Navy Strategic Forces: Trident II (D-5) Missile Contract Incentives

Published by the Government Accountability Office on 1990-11-14.

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

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                                                                                                           (III kgislat,ion and Nation&l Security,
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                                                                                                           NAVY STRATEGIC
                                                                                                          Trident II (D-5) Missile
                                                                                                          Contract Incentives


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I        GAO/NSIAI)-91-30                                     -
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   National Security and
                   International Affairs Division

                   November 14,199O

                   The Honorable John Conyers,Jr.
                   Chairman, Subcommitteeon
                     Legislation and National Security
                   Committee on Government Operations
                   Houseof Representatives
                   Dear Mr. Chairman:
                   This report respondsto your request that we provide information on the
                   Navy’s Trident II (D-6) missile contract’s reliability incentives and con-
                   tractor/government cost-sharing arrangements.You expressedinterest
                   after the Navy experiencedtwo D-6 missile failures in the first three
                   sea-launchedmissile flight tests.

                   The D-6 missile full-scale development and initial production contract is
Results in Brief   a cost-plus-incentive-feecontract that includes reliability and other per-
                   formance and program incentives. The reliability incentive was not
                   affected by the two failed sea-launcheddevelopment missile flight tests
                   becausethe tests were not made during the period designatedas the
                   basis for calculating incentive fees. The contractor has received a $112-
                   million interim payment out of a possible $138.6-million total reliability
                   incentive target.
                   The D-6 missile system development effort is almost complete, and the
                   contractor estimates the contract will exceedthe $3,839-million develop-
                   ment target cost by about $100 million. Theseoverruns were caused
                   largely by the need to design and incorporate changesto the missile
                   becauseof the failed sea-launchedtests. The government’s obligation is
                   $90 million of this overrun, and the contractor’s obligation is $10

                   The Navy’s Office of Strategic SystemsPrograms (SSP) is responsible for
Background         the development, acquisition, and maintenance of the Trident II system
                   and the Navy’s predecessorsubmarine-launchedballistic missile sys-
                   tems. Comparedto the Trident I system, the Trident II system is
                   designedto reach a target with improved accuracy and greater explo-
            Y      sive power.

                   Page 1                           GAO/NSLAD91-99 Trident II Missile Contract Incentives
D-6 Contract                              The D-6 missile program entered full-scale development in October 1983.
                                          LockheedMissiles & SpaceCompany, Inc., is the prime contractor, Lock-
                                          heed also was the prime contractor for the Navy’s previous submarine-
                                          launched ballistic missiles, beginning with the Polaris A-l missile.
                                          The D-6 missile contract with Lockheed covers full-scale development
                                          and initial production, development flight test analyses,and other tasks,
                                          as shown in table 1.
Table 1: D-S Mirdle Operational Syatema
Development and Production Contract       Dollars in millions
Component8                                                                            Taraet cost        Taroet fee     Taraet orice
                                          Missile system development                     $3,838.6            $331.6         $4,170.2
                                          Production hardware                               929.9              82.3          1,012.2
                                          Other hardware                                     49.5                4.3            53.8
                                          Strategic Weapons Facility, Atlantic
                                            activation                                       385.3             33.3            418.6
                                          Engineering support services                        48.7              4.2             52.9
                                          Submarine outfit and shiovard suooort               71.3              4.9             76.2
                                          Special program tasks                                18.1             1.6              19.7
                                          Special orders                                      20.5              1.5             22.0
                                          Reentry body processing                               6.1               .5              6.6
                                          System requirements evaluation                        5.6               .5              6.1
                                          Total                                           $5.373.6           $464.7         $5.838.3

D-5 Development Flight                    From January 1987 through January 1989,lQ D-6 land-launched devel-
Tests                                     opment missile flight tests were conducted.Onewas considereda “no
                                          test,” 2 were failures, 1 was rated as a partial success,and the
                                          remaining 15 tests were consideredsuccessesby the Navy.
                                          The 20th through 28th tests were sea-launcheddevelopment missile
                                          flight tests from Trident II submarines.This seriesof nine tests beganon
                                          March 21, 1989, with a failure. After analysis of the failure and correc-
                                          tive action, missile testing resumed on August 2, 1989, with the 21st
                                          development flight test, which the Navy considereda success.On
                                          August 16,1989, the 22nd development flight test occurred, which was
                                          a failure. After further analysis, design, and corrective action, missile
                                          testing again resumedon December4, 1989, with the successfullaunch
                                          of the 23rd development missile flight test. Subsequently,by February
                                          12, 1990, the missile test program recorded successesin all five of the
                                          remaining sea-launcheddevelopment missile flight tests. Also, the U.S.S.

