Rqwr t, t,o the Chairman, Subcommittee (III kgislat,ion and Nation&l Security, ( k)mmi We ()n Government Operations, I Iouso of’ Representatives e “ll._l. -l”-l__ll- -....- _.._- --- _- ._.~.. ._--. ..- ..__ --. .__..._____. II 1 No\‘~‘llllwr l!)!H) NAVY STRATEGIC FORCES Trident II (D-5) Missile Contract Incentives IR 142813 1 . ..-.-. -I,II”I,,,,,,.,...- -,._.-_ ~._ -~ , I GAO/NSIAI)-91-30 - United States GAO General Accounting Office Washington, D.C. 20648 National Security and International Affairs Division B-241399 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 million. 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 M-41999 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 B241399 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 E-241880 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 --l.-l -_.._- --.--. ^_-- .._.. - _______-_I . .I--.--..“._-..~.---.-~ Orclc~rirrg Ittfortnat.iott ‘I’hcb first. five copichs of each GAO report. arc fret. Adclitioual c*opifbs itrc $2 ctach. Orclc~rs should bet sent to the following ;t.(Idress, accotttpattied by a check or money order made out. to I.hch Superi titt~tttlc~til. of I)ocutnc~tits, when necessary. Orders fur 100 or ttiore copicbs to t)c: mailed to a single address are tlisc-outttc4 25 jbc~rcettt.. 113. (;c~ttc~ral Ac*coutttittg Office I’. 0. Box 6015 (;;tit,hc*rsburg, MI) 20!477
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)