Procurement: Assessment of DOD's Multiyear Contract Candidates for Fiscal Year 1991

Published by the Government Accountability Office on 1990-08-31.

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

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                                                                  Assessment of DOD’s
                                                                  Multiyear Contract
                                                                  Candidates for Fiscal
                                                                  Year 1991


~I                                                    __--.-

“_”. I _ _..___
            _... .-. ._.._ _. _.... . .--_ .._. _... ._-.. - _ .._-..-._-.- ___-____.
                                                                                 .-..--..-.-   _____ --.--
1                Uuited States
,   GAO          General Accounting Office
                 Washington, D.C. 20648

                 National Security and
                 International Affairs Division


                 August 3 1,199O

                 The Honorable Daniel K. Inouye
                 Chairman, Subcommittee on Defense
                 Committee on Appropriations
                 United States Senate

                 Dear Mr. Chairman:

                   As’,requested, we analyzed six multiyear contract candidates in the
                   Department of Defense’s (DOD) fiscal year 1991 budget to determine
                   whether they satisfied the legislative criteria for multiyear contract
                 . approval. The six weapon systems we analyzed were (1) the UH-60
                   Black Hawk helicopter, (2) the Family of Medium Tactical Vehicles
                   (FMTV),(3) the Avenger weapon system, (4) the LHD amphibious ship,
                   (6) the Landing Craft, Air Cushion (LCAC),and (6) the Navstar Global
                   Positioning System (GPS). We briefed your staff on the preliminary
                   results of our review on June 27, 1990, and on July 20, 1990, we pro-
                   vided additional information requested. This report summarizes the
                   final results of our review and also provides updated information on
                   candidates proposed between fiscal year 1986 and 1990.

                 Multiyear procurement is a method of acquiring up to 6 years’ require-
    Background   ments of systems, subsystems, or other items with a single contract. In
                 1981, the Congress authorized DOD to use multiyear procurement for
                 major weapon systems. Since that time, DOD has annually proposed
                 various weapon systems as multiyear contract candidates for congres-
                 sional approval.

                 Although multiyear procurement can benefit the government by saving
                 money and improving contractor productivity, it can also entail certain
                 risks, such as increased costs to the government, should a multiyear con-
                 tract be changed or terminated. A particular disadvantage of multiyear
                 contracts is that they decrease annual budget flexibility because the
                 Congress and DOD commit themselves to fund such contracts through
                 completion or pay any contract cancellation charges, which may be sub-
                 stantial. If DOD’S procurement budget is reduced significantly and multi-
                 year contracts are maintained, programs not under multiyear contracts
                 would have to be cut disproportionately.

                 Section 909(b) of the DOD Authorization Act of 1982 (P.L. 97-86, 10
                 U.S.C. 2306(h)) established criteria to ensure that multiyear contract

                 Page 1                                    GAO/NSL4D9O-270BB   Multiyear   Contract

                                        candidates achieve a reasonable balance of benefits and risks. The cri-
                                        teria require that (1) the estimated contract costs and projected savings
                                        be realistic, (2) the minimum requirement (total quantity, production
                                        rate, and procurement rate) for the system be expected to remain sub-
                                        stantially unchanged, (3) there is a reasonable expectation that suffi-
                                        cient funding will be requested by DOD to carry out the contract, and
                                        (4) the design be stable. Failing to meet one or more of the criteria may
                                        not necessarily mean that a system is an inappropriate candidate, but
                                        indicates areas of increased risk that must be weighed against the poten-
                                        tial savings to determine whether multiyear procurement approval
                                        should be granted.

                                        Our evaluation of six weapon systems proposed for multiyear con-
Results in Brief                        tracting authority showed that these systems did not clearly meet one or
                                        more of the legislative criteria.

                                        Table 1 summarizes our views of whether each candidate satisfied the
                                        criteria. Each “?” identifies an instance where a candidate does not
                                        clearly meet one of the criteria.
Table 1: Fiscal Year 1991 Multiyear
Contract Candidates Not Clearly in                             DOD’s
Conformance With Legislative Criteria                      Estimated
                                                             percent    Realism of                  Stability
                                        System               savings      savings        Requirement     Funding          Design
                                          Black Hawk             12.4            ?                   ?               ?              .
                                          FMTV                   12.9            ?                   .               .              ?
                                          Avenger                 9.3            ?                   .               ?              ?
                                          LHD                     7.6            ?                   ?               ?              .
                                          LCAC                    7.7            .                   ?               .              .
                                        Air Force:
                                          GPS                    19.8            .                   ?               .              ?

                                        From fiscal years 1986 through 1990, DOD proposed 68 major candidates
                                        for multiyear contracts and the Congress approved 32.

                                        To calculate an amount of savings for a candidate, the estimated costs of
Estimated Savings                       procurement on a multiyear contracting basis must be compared to the

                                        Page 2                                       GAO/NSIAD80-270BR   Multiyear       Contract

                    estimated costs of the same procurement through a series of annual con-
                    tracts. For the six systems we reviewed, DOD estimated that it would
                    require about $7.1 billion in then-year dollar& to complete the planned
                    multiyear procurements. DOD estimated that multiyear procurement of
                    these six systems would save $0.876 billion, or about 11 percent, com-
                    pared to annual contract estimates.

                    Our review indicated that four of the systems’ savings projections were
                    unrealistic because of questionable assumptions. We found questionable
                    savings projected for the Navy’s LHD amphibious assault ship, question-
                    able estimating techniques for the Army’s Black Hawk helicopter and
                    FMTV, and outdated information used to estimate the Army’s Avenger
                    weapon system costs.

                    To achieve savings through the use of a multiyear contract, more
                    funding is usually required in the early years of the contract term than
                    would be needed for a series of annual contracts. For fiscal year 1991,
                    DOD requested $90.7 million more in advance procurement funding for
                    the six multiyear contract candidates than it estimates would have been
                    required for advance procurement under annual contracts. This addi-
                    tional funding should be offset by reduced funding requirements in later

                    We identified uncertainties regarding the requirement and/or funding
Requirement and     stability of five of the six systems. Specifically, due to impending force
Funding Stability   structure changes, the program requirements for the Army’s Black
                    Hawk helicopter and the Navy’s LCACand LHD ships may be signifi-
                    cantly reduced. The Black Hawk and LHD systems could also face
                    funding uncertainties. It is unclear whether the services and DOD will
                    include them in their future funding requests. The Air Force’s Navstar
                    GPSsatellite requirement is uncertain because there is not sufficient
                    operational experience with the current Block II satellites to know how
                    long they will last and because current Air Force estimating procedures
                    have given conservative results in the past. If satellite design life is
                    exceeded, the Air Force would be acquiring satellites earlier than
                    needed, and thereby incur additional storage costs. In addition, the
                    Army’s Avenger system may require additional funding because the
                    contractor’s recent proposals and estimates indicate higher unit prices
                    than those estimated by the Army and included in the budget.

                    ‘Then-yeardollar expendituresinclude estimatedinflation for the yearsin which the expenditures
                    are expectedto occur;constantdollar expenditureseliminatethe effect of inflation.

                    Page 3                                               GAO/NSIAD-90-270BR     Multiyear   Contract

                          Uncertainties in design stability were evident in three systems. The
Design Stability          Avenger, while operable as a stand-alone system, has not yet been inte-
                          grated with other components of the Forward Area Air Defense System.
                          Its integration is a system requirement; therefore, until such integration
                          is demonstrated, the successful operation of the total system will have
                          inherent risks. Although the design for the GPSBlock IIR operational
                          replacement satellites may be stable, there is some additional risk since
                          no production history exists for the redesigned satellite. The satellite’s
                          critical design review is not scheduled for completion until 2 months
                          before the exercise of the multiyear procurement option. In addition,
                          some system research and development effort will continue during early
                          production and no production history exists for the redesi.gned Block IIR
                          satellite. Design stability is also uncertain for the FMTV,which is a new
                          system that has not yet been designed, tested, or produced.

                          According to an Office of the Secretary of Defense (OSD) official, during
Update on Candidates      the last 6 fiscal years, 1986 through 1990:
Proposed Since Fiscal
Year 1986             .   DOD proposed 68 major candidates for multiyear contracts and the Con-
                        gress approved 32, or about 47 percent.
                      9 Of the 32 approved candidates for multiyear contracts, DOD has awarded
                        24 contracts (76 percent of those approved), 3 are pending award, and 4
                        were awarded as annual instead of multiyear contracts. In one case, the
                        proposed fiscal year 1990 Maverick missile system, DOD terminated the
                        program and did not award any contract.
                      . Two awarded multiyear contracts were subsequently terminated; the
                        fiscal year 1988 Hawk missile and the fiscal year 1986 MK-46 Torpedo.
                        Estimated cancellation cost for the Hawk missile was about $13 million,
                        but no costs were associated with the cancellation of the MK-46

                          Appendix I presents DOD'S multiyear contract savings projections and
                          present value estimates of those savings. Appendix II provides our anal-
                          ysis of each of the six candidates we reviewed. Appendix III discusses
                          our objective, scope, and methodology.