                                          Page 2                              GAO/NSIAD-91-30 Trident II Missile Contract Incentives
                         Tennesseeand the U.S.S.Pennsylvania each successfully fired a Demon-
                         stration and Shakedown Operation1missile. Thesetests were conducted
                         before the Trident II system reached its initial operational capability at
                         the end of March 1990.

                         During 1987, the Congressreduced the Navy’s fiscal year 1988
D-5 Contract             Research,Development,Test and Evaluation appropriation request for
Modifications            the Trident II system by $60 million. In March 1988, SSP notified Lock-
                         heed that to accommodatethis reduction SSP intended to decreasethe
                         number of development missile flight tests from 30 to 28, deleting 1 mis-
                         sile each from the land-launched and the sea-launchedmissile flight test
                         series.SSP planned to modify the contract during the first quarter of
                         1989. Subsequently,the 2 missiles were transferred from the develop-
                         ment portion of the contract to the initial production portion, increasing
                         the initial production missile quantity from 62 to 64. Concurrently, the
                         fiscal year 1989 follow-on production contract’s planned missile quan-
                         tity was reduced from 66 to 64.
                         Lockheed submitted its initial proposal for the contract modification to
                         SSP on August 22,1988. SSP and Lockheed reached final agreementon
                         the modification of the incentive fee provisions on April 26, 1989. The
                         modification was executed on August 9, 1989.

                         In its August 22,1988, proposal, Lockheed requested a changeto the
Reliability Incentives   contract reliability provisions becauseof the loss of development data
                         from the two flight tests deleted by the modification. Specifically, Lock-
                         heed proposed to reduce the final missile reliability target by 2 per-
                         centagepoints. SSP found a decreasein the missile reliability target
                         unacceptable and countered with a proposal to delay the start of the
                         reliability measurementperiod from the 21st to the 23rd development
                         flight test. SSP’S proposal was incorporated in the contract modification.
                         The 20th development missile flight test, which failed, was never
                         planned to be consideredin calculating the contract reliability incentive.
                         As a result of the contract modification, the successful21st missile
                         flight test, which occurred prior to the modification being executed, and
                         the failed 22nd missile flight test, made shortly after the modification
                         ‘A Demonstration and Shakedown Operation is a test conducted before submarine deployment to
                         verify the proper functioning and readiness of the strategic weapon system and the submarine by the
                         crew. Missiles used in these tests are production missiles with test instrumentation replacing the mis-
                         slles’ warheads.

                         Page 3                                    GAO/NSLAD-91-30 Trident II Missile Contract Incentivee

