michael D. Silver; Michael Shaughnessey; and
                  Richard S. Powelson.




(351600)
                  Page 24                                              GAO-13-51 Fighter Aircraft
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