                          As requested, we did not obtain official DOD comments on this report.
                          However, we discussed our findings with officials from OSD, the Army,
                          Navy, Air Force, and the individual system program offices, and have
                          included their views where appropriate.

                          Page 4                                    GAO/NSIADVO-270BB   Multiyear   Cmtract

We are sending copies of this report to the Chairmen, House Committee
on Appropriations, Senate and House Committees on Armed Services,
House Committee on Government Operations, and Senate Committee on
Governmental Affairs. Copies are also being sent to the Secretaries of
Defense, the Army, Navy, and Air Force, and other interested parties.
Copies will be provided to others upon request.

Please contact me at (202) 2758400 if you or your staff have any ques-
tions concerning this report. Major contributors to this report are listed
in appendix IV.

Sincerely yours,

Paul F. Math
Director for Research, Development,
  Acquisition, and Procurement Issues

Page 5                                   GAO/NSIAD-90-270BR   Multiyear   Contract

Letter                                                                                                         1

Appendix I
Estimated   Savings  for   Present Value Analysis
                           DOD’s Estimated Source of Savings
Fiscal Year 1991
Multiyear Contract
Appendix II                                                                                               11
Our Assessmentsof          UH-60 Black Hawk
the Fiscal Year 1991       Avenger Weapon System                                                          18
Multiyear Contract         LHD Amphibious Ship                                                            22
Candidates                 LCAC                                                                           26
                           Navstar GPS Block II Replenishment Satellites                                  29

Appendix III                                                                                              34
Objective, Scope,and
Appendix IV                                                                                               36
Major Contributors to
This Report
Tables                     Table 1: Fiscal Year 1991 Multiyear Contract Candidates
                               Not Clearly in Conformance With Legislative Criteria
                           Table I. 1: DOD Cost and Savings Estimates for Fiscal Year
                                199 1 Multi year Contract Candidates
                           Table 1.2: Our Estimated Present Value Savings as
                               Compared to DOD’s for Fiscal Year 1991 Multiyear
                               Contract Candidates
                           Table 1.3: Sources of Estimated Multiyear Contract                             10
                               Savings for Fiscal Year 1991 Candidates

                           Page 6                                  GAO/NSIAD@O-27OBR    Multiyear   Camtract


CBO        Congressional Budget Office
DOD        Department of Defense
FAADS      Forward Area Air Defense System
FMTV       Family of Medium Tactical Vehicles
GPS        Global Positioning System
           Landing Craft, Air Cushion
NAVSEA     Naval Sea Systems Command
OSD        Office of the Secretary of Defense
POM        Program Objective Memorandum
RDT&E      Research, Development, Test, and Evaluation

Page 7                                  GAO/NSIAD-BO-27OBR   Multiyear   Ckmtract
Appendix I

Estimated Savingsfor Fiscal.Year 1991
Multiyear Contract Candidates

                                           We reviewed six of the seven multiyear contract candidates in DOD'S
                                           fiscal year 1991 budget. DOD estimated that multiyear procurement of
                                           these six candidates could save $874.7 million in then-year dollars, or
                                           about 11 percent of the estimated cost of procurement based on annual
                                           contracts for the six candidates. (See table 1.1.)

Table 1.1: DOD Cost and Savings
Estlmatee for Fiscal Year 1991 MultIyear   Then-year dollars in millions
Contract Candidates                                                                      Estimated contract costs and savings
                                           System                                        Annual     Multiyear    Savings   Percenta
                                             Black Hawk                                 $1,508.0       $1,320.8      $187.2           12.4
                                             FMTV                                        1,946.2        1,694.3       251.9           12.9
                                             Avenger                                       362.5          328.7        33.8            9.3
                                             LHD                                          2,288.g        2,115.3      173.6            7%
                                             LCAC                                         1,170.g        1,080.4       90.5            7.7
                                           Air Force:
                                             GPS                                           694.6          556.9        137.7          19.8
                                             Total                                      $7,971 .l      $7,096,4      $074.7           11.0
                                           ‘Savings divided by annual contract costs.

                                            Present value analysis is used to put annual and multiyear procurement
Present Value                              estimates on a comparable basis because the rates of government
Analysis                                   expenditures differ under annual and multiyear procurement methods.
                                           It can be used to compare the two procurement alternatives to reflect
                                           the time value of money. Although present value analysis is a generally
                                            accepted practice, selecting an appropriate interest rate has been a sub-
                                           ject of controversy. Because most government funding requirements are
                                           met by the Department of the Treasury, we believe its estimated cost to
                                           borrow is a reasonable basis for establishing the interest rate to be used
                                            in present value analysis.

                                           Accordingly, for our analysis, we used the average yield on outstanding
                                           marketable Treasury obligations that have remaining maturities similar
                                           to the period involved in the analysis and applied that rate to then-year
                                           dollars. DOD uses the Office of Management and Budget Circular A-94’s
                                           prescribed present value method, which applies a flat lo-percent dis-
                                           count rate to constant dollars.

                                           Page 8                                               GAO/NSIAD-80-270BR   lpltiyear   Contract
                                         Appendix I
                                         EktlnlAted savlnga for FiJJcal Year 19Bl
                                         MultIyear Contract Candidat8e

                                         Despite the difference in the two methodologies, the end results are very
                                         similar. Our present value analysis of the six multiyear contract candi-
                                         dates, as shown in table 1.2, shows projected savings of about 10 per-
                                         cent. DOD’S present value analysis shows savings of about 9.7 percent.
                                         Therefore, distortions in projected savings rates caused by the time
                                         value of money are not a significant factor for these candidates.

Table 1.2: Our Estlmated Present Value
Savings as Compared to DOD’s for         Dollars in millions
Fiscal Year 1991 Multiyear Contract                                                         DOD prexe;;n:value           Our p;;wMsvalue
Candidates                                                                                               a                             a
                                         Syrtem                                              Amount       Percenta       Amount        Percentb
                                           Black Hawk                                           $75.2              8.9      $96.1           10.1
                                           FMTV                                                 139.8             13.4      158.3           13.2
                                           Avenger                                                5.3              2.6       11.9            5.0
                                           LHD                                                    52.1             4.5       79.8            5.4
                                           LCAC                                                   76.9            12.3       83.7           10.8
                                         Alr Force:
                                           GPS                                                    67.9            16.1       80.9           17.5
                                           Total                                              $417.2               9.7    $510.7            10.0
                                         ?3avings divided by DOD’s estimated present value annual contracts cost
                                         ‘Savings divided by our estimated present value annual contracts cost.

                                         Just as the estimated savings for each candidate varies, so does the
DOD’s Estimated                          source of the savings. The majority of the savings for DOD’S multiyear
Source of Savings                        contract candidates has been associated with procurement of vendor
                                         and subcontracted items on a more economical basis than is possible
                                         with a series of annual procurements. Multiyear contracting allows eco-
                                         nomic order quantity procurement. Rather than procuring subcon-
                                         tracted parts and materials in annual lots of limited sizes, the prime
                                         contractor can procure parts in larger lots, thereby obtaining lower
                                         prices from subcontractors. However, the government must make a con-
                                         tractual commitment to the prime contractor to either procure the total
                                         multiyear contract quantity or pay termination costs if the quantity is
                                         later reduced. The commitment to larger advance procurement usually
                                         requires additional funding in the early years of a multiyear contract.

                                         Another significant source of savings is attributed to manufacturing
                                         savings at the prime and major subcontractor levels. These savings
                                         result from such factors as improved fabrication, assembly, inspection,

                                         Page 9                                                   GAO/NSLAD-fJO-270BB      Multiyear   Contract
                                            Appendix    I
                                            Edmated     Savinge for Fiscal Year 1991
                                            Multiyear   Contzact Candiddee

                                            and test processes; reduced labor hours and spare part and repair
                                            requirements; and improved quality and reliability of the product. Table
                                            I.3 shows the sources of savings for the six multiyear contract candi-
                                            dates, as estimated by DOD.

Table 1.3: Source8 of Eetlmated Multlyear                                                                               -.
Contract Saving8 for Fiscal Year 1991       Then-year dollars in millions
Candidate8                                                                              Total savings        Percent savings
                                            Vendor procurement                                 $398.7                            45.6
                                            Manufacturina   ”
                                                                                                343.3                            39.2
                                            Inflation                                            100.3                           11.5
                                            Other                                                 32.4                            3.7
  I                                         Total                                              $074.7                           100.0

                                            Page 10                                    GAO/NSIAD-BO-270BR   Multiyear        Contract
~lbissessments of the Fiscal Year 1991
Multiyear Contract Cmdidaks

                     This appendix summarizes our assessments of six multiyear contract
                     candidates proposed in the fiscal year 1991 budget. We also provide
                     background information on each system, including the proposed multi-
                     year contract period.

                     We reviewed DOD’S multiyear contract justification materials submitted
                     to the Congress in January 1990 for the six candidates. Candidates were
                     reviewed to assess their conformance with the legislative criteria for
                     multiyear procurement (P.L. 97-86).