was executed,were not included in the reliability incentive measure-
ment period. If these two tests had been included in the measurement
period, the Navy would have withheld about $23 million from Lock-
heed’s first interim incentive fee payment.
The contract initially required Lockheed to deliver 30 development mis-
siles and 62 production missiles to the Navy. It included performance
incentives for reliability, accuracy, and range and incentives for quality
and other program parameters. Dependingon the contractor’s perform-
ance,the incentive fees are either positive (raising the target fee for per-
formance exceedingexpectations) or negative (lowering the target fee
for failing to meet expectations). SSP structured the contract to place the
greatest emphasison the reliability incentive, which comprises75 per-
cent of the performance and program incentive fee pool. The reliability
fee ranges from a positive $138.6 million to a negative $138.6 million.
The contract’s missile reliability incentive is basedon 50 missile flight
tests to be made over a measurementperiod that begins during sea-
launched development missile flight tests and continues with Demon-
stration and Shakedown Operation tests and evaluation tests2 These
tests are expectedto be conducted during the first 3 years of the D-S’s
deployment. The contractor may be paid the maximum reliability fee
even if two or three failures occur during the measurementperiod.
Therefore, an early missile failure may not ultimately result in any
reduction in the total reliability fee paid.
The contract provides for an interim incentive payment to Lockheed
after the completion of the measurementperiod’s first six missile flights
and other interim payments as the testing progresses.Rather than being
evenly distributed, the interim payments are structured to ensure that
the Navy receivesa highly reliable product early. Thus, if missile relia-
bility is determined to be sufficiently above contract expectations, Lock-
heed could earn the maximum reliability fee in the secondor third
interim payment payable after 12 or 18 missile flight tests. If reliability
declines later, however, Lockheed is liable to repay a portion of or all
the reliability fees already received, or in the worst case,lose additional
fees. According to the contract’s provisions, Lockheed requested an
interim incentive payment of about $112 million, which SSP approved in
June 1990.

2Evaluation tests are performed to ensure reliability confidence levels.

Page 4                                    GAO/NSIAD-91-99 Trident II Missile Contract Incentives

                  Cost-sharingof variances over or under the contract’s target cost add to
Cost Incentives   or take away from the contract’s negotiated target fee. Under the devel-
                  opment portion of the D-5 contract, the government’s obligation is 90
                  percent of cost overruns above the target cost. Lockheed’sobligation is
                  the remaining 10 percent, which reducesits target fee. In caseof cost
                  underruns, Lockheed earns 10 percent, increasing its total contract fee
                  above the negotiated target fee. For the contract’s initial production por-
                  tion, Lockheed’sobligation is 30 percent of costs over the target cost,
                  and the government’s obligation is 70 percent. Lockheed can also earn
                  30 percent of under-runs.
                  According to Lockheed’scost performance report for October 1983
                  through June 1990, the missile development is essentially complete, and
                  Lockheed estimates that the contract will be about $100 million over the
                  $3,839-million development target cost at completion. Lockheed’sshare
                  of the overrun is about $10 million, which would reduce its development
                  target fee from $332 million to $322 million. For initial production,
                  Lockheed estimates it will earn at completion an additional $3 million
                  from an estimated $ lo-million underrun of the $930-million target cost.
                  That would raise Lockheed’sproduction target fee to $85 million,

                  We obtained and analyzed information from (1) SSP, Arlington, Virginia,
Scopeand          and (2) Lockheed.We reviewed documents relative to the D-6 missile
Methodology       contract terms, conditions, and modifications. These documents included
                  a chronology of events leading to the contract modification of the evalu-
                  ation period for reliability incentives. We also reviewed Lockheed’s cost
                  performance reports on the D-5 contract and SSP’S comments on the cost
                  reports. We interviewed SSP’S technical director; deputy technical
                  director; the heads of the Missile Branch, the Missile Engineering Sec-
                  tion, and the Contracts Office; the cognizant contracting officer; and
                  officials in the Program Evaluation and ResourcesBranchesto obtain
                  information on the contractor’s performance relative to the contract’s
                  incentives and cost-sharing arrangements.
                  We conducted our review from January to October 1990 in accordance
                  with generally acceptedgovernment auditing standards. As requested,
                  we did not obtain official agencycomments.

                  As requested,we plan no further distribution of this report until 30
                  days after its issue date, unless you publicly announceits contents ear-
                  lier. At that time, we will send copiesto the Secretariesof Defenseand

                  Page 5                        GAO/NSIAD91-39 Trident II Missile Contract Incentives

          the Navy; appropriate congressionalcommittees; and other interested
          parties. We will make copies available to others upon request.

          Brad Hathaway, Associate Director; Bernard Easton, Assistant Director;
          and Fred Fenstermaker, Evaluator-in-Charge, were major contributors
          to this report. If you or your staff have questions on this report, please
          call me on (202) 2756604.
          Sincerely yours,

          Martin M Ferber
          Director, Navy Issues

(mrael)   Page 6                        GAO/NSIAD91-99 Trident JI Missile Contract Incentives
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