                     The Army’s UH-60 Black Hawk, manufactured by Sikorsky Aircraft, is a
UH-60 Black Hawk     squad carrying assault helicopter. Its mission is to transport infantry
                     into combat, resupply units in combat, perform aeromedical evacuation
                     and reposition reserves. The UH-6OA Black Hawk is a twin-engine,
                     single rotor helicopter designed to carry a crew of 3 and up to 14 combat
                     equipped troops or the equivalent cargo load.

                     In October 1989, the engines for the UH-6OA Black Hawk were upgraded
                     from the General Electric T700 engine to the General Electric T701C,
                     requiring a change in the designation of the aircraft to the L model. The
                     new T701C engine includes various enhancements, such as a 12 to 14-
                     percent increase in horsepower and a digital electronic control. In addi-
                     tion, the UH-6OL model also has an improved main transmission.

Proposed Multiyear   Term: Fiscal years 1992-96 (Advanced procurement in fiscal years 1991-
Contract             96).

                     Type: Firm fixed-price, sole-source contract, with a variable business
                     base option clause.

                     Estimated cost: $1,320.8 million.

                     Estimated savings: $187.2 million (12.4 percent) compared to estimated
                     annual contract costs.

                     Quantity: 300 aircraft (60 aircraft per year for 6 years).

                     Procurement objective: 2,263 (Multiyear procurement would provide
                     units 1,108 through 1,407).

                     Page 11                                   GAO/NSIAD-90-270BR   Multiyear   Contract
                              Appendix II                                                                                    .
                              Our h6twment.a    of the Fbxd Yeur 1981
                              Multiyear Contract candidates

                              Unfunded cancellation ceiling:’ $0.

                              Fiscal year 1991 funding: $149.6 million - all advance procurement.

Review Results

Savings Realism           l The UH-60 Black Hawk Program Office calculated both multiyear and
                            annual cost estimates using prior procurement history, contractor’s cost
                            data, and DOD inflation indexes. It developed a computer program which
                            uses historical contract data and the most recent cost information from
                            the current multiyear procurement contract, then converted the costs to
                            constant fiscal year 1989 dollars for its cost estimates.
                          . The same method was used for the annual contract estimates. The
                            annual and multiyear estimates for labor and overhead are the same.
                            The primary difference between the two estimates is in material cost.
                          9 Annual contract material costs were projected to be about 16 to 17 per-
                            cent higher than multiyear contracts costs. The Army applied price/
                            quantity adjustments factors, developed for a 1984 multiyear contract,
                            which resulted in a $136 million savings. The Army assumed that this
                            same price/quantity relationship still existed. No data were available to
                            support the $136 million savings in materials the Army attributed to the
                            multiyear contract. Because proposals have not yet been requested, the
                            program office believes the historical data derived from prior multiyear
                            procurements are a good indicator of what to expect for the proposed
                            multiyear procurement.
                          l The information submitted in the multiyear justification package has
                            not been comprehensively and independently verified by the Army. The
                            supporting data for the figures and underlying assumptions were not
                            reviewed or analyzed for reliability or validity. The Army submitted the
                            package after a cursory review by program officials.

Requirement and Funding   . The requirement for the UH-60 Black Hawk has fluctuated in the last
Stability                   year and a half and the future of the program is uncertain. On
                            February 16,1989, the procurement objective was increased from 1,107
                            to 2,263 aircraft, representing about a loo-percent increase in the pro-
                            gram baseline.

                              ’ Unfunded cancellationceiling is the total amountof DOD’sliability for which funds have not been
                              budgetedor appropriatedin the caseof multiyear contract cancellation.

                              Page 12                                                GAO/NSIAD-BO-270BR     Multiyear   Contract
                       Appendix II
                       Our Asawsmenta of the F%3cal Year 1991
                       Multiyear Contract C%uxlidates

                   . In a March 1990 testimony, the Army’s Deputy Assistant Secretary for
                     Research, Development, and Acquisition said there would be cuts in the
                     2,263 procurement objective of up to 632 aircraft. Moreover, in a May
                     1990 interview, the Secretary of Defense said the UH-60 Black Hawk
                     Program may be terminated.
                   . The current reduction in the Army force structure, coupled with contin-
                     uing efforts to develop a new Army Aviation Modernization Plan
                     reflecting lower numbers of aircraft, will affect the requirement for
                     UH-60 Black Hawk helicopters. The Army’s Deputy Program Executive
                     Officer for Aviation told us that the service cannot rationally review the
                     procurement objective until its modernization plan is revised because
                     the size and needs of the force structure will determine the size of all
                     Army aviation programs. Another Army official told us the number of
                     UH-60 Black Hawks needed will be based on the modernization plan and
                     a smaller force structure will almost certainly require fewer UH-60
                     Black Hawks.
                   9 Whether DOD or the Army will request sufficient funding for the multi-
                     year contract is highly questionable. The Army did not request funding
                     for UH-60 Black Hawk helicopter procurement beyond fiscal year 1992
                     in its Program Objective Memorandum (POM).
                   . Several Army Aviation System Command officials believe that, if there
                     is a multiyear procurement, it will most likely be for 36 aircraft per year
                     rather than the 60 annual production rate estimated in the multiyear
                     procurement proposal. At 36 aircraft per year, based on the estimating
                     method used by the UH-60 Black Hawk Program Office, estimated sav-
                     ings would decrease by at least $86 million, from $187.2 million (12.4
                     percent) to a saving of $10 1.2 million (10.4 percent).

Design Stability   9 The basic UH-60 Black Hawk is in its 13th year of full production, thus,
                     indicating a stable design. Even with the upgrade to the L model, pro-
                     gram officials said it is considered a nondevelopmental item.2
                   l Army officials told us about the UH-60 Black Hawk’s water integrity
                     problems which could lead to accelerated aircraft corrosion and opera-
                     tional problems. When the contractor was notified of the leakage
                     problem, it anticipated that the new UH-60 model design would solve
                     the water problem. However, in April 1990 when a UH-6OA and a new
                     L model were subjected to a water integrity test, both models leaked in
                     the nose and cabin compartments and under the transmission. Several

                       21t.emsthat are either available in the commercialmarket placeor otherwise already developedand
                       ln useby a governmentalentity, including itemsthat require only minor modifications.

                       Page 12                                              GAO/NSL4D-9O-270BR      Multiyear   Contract
              Our Awsemento     of the Fka.l Year 1991
              MultIyear Contract candidates

              Army officials told us they were concerned that this deficiency has not
              been corrected.

Conclusions   UH-60 Black Hawk requirements and funding are uncertain because of
              the expectation that the reduction in the Army force structure and the
              new Army Aviation Modernization Plan will reduce aircraft require-
              ments. In addition, the Army has not requested funding for the UH-60
              Black Hawk procurement beyond 1992, and the Secretary of Defense
              has indicated that the program may be terminated.

              We question the $187 million savings estimate claimed for the multiyear
              contract in the justification package because over 70 percent of it is
              based on a relationship between quantity and price estimated to exist
              for a different contract 6 years ago. In addition, if annual production is
              36 aircraft per year, instead of the 60 proposed, savings are likely to be

              Although the UH-60 Black Hawk’s design has been stable, the water
              integrity problems identified could lead to accelerated aircraft corrosion
              and other operational problems.

              The F’MTVprogram is designed to replace DOD'S present 2-l/2-ton and
F’MTV         &ton truck fleets with new vehicles that will satisfy the operational
              needs of the Army. FMTVwill consist of new 2-l/2-ton and S-ton trucks,
              utility trailers, and “kits”. The Army can use the trucks, trailers, and
              kits in various configurations for different purposes, such as operating
              in arctic weather, carrying troops under a canvas cover, or using a crane
              to unload bulk cargo.

              FMTVhas no prior production history and is being procured as a
              nondevelopmental item. The program began with the competitive award
              of three prototype contracts in October 1988 to Tactical Truck Corpora-
              tion, Teledyne Continental Motors, and Stewart and Stevenson. Proto-
              type testing is scheduled for completion in December 1990. Production is
              scheduled to begin with a March 1991 award of a competitive S-year
              multiyear production contract.

              Page 14                                    GAO/NSIAD-90-270BR   Multiyear   Contract
                         Apps*       II
                         Our Aeeemmente of the E&ml Year 1991

Proposed Multiyear       Term: Fiscal years 1991-96 (No advanced procurement).
Contract                 Type: Competitive, fixed price, with an economic price adjustment

                         Estimated cost: $1,694.3 million,

                         Estimated savings: $26 1.9 million (12.9 percent) compared to estimated
                         annual contract costs.

                         Quantity: 18,667 FMTVtrucks, 269 trailers and 39,766 kits.

                         Procurement objective: Currently authorized at 79,612; however, pro-
                         gram quantities are being revised. (Multiyear procurement would pro-
                         vide units 1 through 18,667.)

                         Unfunded cancellation ceiling: $0.

                         Fiscal year 1991 funding: $63.2 million-abT&@ $6.9
                         Procurement                                    66.3
                         Total                                         $63.2

Review Results

Savings Realism      . No price history exists for the FMW, and the contractors’ price proposals
                       will not be submitted until October 1990.
                     . The multiyear contract cost estimates for the 2-l/2-ton and S-ton trucks
                       are based on cost estimates from previous contracts. The estimate for
                       S-ton trucks was based on a 1986 multiyear contract. The estimate for
                       2-l/2-ton trucks was based on a 1981 contract price which, with
                       options, was extended through 1984. The Army adjusted its estimates to
                       reflect the physical differences between the trucks previously procured
                       and the FMTV,
                     l The cost of FMTV trailers was based on an Army cost estimating formula
                       using historical contractual data on payload and contract costs for four-
                       wheel flatbed trailers.
                     . Over half of the Army’s estimated multiyear savings were baaed on cal-
                       culations using the estimated cost penalties of annual contracting over
                       multiyear contracting derived from the Army’s December 1988 vehicle

                         3Research,development,test, and evaluation.

                         Page 15                                       GAO/NSIADQO-270BR   Multiyear   Ckmtract
                              Appendix II
                              Onr Aeraessmenta of the Fiscal Year 1991
                              Multiyear  Contract Candidates

                            manufacturers’ survey. The Army then increased the estimated savings
                            on the assumption that, under annual contracts, a new contractor would
                            be selected to build the vehicle in each of the 6 years. In doing so, the
                            Army (1) added an average of $17.8 million per year to annual contract
                            costs for production line start-up costs and (2) added or increased
                            testing, training, and data costs by $60.3 million for the S-year period.
                          . 0!3D's Cost Analysis Improvement Group reviewed and generally agreed
                            with the Army’s estimate for the FMW'S life-cycle costs, including devel-
                            opment, production, and operations and support. These cost estimators
                            found the total program estimates to be low risk because of the
                            nondevelopmental nature and the competitive environment of the FMTV
                            procurement. However, they did not specifically review the multiyear
                            and annual cost estimates for the proposed fiscal year 1991 through
                            fiscal year 1996 buy. The Cost Analysis Improvement Group did note
                            that if the Army changed the present procurement mix of the FMTVcon-
                            figurations, the cost could change substantially because of the wide cost
                            range for the various configurations.

Requirement and Funding   l   In May 1990, the procurement objective for the FMTV was reduced from
Stability                     about 160,000 to 79,612 vehicles and may be reduced further due to
                              planned force reductions. Army officials said that the proposed multi-
                              year contract will not be affected by this reduction because (1) the need
                              to replace the aging 2-l/2 and 6-ton trucks still exists and (2) the con-
                              tract is only for 18,667 vehicles, which is significantly less than the
                              79,6 12 required.
                          l   Army officials told us that the Army requested funding for the proposed
                              multiyear contract in the 1990 POM. However, we noted that in 1989 the
                              Army withdrew funding for the final year of its 1986 multiyear contract
                              for S-ton trucks because of higher priority programs. The Program Exec-
                              utive Officer said the FMTV system is a very high priority for the Army.
                          l   According to program officials, “ramp up” planning for the FMTV allows
                              for low-rate initial production until vehicles are certified as having met
                              initial product testing requirements. Once these requirements are met,
                              the Army expects the contractor to build vehicles at an economically
                              advantageous rate. The contractor expects to produce about 90 vehicles
                              a month for 4 months in fiscal year 1991; 160 vehicles a month for the
                              first 2 months in fiscal year 1992, then 200 a month for the remaining
                              10 months. In fiscal year 1993, the contractor is expected to produce
                              200 a month for the first 6 months. At that time, the test results from
                              the first fiscal year 1991 vehicles are expected and, if satisfactory, pro-
                              duction will gradually increase to 650 vehicles a month. The Army
                              expects to buy 650 vehicles a month during fiscal years 1994 and 1996.

                              Page 16                                    GAO/NSIAIHW270BR   Multiyear   Contract
                     Appendix II
                     Our Assessments of the Ihal   Year 1991
                     Multiyear Contract Candidates

Design Stability   9 Although the FMTVhas no production history, program office officials
                     believe that the FMTVdevelopment is low risk because (1) the vehicle
                     will be composed of commercial components available in the market-
                     place, (2) the manufacturing processes are not new, and (3) each vehicle
                     configuration is being subjected to prototype hardware testing. How-
                     ever, design stability is uncertain because the components have not been
                     integrated and functioned together before and prototype testing has not
                     been completed.
                   . A program official told us that as of April 1990 no major design
                     problems had been identified during these tests. We did not verify the
                     test data. The Army expects to complete testing in December 1990, after
                     the scheduled October 1990 receipt of contractor proposals, but before
                     the scheduled January 1991 completion of negotiations or the March
                     1991 contract award.

Conclusions          Although force reductions could affect the overall FMTV requirement, the
                     multiyear contract quantity of 18,667 will be needed to replace the
                     aging truck fleet.

                     However, we question the Army’s cost estimate because there is no prior
                     price history for the FMTV, and contractor price proposals will not be
                     submitted until October 1990. In addition, the Army’s assumption that a
                     new contractor would be selected for each annual contract during the 6-
                     year period is highly unlikely because there are only three interested
                     bidders. Further, the original production contractor, who will have
                     already received payment for production line start-up costs, will have
                     an advantage over any competitor.

                     When the Army’s estimate of $17.8 million average annual start-up
                      costs is deducted from all but the first year of production, the savings
                     estimate is reduced to a maximum of 9.6 percent (rather than the pro-
                     jected 12.9 percent). Finally, when the proportional share of the $50.3
                     million in added testing, data, and training costs is deducted from all but
                     the first year of production, the savings estimate is reduced further to
                     7.1 percent.

                     Because the multiyear contract costs are included in the Army’s current
                     POM and the FMTV seems to be a high priority, funding support appears to
                     be adequate.

                     Page 17                                   GAO/NSIAD-SO-270BR   Multiyear   Contract
                     Appendix II
                     Our Aaaeaementa of the Fiscal Year 1991                                         ,
                     Multiyear Contract Candidates

                     Design stability is uncertain because the FMTV components have not been
                     integrated and functioned together before and prototype testing is not
                     scheduled to be completed until December 1990.

                     In late 1986, the Army Chief of Staff convened a group of experts who
Avenger Weapon       concluded that no single weapon system could provide adequate for-
System               ward area air defense. It recommended a concept referred to as the
                     “Forward Area Air Defense System” (FAADS). To field FAADS quickly, the
                     Army decided to rely on available systems, or “off-the-shelf” tech-
                     nology, to the extent possible.

                     FUDS  consists of five elements or components: (1) the Air Defense Anti-
                     tank System, (2) the Fiber Optic Guided Missile, (3) the Pedestal
                     Mounted Stinger, or Avenger, (4) a command, control, communication,
                     and intelligence system, and (6) improvements to certain existing sys-
                     tems, which the Army calls the “Combined Arms Initiative.”

                     The Avenger is the initial component of FAADS to be procured and fielded
                     by the Army. It provides defense against both fixed-wing aircraft and
                     helicopters, and uses passive sensors for day/night/adverse weather

                     The Avenger consists of Stinger missiles, a 0.60-caliber machine gun,
                     passive sensors, the Stinger Identification Friend or Foe system, and a
                     fire control system integrated in a stabilized turret and mounted on a
                     High Mobility Multipurpose Wheeled Vehicle. The Avenger will replace
                     selected man-portable Stinger teams.

                     In 1986, three contractors submitted proposals for the Avenger as a
                     nondevelopmental item. Boeing won the candidate evaluation test and
                     was awarded a production contract in August 1987. To date, the total
                     quantity under this contract, including a fiscal year 1991 option for 72
                     units not yet exercised, is 326 Avenger systems. This includes 62 units
                     covered in a May 1990 contract amendment.

Proposed Multiyear   Term: Fiscal years 1991-96 (Advanced procurement in fiscal years 1991-
Contract             93).

                     Type: Firm fixed-price, sole-source contract to Boeing Aerospace.

                     Estimated cost: $328.7 million.

                     Page 18                                   GAO/NSIAD@O-270BR   Multiyear   Contract
                      Appendix II
                      Our Assessments of the Fiscal Year 1991
                      Multiyear Contract Candidates

                      Estimated savings: $33.8 million (9.3 percent) compared to estimated
                      annual contract costs.

                      Quantity: 660 systems.

                      Procurement objective: 1,207 (Multiyear procurement would provide
                      units 264 through 913).

                      Unfunded cancellation ceiling: $0.

                      Fiscal year 1991 funding: $76.9 million-Procurement        $61.2
                      Advance procurement                                         26.7
                      Total                                                      $76.9

Review Results

Savings Realism   l The initial cost estimates for the proposed multiyear and annual con-
                    tracts were made in late 1988 by Boeing and an independent contractor
                    to the Army, based on cost estimates and option prices generated for the
                    initial production contract awarded in 1987. Both Boeing and Stinger
                    project officials stated that the cost history since that time indicates
                    these estimates were too low. In addition, the project office has revised
                    the estimated cost of the total program twice because of rescheduled
                    procurement quantities and other changes. The Army has not revised
                    the estimated cost of the proposed multiyear contract to reflect these
                  l Boeing proposed a not-to-exceed price of $661,000 per unit for 62 units
                    in May 1990, or about $76,000 per unit more than the fiscal year 1991
                    option prices included in the 1987 production contract. Boeing officials
                    said Boeing’s price would decrease as more detailed data were received
                    from subcontractors, but Boeing’s price would not be as low as the
                    option prices.
                  . In July 1990, the project office prepared a new estimate of the multiyear
                    procurement cost, based on Boeing’s proposal for the 62 additional units
                    and other preliminary data provided by Boeing. This new estimate is
                    $373.3 million, or about $44.6 million more than the estimate submitted
                    to the Congress in the justification package. It is unclear how this
                    change would affect the estimated multiyear contract savings because
                    the project office did not prepare a new savings estimate.

                      Page 19                                   GAO/NSIAD-90-27OBR   Multiyear   Contract
                                  Appendix II
                                  Our Afweesment-9 of the F&al Year 1991
                                  Multiyear Contract Caudidatee

                              . Boeing officials told us they were preparing detailed estimates for the
                                proposed multiyear and annual contracts but the estimates were not
                                available at the time of our review. Stinger project officials said these
                                proposals will provide a basis for estimating costs and multiyear con-
                                tract savings, before a multiyear contract is awarded. Both Boeing and
                                project officials said they expect multiyear contract savings to be more
                                than 10 percent compared to annual procurement.
                              l The advanced funding estimates included in the justification package
                                were prepared by Boeing in 1988 as part of its initial estimates. These
                                estimates were based on an assumed economic order quantity of 240
                                units per year for major components at an average cost of $246,000 per
                                unit. Boeing officials said they have not yet established a firm economic
                                order quantity, but will do so as part of the proposal prepared for the
                                multiyear contract.

Requirement and Funding   . Requirements for the Avenger appear firm. The Five-Year Defense Pro-
                            gram, dated January 10, 1990, included all of the units proposed for the
Stability                   multiyear procurement. Requirements identified in this document
                            totaled 1,207, which is 294 more than the total multiyear procurement
                            plus procurement through fiscal year 1990 under the initial contract. In
                            addition, the Marine Corps has expressed an interest in procuring some
                            yet-to-be-determined number of systems which would be included as
                            part of this multiyear procurement.
                          l DOD is currently reevaluating its requirements in view of recent world
                            events. However, Army Missile Command officials said that total Army
                            Avenger requirements will increase to over 1,700.
                          . DOD funding support for the Avenger has been consistent since its incep-
                            tion However, future funding will be determined after DOD reevaluates
                            its requirements, The Five-Year Defense Program includes funding for
                            the proposed multiyear procurement. However, if recent proposals from
                            Boeing are a good indicator, the unit prices may be somewhat higher
                            than the Army estimated and included in the budget. Depending on the
                            extent of Boeing’s price increases, the amount provided in the budget
                            may not be sufficient to procure the planned number of units. Project
                            officials said that if funding is not adequate, other program elements
                            would be cut rather than reduce the multiyear contract quantities.

Design Stability          l       The Avenger, as a stand-alone system and as currently produced, meets
                                  all operational requirements, is already being deployed, and appears rel-
                                  atively stable in design. This system, as a nondevelopmental item, suc-
                                  cessfully completed operational testing and evaluation. Approval for

                                  Page 20                                  GAO/NSIAIHO-270BR   Multiyear   Contract
                  Appendix II
                  Our Awessments of the Fiscal Year 1991
                  Multiyear Contract Candidates

                full-scale production was granted by the Army in April 1990. As of that
                date, the contractor had delivered 66 fire units, 4 units ahead of
              l Integration of the Avenger system with the command, control, communi-
                cation, and intelligence component of FAADS is necessary to meet the
                requirements established for Avenger. The requirement provided that
                the basic Avenger system would be upgraded to interface with other
                FAADS components, but that is not likely to be assured until long after the
                scheduled award date for the proposed multiyear contract. The integra-
                tion of the Avenger with other FAADS components has yet to be
              . To fully implement FAADS (as a system), all individual weapon systems
                must be tied together by the command, control, communication, and
                intelligence component. This component consists of the software, target
                identification device, ground-based sensor, and masked (aerial) target
                sensor. These elements are scheduled to be fielded between December
                1993 and September 1998, depending on the element. Therefore, it will
                not be known if the Avenger can be successfully integrated with the
                other components until long after the scheduled award date for the pro-
                posed multiyear contract, Project officials said the only element sched-
                uled for fielding during the multiyear contract period that will affect
                Avenger is the software automating command and control. The expected
                modifications to Avenger include some wiring changes and the addition
                of some devices, but should not cause a major disruption in the produc-
                tion process.

Conclusions       The Army does not have a reliable cost estimate for the proposed multi-
                  year contract. Both Boeing and Stinger project officials stated that the
                  annual and multiyear contract estimates for the proposed procurement,
                  made in late 1988 and based on data generated for the initial production
                  contract awarded in 1987, were too low. Boeing’s May 1990 proposal for
                  additional quantities supports their statements that prices have

                  Funding for the Avenger has been stable to date and the latest Five-Year
                  Defense Program includes funding for the multiyear contract. However,
                  DOD is reevaluating its requirements in view of recent world events and
                  support for the Avenger could change. In addition, recent Boeing pro-
                  posals and revised estimates indicate higher unit prices than those esti-
                  mated by the Army and included in the budget. Thus, the amounts
                  provided in the budget may not be enough to procure the number of
                  units planned.

                  Page 21                                  GAO/NSIAlWO-270BR   Multiyear   Contract
                      Appendix II
                      Our Assessments of the Flsed Year 1991                                                      ,
                      Multiyear Contract CMdidates

                      Since the Avenger has not been integrated with other FAADS components,
                      design stability has not been established and it is uncertain how the
                      total system will operate.

                      The Navy operates three different classes of amphibious assault ships-
LHD Amphibious Ship   the LHD-1 Wasp, the LHA-1 Tarawa, and the LPH-2 Iwo Jima. The LHD,
                      the largest of its type in the fleet, is designed primarily for amphibious
                      warfare. LHDs can transport elements of a landing force, landing craft,
                      and vertical/short take-off and landing aircraft and helicopters, and can
                      also launch preloaded assault craft in support of an amphibious assault
                      operation. LHDs can also deploy aircraft and helicopters in secondary
                      sea control and power projection missions,

                      Four LHDs have been funded to date-the first ship entered the fleet in
                      May 1989. The LHD’s design is similar to that of the LHA assault ship,
                      although modifications have been made for the operation and support of
                      AVSB Harrier jets, increase the number of LCACcarried, and provide
                      increased command and control capabilities.

                      The LHD program started in fiscal year 1981 as part of an overall pro-
                      gram to increase amphibious capability. In the spring of 1981, the Navy
                      accelerated the LHD program by moving the authorization to award the
                      contract for the lead ship from fiscal year 1987 to fiscal year 1986. Sub-
                      sequently, the program was authorized for fiscal year 1984, based on a
                      modified LHA design.

                      The LHD-1 lead ship construction contract was awarded in February
                      1984 to Ingalls Shipbuilding, Incorporated. The LHD-1 was delivered to
                      the Navy in May 1989 and is currently undergoing post shakedown
                      availability.” The Navy’s final acceptance of the LHD-1 is expected in
                      October 1990.

                      Ingalls was also awarded a competitive, fixed-price contract in Sep-
                      tember 1986 for construction of LHD-2, with scheduled delivery to the
                      Navy in 1992. This contract contained options for construction of
                      LHDs-3 and -4. The option for LHDS was exercised in November 1987
                      with a scheduled delivery for January 1993 and the option for LHD4
                      was exercised in October 1988 with a scheduled delivery for March

                      ‘Post shakedownavailability is a period during which both governmentand contractorresponsible
                      deficienciesare corrected.

                      Page 22                                             GAO/NSIADQO-270BR      Multiyear   Contract
  .                      AppendixII
                         Our hlnnenta       of the Fk8l Year 1931
                         Multiyear  Contract Candldatea

                         The Navy has requested approval for a multiyear contract to competi-
                         tively procure three additional LHD class ships over 6 years, with a con-
                         tract award planned for February 1991.

Proposed Multiyear       Term: Fiscal years 1991-96 (Advance procurement in fiscal years 1990,
Contract                 1992, and 1994).

                         Type: Competitive, fixed-price incentive contract.

                         Estimated cost: $2,116.3 million.

                         Estimated savings: $173.6 million (7.6 percent) compared to estimated
                         annual contract costs.

                         Quantity: 3 ships.

                         Procurement objective: 10 (Multiyear procurement would provide units
                         6 through 7).

                         Unfunded cancellation ceiling: $20 million

                         Fiscal year 1991 funding: $961.8 million-rttrr&E $2.0
                         Procurement                                      969.8
                         Total                                           $961.8

Review Results

Savings Realism      l   The Navy’s estimate of multiyear contract savings was based primarily
                         on actual cost data from LHDs-1 through -4. According to officials from
                         the Cost Estimating/Analysis Branch of the Naval Sea Systems Com-
                         mand (NAVSEA), they developed cost estimates for both annual and multi-
                         year contracts for LHDs-6 through -7 using actual cost data contained in
                         cost performance reports furnished by the contractor, past contract
                         awards, historical costs, and costs developed based on current labor and
                         material rates, Program officials told us that these cost estimates were
                         agreed to during senior working level reviews which included officials
                         from the Office of the Assistant Secretary of the Navy, Shipbuilding and
                         Logistics. However, we were unable to document such agreement.

                         Page 23                                    GAO/NSIADgO-270BR   Multiyear   Contract
                              Appendix II
                              Our Assessments of the Fiscal Year 1991
                              Multiyear Contract Caudidates

                          . The Navy’s October 1990 request for proposals will require proposals
                            for both annual and multiyear contracts. Navy officials expect that four
                            shipbuilders will bid for the contract. The Navy plans to award the con-
                            tract in February 1991. LHDs-2 through -4 were competed in a similar
                            manner in 1986 and approved for multiyear procurement, However, the
                            contract was not awarded on a multiyear basis because a present value
                            analysis of the proposals projected little savings (0.046 percent) com-
                            pared to the cost of an annual procurement with options.

Requirement and Funding   . NAVSEA officials said current DOD guidance for lifting one Marine Expedi-

Stability                   tionary Force plus one Marine Expeditionary Brigade requires 10 LHD
                            ships. They also said the total number of amphibious ships required to
                            meet the amphibious fleet’s inventory objective is 66 ships, including the
                            current requirement for 10 LHDs. This requirement is based on an out-
                            dated study6 that is over 7 years old. Navy officials told us that a new
                            amphibious requirement study,6 which was forwarded to the Secretary
                            of Defense in April 1990, found that nine LHDs are required for lifting
                            an expeditionary force and brigade. Although this new study has been
                            approved by the Secretary of the Navy, Navy officials would not release
                            the study to our office until all the appendixes are complete. The study
                            reportedly does not recommend specific force levels, but provides a
                            basis for future force level planning within the Navy. According to Navy
                            officials, the new study is not a definitive requirements document,
                            rather, it is a guide to establishing force level goals and the assets
                            required to achieve those goals. We were told that while the new study
                            indicates a need for a minimum of seven LHDs, DOD has not agreed to a
                            reduced requirement.
                          . An October 1989 Congressional Budget Office (CBO) study7 raises ques-
                            tions concerning the administration’s goals for amphibious ships. The
                            administration’s goal, based on the Navy’s 1983 study, is to provide
                            enough amphibious lift to transport about 60,000 Marine troops and
                            associated aircraft, vehicles, and equipment. However, the CBO study
                            notes that this goal is much larger than what has been required in any
                            assault since World War II. For example, the landing at Inchon, South
                            Korea, involved about 19,600 Marines, and a total force of about 26,000
                            troops. None of the five major events involving Marines since Inchon has

                              “Departmentof the Navy LongTerm AmphibiousLift Requirementand OptimumShip Mix Study
                              “Departmentof the Navy IntegratedAmphibiousOperationsand USMCSupportStudy (1990).
                              7Movingthe Marine Corpsby Seain the 1990s(Oct. 1989).

                              Page 24                                           GAO/NSIAIWO-270BR   Multiyear   Contract
                       Appendix II
                       Onr Aiwesements of the Fiscal Year 1991
                       Multiyear Contract Candidates

                     required more than 1,700 troops in the initial landings that involved
                     amphibious ships.” The CBO study suggested several options, including
                     (1) retiring some older amphibious ships early and buying new ships
                     according to the administration’s plan; (2) keeping amphibious ships in
                     the fleet through their expected service life, but canceling procurement
                     of two amphibious ships, including one LHD, which would apparently be
                     LHD-10; or (3) establishing a reduced goal for amphibious lift, which
                     could be met by canceling procurement of all new amphibious ships,
                     including LHDs-6 through -7.
                   l Multiyear procurement funding for LHDs-6 through -7 is contained in
                     both the 1990 Five-Year Defense Program and the 1990 POM. We were
                     not able to determine if LHDs-6 and -7 were included in the 1992 POM.
                     Neither NAVSEAnor DOD officials would comment on the validity of state-
                     ments that have appeared in trade publications indicating that procure-
                     ment of LHDs-6 and -7 would be canceled.
                   . Funding for the fiscal year 1991 LHD-6 program is expected to increase
                     approximately $233 million from the fiscal year 1989 LHD4 program.
                     Navy officials attributed this increase to (1) understated man hours by
                     the shipbuilder on LHD-4, (2) inflation from fiscal years 1989 to 1991,
                     and (3) improved combat and ship systems on the LHD-6. The officials
                     said that none of the increase is for a gas turbine propulsion system for
                     the LHD-6 and no change in propulsion systems is envisioned for LHDs-6
                     through -7.

Design Stability   l The LHD-1 is a derivative of the LHA class amphibious assault ship,
                     which entered the fleet in 1976. NAVSEAofficials considered the program
                     risks minimal because the LHD is a modified LHA ship design and uses a
                     steam propulsion system that has been installed in five LHAs. All major
                     tests have been completed to ensure that the LHD-1 delivered to the
                     Navy in May 1989 meets operational requirements. NAVSEAofficials said
                     deficiencies for which the contractor was responsible were considered
                     minor and have been corrected. Deficiencies for which the government
                     is responsible are scheduled for correction during post shakedown avail-
                     ability from June to October 1990. According to the officials, none of the
                     deficiencies required any major rebuild of the ship.
                   . As late as June 1989, the Navy was considering design changes to a gas
                     turbine propulsion system. However, in view of budget pressures and
                     the relatively short time before contract award, the Navy decided to

                       ‘Although we recognizethat about 60,000Marinesare currently beingsentto the Middle East,this
                       operationis not an amphibiousassault.

                       Page 25                                             GAO/NSIAD-90-270BR     Multiyear   Contract
              Appendix II                                                                      .
              Our Aaseesmenta of the Fiscal Year 1991
              Multiyear Contract Candidates

              proceed with a repeat procurement of the steam propulsion LHD-2 con-
              figuration According to NAVSEA officials, current schedule and budget
              considerations continue to preclude consideration of a gas turbine pro-
              pulsion system for LHDs-5 through -7.

Conclusions   The estimated multiyear savings of $173.6 million (or 7.6 percent) were
              based on actual cost data from prior LHD buys. However, the previously
              approved multiyear procurement for LHDs-2 through -4 was not
              awarded because a present value analysis projected little savings com-
              pared to the cost of an annual contract with options. Therefore, firm
              contract proposals for both annual and multiyear contracts for LHDs-5
              through -7 should be evaluated, and the level of savings that would
              result from a multiyear contract should be carefully considered before
              contract award.

              LHD requirements may be questionable because (1) the total amphibious
              ship requirement is based on a study that is over 7 years old and (2) the
              Navy’s recent study has not been finalized. Finally, the 1989 CBOstudy
              suggested several options for amphibious requirements during the

              Funding support appears uncertain. The status of the LHD program is
              currently being debated and questioned in the 1992 FQM finalization

              Design for the LHD appears to be stable.

              The Navy’s LCACboats are carried by many amphibious ships in their
LCAC          well-decks. They require a crew of five to transport troops, vehicles, and
              cargo from the amphibious ship to the target landing area while the ship
              remains 26 to 60 miles at sea. The w can deliver its load of up to 60
              tons to the landing area at a speed of over 40 knots. These boats can be
              loaded, launched, and docked while the amphibious ship is underway.
              The LCACboat is powered by four gas turbines and moves about on a
              cushion of air rather than through the water like conventional boats.
              This capacity allows the LCAC: boats to deliver the troops, vehicles, and
              cargo to an inland target area over obstacles of up to 4 feet in height.
              Conventional landing boats deliver cargo to the beach.

              The LCAC concept originated from demonstrations of air cushion vehicles
              in the 1960s. These led to the amphibious assault landing craft program,

              Page 26                                    GAO/NSIAD-90-270BR   Multiyear   Contract
                         Appendix II
                         hr hseeementa    of the Fiscal Year 1991
                         Multiyear Contmct candidates

                         which, from 1968 to 1984, consisted of evaluating the concept and pro-
                         ducing two competing hovercraft boats-the JEFF(A) and JEFF(B). The
                         JEFF(B), built by Textron Marine Systems, was selected as the boat on
                         which to design the LCACsystem.

                         In December 1981, after the milestone III review, the Secretary of the
                         Navy approved the limited production of LCAC.The Navy’s requirement
                         is for 107 LCACS.In addition to Textron Marine Systems, Avondale Gulf-
                         port Marine was selected as a second source. These two companies are
                         the current LCAC contractors. To date, 60 LCACShave been contracted,
                         and 20 have been delivered.

Proposed Multiyear       Term: Fiscal years 1991-94 (Advance procurement starting in fiscal year
Contract                 1989).

                         Type: Firm fixed-price contract to either Textron Marine Systems or
                         Avondale Gulfport Marine, or a contract to each contractor.

                         Estimated cost: $1,080.4 million.

                         Estimated savings: $90.5 million (7.7 percent) compared to estimated
                         annual contract costs.

                         Quantity: 47 IXACS.

                         Procurement objective: 107 (Multiyear procurement would provide units
                         61 through 107).

                         Unfunded cancellation ceiling: $20 million.

                         Fiscal year 1991 funding: $267.7 million-Procurement          $244.5
                         Advance procurement                                             23.2

Review Results

Savings Realis?      l   The estimated cost and savings, which were prepared by the NAVSEA
                         comptroller’s office, were based on prior contract bid and actual cost

                         Page 27                                    GAO/NSIAWO-270BR    Multiyear   Contract
                              Appendix II
                              Onr Amessmenta of the Fbcal Year 1881
                              Multiyear Contract Candidates

                            data. Since 1986, six LCACcontracts have been awarded to the two
                          9 Most recently, the two contractors submitted cost proposals for the pro-
                            duction of 12 LCACSin response to a 1988 request for proposal. This is
                            the same rate of production planned for the proposed multiyear con-
                            tract. NAVSEA officials said that the request for proposal will require the
                            two contractors to submit proposals for a 4-year contract for 47 craft
                            and for one annual contract for 12 craft.
                          . Navy officials said they do not expect the estimated multiyear savings
                            of 7.7 percent to change whether a multiyear procurement is awarded to
                            one contractor or is split between both contractors. Although the multi-
                            year procurement for 47 w craft is being competed between the two
                            contractors, NAVSEA assumed, for cost estimating purposes, that one mul-
                            tiyear contract award will be made for all 47 craft.

Requirement and Funding   . The Navy requirement is for 107 LCACSto support one Marine Expedi-
Stability                   tionary Force and one Marine Expeditionary Brigade. Forty-five LCACS
                            would be ported on the east coast, 45 on the west coast, and the
                            remaining 17 would be used for training, spares, and replacements. The
                            need for 107 craft was approved in 1980 and the administration’s 1991
                            budget request shows a goal of 107 craft.
                          9 In July 1990, NAVSEA officials, in response to reports that the Navy was
                            seriously considering reducing the LCK program, stated that the official
                            program requirement is still 107 LUCS. They said that any reductions or
                            changes to official program quantities would have to be finalized within
                            OSD and, to date, no revisions to requirements have been made.
                          l The requirement for 107 LCACSwas supported by the Navy’s outdated
                            1983 amphibious lift study. The Navy has reevaluated LCACrequire-
                            ments in a new amphibious requirements study, which was provided to
                            the Secretary of Defense in April 1990. This study, not yet released to
                            our office, provides a basis for future force level planning for amphib-
                            ious ships, which also affects LCACrequirements. However, the Navy has
                            not finalized this study and DOD has not determined what its amphibious
                            ship requirements should be. A 1989 CBO study suggested options, some
                            of which raise questions about the requirement for LCQZSas well as
                            amphibious ships. The number of J..GCSrequired is directly related to
                            the number of well-deck ships and the size of the Marine Corps. If the
                            Navy could not field both a Marine Expeditionary Force and a Marine

                              ‘The Navy’s 1983and 1990studiesand CBO’s1989study are discussedin the sectionon the LHD

                              Page 28                                           GAO/NSIAENO-270BR    Multiyear   Contract
                          Appendix II
                          Our Assessments of the Firscal Year 1991
                          Multiyear Contract Candidates

                          Expeditionary Brigade, the requirement for 107 LCACSwould no longer
                          be valid.
                      l   The LCACprogram has been funded since 1981, and has under contract
                          or delivered 60 of the 107 LGACS.The Navy’s 1990 POM and DOD'S 1991
                          budget request include the required funding for the proposed multiyear

Design Stability      l   The LCAC has a stable design, with initial design studies dating back to
                          1978. The first of 12      were produced under a 1981 contract and full

                          production began in 1987.
                      l   All operational test and evaluation requirements were successfully com-
                          pleted in 1987. The LCAChas been used during five major deployments
                          accumulating about 100 months of LCAC operation. The Navy does not
                          believe problems noted during these deployments were significant
                          enough to require major engineering or design changes. Further, NAVSEA
                          did not request research and development funds for the LCACsystem in
                          fiscal year 1990.

Conclusions               Although proposals for multiyear and annual contracts will not be eval-
                          uated until the autumn of 1990, the Navy’s cost and savings estimates
                          were derived from years of contract bid and actual cost data and appear
                          realistic. The LCAC design is stable and DOD had requested sufficient
                          funding for the proposed multiyear contract.

                          The current requirement of 107 LCACSis based on an outdated study, so
                          the number of LCACS needed to meet the Navy’s mission may be subject
                          to change.

                          The Navstar GPS is a joint service program that supports two major mis-
Navstar GPSBlock II       sions: navigation and nuclear detonation detection. The system is to pro-
Replenishment             vide precise, continuous, all-weather, three-dimensional position,
Satellites                velocity, time and navigation, and nuclear detonation information to
                          properly equipped air, land, sea, and space-based military and civilian

                          The military services have been jointly developing GPS since 1973; the
                          program is currently in the production and deployment phase. Between
                          February 1978 and October 1985,ll development phase (Block I) satel-
                          lites were bought from Rockwell International Corporation Satellite Sys-
                          tems Division-6 were still in orbit and operating as of May 1990. In

                          Page 29                                    GAO/NSlAJH&270BR   Multiyear   Contract
                     Our Wementi       of the Fkd  Year 1991
                     Multiyear Contract Candidatea

                     May 1983, a noncompetitive, firm fixed-price multiyear contract was
                     awarded to Rockwell for the production of 28 operational (Block II)
                     satellites. The last of the Block II satellites is scheduled to be delivered
                     in October 1992 and launched in May 1994. In June 1989, General Elec-
                     tric Company’s Astro-Space Division was competitively awarded a
                     fixed-price contract to produce 20 to 26 Block II replenishment (Block
                     IIR) satellites. This contract included options to exercise either multi-
                     year or annual contract provisions. Alternate annual production options
                     were included in the contract to provide a comparison with the same
                     production rate as the multiyear provisions. The multiyear provisions of
                     the Block IIR contract only apply to the first 20 satellites. The govern-
                     ment will provide most of the navigation and nuclear detonation detec-
                     tion components to General Electric for integration.

Proposed Multiyear   Term: Fiscal years 1992-96 (Advance procurement in fiscal years 1991-
Contract             96).

                     Type: Fixed-price to General Electric with an economic price adjustment

                     Estimated cost: $666.9 million.

                     Estimated savings: $137.7 million (19.8 percent) compared to estimated
                     annual contract costs.

                     Quantity: 20 satellites.

                     Procurement objective: 26 (Multiyear procurement would provide units
                     1 through 20).

                     Unfunded cancellation ceiling: $0.

                     Fiscal year 1991 funding: $179.2 million-RuT&E $ 26.6
                     Procurement                                      66.3
                     Advance procurement                              96.3
                     Total                                          $179.2

                     Page 20                                   GAO/NSL4D-9O-27OBR   Multiyear   Contract
                              Appendix II
                              Our Asaesnmentxa of the F&al Year 1991
                              Multiyear Contract Candldatea

Review Results

Savings Realism           l   The Navstar     GPSannual and multiyear contract cost estimates, as well as
                              the savings estimate, are based on firm fixed-price options in a June
                              1989 competitively awarded contract. The contract requires that the Air
                              Force exercise the multiyear production option on or before October 30,
                              1990. Air Force officials said the required award date could be extended
                              if a contract modification is negotiated with the prime contractor.
                          l   Based on the multiyear procurement options to the Block IIR contract,
                              satellite deliveries would begin in fiscal year 1995 and continue through
                              1999. If Block II operational and launch experience remains favorable,
                              Block IIR satellites may need to be stored because of the overlap
                              between the need for the last Block II and delivery of the first Block IIR.
                              The estimated savings could be slightly reduced because of these storage
                              costs. The Air Force estimates that annual storage costs would be
                              $200,000 per satellite, per year.      program officials stated that no

                              additional costs would be incurred for retesting the satellites and
                              repairing any deficiencies identified after removing them from storage
                              up to a period of 4 years. The contract requires General Electric to
                              assume responsibility for ensuring that each satellite is capable of being
                              stored with a shelf life of 4 years. Program officials said it would be
                              unlikely that any of the satellites would be in storage beyond 4 years.

Requirement and Funding   l The Block IIR satellites are required to maintain the      constellation of

Stability                   21 operational satellites and 3 on-orbit spares. This requirement was
                            validated by DOD’SJoint Requirements Oversight Council in January
                            1988. The Air Force launched the first Block II satellite in February
                            1989. As of May 1990, seven of the satellites had been successfully
                            launched. The Air Force plans to launch two more Block II satellites
                            before October 1990, when the multiyear production option for Block
                            IIR satellites must be exercised. The Air Force expects 24 Block II satel-
                            lites to be in orbit by May 1993.
                          . Navstar       program officials estimate that three Block IIR satellite

                            launches will be required beginning in fiscal year 1995 to replace failed
                            Block II satellites. The Air Force used statistical model projection based
                            on a constellation availability requirement of 0.98, expected operational
                            and launch failures, and a planned satellite design life of 7.5 years to
                            determine the 1995 launch requirement. The design life of 7.5 years is
                            equal to 6.1 years mean mission duration or the actual expected life.
                            However, if the Block II satellites experience no early operational or

                              Page 31                                        GAO/NSLAD-90-270BR   Multiyear   Contract
                       Appendix II                                                                   .
                       Oar Assessments of the Fiscal Year 1901
                       Multiyear Contract Candidates

                     launch failures and the first satellite operates to its full design life, no
                     Block IIR satellite would be needed until June 1997. GPSprogram office
                     officials stated that, based on their experience with the Block I satel-
                     lites, it is unrealistic to think there will be no satellite failures during the
                     design life of 7.5 years. Some of the past projections using this statistical
                     model have been conservative. However, in view of the long lead time to
                     procure satellites, GPSprogram officials would rather risk keeping satel-
                     lites in storage rather than not having a satellite available when
                   9 Past experience with the GPSBlock I development satellites has shown
                     that design life can be exceeded. For example, as of May 1990, the
                     Block I satellites had exceeded their design life of 5 years; lasting an
                     average of 6.6 years.
                   l The GPSsatellites are currently being launched by Delta II expendable
                     launch vehicles. The Medium Launch Vehicle program office has a cur-
                     rent contract with McDonnell Douglas to launch the first 18 Block II
                     satellites on the Delta II and negotiations are in process for a contract to
                     support the remaining Block II launches. Medium Launch Vehicle and
                     GPSprogram management directives both support the same number of
                     Block IIR launches from fiscal years 1995 through 2000.
                   l Funding for the proposed GFt3multiyear contract is included in DOD'S
                     fiscal year 1991 budget request and the Five-Year Defense Program. The
                     GPSProgram Executive Officer told us that GPShas a high funding pri-
                     ority within the Air Force and DOD,and he would expect funding sup-
                     port to be provided during the multiyear contract period.
                   . In fiscal year 1990, the Congress reduced the GPSprocurement budget by
                     $16.3 million, or about 23 percent of the total request, but did not specif-
                     ically object to the Rockwell Block II multiyear procurement. In addi-
                     tion, the Air Force withheld $6 million of the approved budget to be
                     used for other programs. To accommodate these reductions, among
                     other things, the GPSprogram office restructured the firm fixed-price
                     portion of the Rockwell Block II multiyear contract to delay funding
                     until future years.

Design Stability   l   Block IIR satellites represent a redesign of the Block II satellites to pro-
                       vide (1) improved reliability, supportability, and producibility,
                       (2) increased autonomy, and (3) increased survivability. The GR pro-
                       gram office believes the overall Block IIR design changes are minor
                       because an existing satellite bus, supporting subsystems, and qualified,
                       flight-proven components are being used in the Block IIR design.

                       Page 32                                    GAO/NSIAD-90-270BR   Multiyear   Contract
                  Appendix II
                  Our Aooeoomenta of the Fiscal Year 1991
                  Multiyear Contract Candidates

              . In 1988, Rockwell and General Electric were awarded contracts to
                develop the Block IIR satellite. General Electric was awarded the pro-
                duction contract in June 1989. Although General Electric has built other
                military satellites, it has no production experience with the Block IIR
              l General Electric is in the development phase of the contract. A critical
                design review is scheduled for August 1990, 2 months before a decision
                on the production options. Development and production will be concur-
                rent, About $48 million of the $106 million estimated development cost
                is currently scheduled for funding between fiscal years 1991 and 1992,
                during the early production period. GPS program officials said this devel-
                opment effort is low risk because development funds are for performing
                component qualification and developing satellite test equipment. The
                production funds are for long lead items and some component level

Conclusions       With a signed fixed-price contract for the GPS Block IIR procurement,
                  there is little uncertainty that the estimated multiyear contract savings
                  are realistic. However, savings could be slightly reduced if the Block II
                  satellites perform better than predicted and the Block IIR satellites are
                  produced before they are needed. In this case, the government would
                  incur storage costs. Funding support for the Block IIR procurement
                  appears to be adequate.

                  The stability of the Block IIR requirement depends on the number of
                  replacement satellites that will be needed to replenish the GPS constella-
                  tion. That will depend on how long the satellites will operate. The Air
                  Force contends that satellite life is difficult to predict accurately and,
                  accordingly, makes conservative estimates. The actual on-orbit experi-
                  ence with Block II satellites is less than 2 years. Block I satellites are
                  lasting longer than their design life. Because a solid data base does not
                  yet exist, it is uncertain whether the Block IIR satellites will be needed
                  in fiscal year 1996.

                  Design of the Block IIR satellite may be relatively stable; however, there
                  is some risk because the critical design review, scheduled for August
                  1990, is 2 months before the deadline for exercising the multiyear pro-
                  curement option provisions. Also, development will continue during the
                  early production phase of the contract, and no production history exists
                  for the redesigned Block IIR satellite.

                  Page 33                                   GAO/NSIADW-270BR   Multiyear   Contract
Appendix III

Objective,Scope,and Methodology

               The Chairman, Subcommittee on Defense, Senate Appropriations Com-
               mittee, asked us to review six of the seven systems proposed for multi-
               year procurement in DOD’S fiscal year 1991 budget. The objective of the
               review was to determine whether the proposed multiyear contracts met
               the criteria in Public Law 97-86. The criteria require that (1) the esti-
               mated contract costs and projected savings be realistic, (2) the minimum
               requirement (total quantity, production rate, and annual procurement
               rate) be expected to remain substantially unchanged, (3) there is a rea-
               sonable expectation that sufficient funding will be requested by DOD to
               carry out the contracts, and (4) the design be stable. Failing to meet one
               or more of the criteria may not necessarily mean that a system is an
               inappropriate candidate, but indicates areas of increased risk that must
               be weighed against the potential savings to determine whether multi-
               year procurement approval should be granted.

               We reviewed information on the six candidates in the January 1990 mul-
               tiyear contract justification package submitted by OSD to the Congress.
               We evaluated the support and underlying assumptions used by each
               program office to prepare its justification package and reviewed other
               documents related to each program’s cost, schedule, and performance.

               To evaluate the realism of estimated contract costs and projected sav-
               ings, we reviewed the cost estimating methodology, past procurement
               history, acquisition strategy, schedule for executing a multiyear con-
               tract, funding profiles, and present value analyses of estimated expendi-
               ture flows. We also calculated present values of the estimated
               expenditure flows using a different method than is used by DOD.

               To evaluate whether the minimum requirement was expected to remain
               substantially unchanged and whether DOD planned to request funding
               necessary to complete the multiyear contract, we evaluated the military
               service’s procurement objective, reviewed the historical and proposed
               rates of production, and requested each service and DOD to confirm that
               service and DOD plans for future budget years included sufficient funds
               to complete the multiyear contract program as proposed to the Con-
               gress. We also reviewed congressional actions on the six candidates.

               To evaluate whether the design of the candidates was stable, we deter-
               mined whether research and development funding and testing of the
               system were complete. We reviewed the history of production deliveries,
               test results, operational performance, and engineering changes in

               Page 34                                  GAO/NSL4D-90-270BR   Multiyear   Contract
    Appendi* m
    ObJecthe, Scope, and Methodology

    We performed our work at the following locations:

l Office of the Assistant Secretary of Defense (Comptroller), Washington,
l Headquarters, U.S. Army, Washington, D.C.
l Headquarters, U.S. Navy, Washington, DC.
l Headquarters, U.S. Air Force, Washington, DC.
. U.S. Army Aviation Systems Command, St. Louis, Missouri.
l U.S. Army Missile Command, Huntsville, Alabama.
. U.S. Army Tank-Automotive Command, Warren, Michigan.
. NAVSEA Command, Washington, D.C.
l U.S. Air Force Space Systems Command, Space Systems Division, Los
  Angeles, California.

    We discussed our findings with officials of OSD, the military services,
    and the program offices. Our work was performed from March through
    July 1990 in accordance with generally accepted government auditing

    Page 36                                  GAO/NSIADSO-270BR   Multiyear   Contract
Appe ndix IV

Major Contributors to This Report

                          Michael E. Motley, Associate Director
National Siecurity and    Kevin M. Tansev. Assistant Director
International Affairs     Charles W. Perdue, Senior Economist
Division, Washington,     ~~~a~d~
                               2:: 7~&~e~~r
                          James S. Moores, Evaluator-in-Charge
Kansas City Regional      Lawrence A. Dandridge, Site Senior
Office                    Lauri A. Bischof, Staff Member

                          Robert W. Herman, Regional Assignment Manager
Detroit Regional Office   Richard F. Seeburger, Site Senior
                          Donna Bright Howard, Staff Member

                          George C. Burdette, Regional Assignment Manager
Atlanta Regional          Don M. Howard, Site Senior
Office                    Lucille E. Bryant, Staff Member

                          Ambrose A. McGraw, Regional Assignment Manager
Los Angeles Regional      Benjamin H. Mannen, Site Senior

(aesosz)                  Page   36                               GAO/NSIAD-90-270BR   Multiyear   Contract
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