Index

Defense Acquisitions: Howitzer Program Experiencing Cost Increases and
Schedule Delays (Letter Report, 07/28/2000, GAO/NSIAD-00-182).

Pursuant to a congressional request, GAO provided information on the
Marine Corps' development of the 155mm lightweight howitzer focusing,
on: (1) whether the program is on schedule; (2) whether costs have
increased and if there is sufficient funding; (3) what the extent of
design changes is and how these changes have affected system testing;
and (4) what effect the exclusive production of the howitzer by a
foreign contractor could have on the Marine Corps' and Army's ability to
maintain the weapon following its procurement, particularly during
wartime.

GAO noted that: (1) the lightweight howitzer program has experienced
several schedule delays, and schedules may not provide the Department of
Defense (DOD) sufficient information by March 2002 to make an informed
decision to begin full-rate production; (2) there has been significant
cost growth in the lightweight howitzer prime development contract; (3)
this cost growth represents a significant part of the total $142.6
million development costs; (4) in June 2000, the program office
projected the cost of the lightweight howitzer prime development
contract to be about $43.4 million--$9.9 million over the contract
target cost; (5) this estimate prompted BAE SYSTEMS to propose
restructuring the development contract from a cost-plus-incentive-fee
arrangement to a firm fixed-price arrangement, under which the company
would be responsible for costs exceeding a new presumed higher fixed
price, which would be negotiated; (6) in addition, projected costs for
producing the lightweight howitzer cannon barrels for the Marine Corps
have increased; (7) the Marine Corps is procuring the barrels from the
Army's Watervliet Arsenal, which is required to include all costs,
including overhead, in prices charged to non-Army customers; (8) because
of increased Watervliet overhead rates, as of March 2000, unit cost
estimates for the barrels for the Marine Corps had more than
doubled--from $106,000 to over $260,000--since the original 1996 cost
estimate; (9) by May 2000, DOD cost cutting measures had reduced these
overhead estimates, but the Marine Corps still expects costs to exceed
its original budget by $20.5 million; (10) several design changes have
been made to the lightweight howitzer--however, testing of the modified
weapon will be delayed by the late delivery of the howitzers to the
program; (11) the program office is adjusting its test plans to complete
the testing needed to verify system performance and initial operational
capabilities before the production decision; (12) the effect of
production by a foreign contractor on the Marine Corps' and Army's
ability to support the howitzer cannot be assessed until the contractor
determines where production models will be built; and (13) to provide
assurances that the howitzer can be supported in wartime, program
officials are requiring BAE SYSTEMS to provide a plan to manufacture 100
percent of the howitzer's parts in the United States.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-182
     TITLE:  Defense Acquisitions: Howitzer Program Experiencing Cost
	     Increases and Schedule Delays
      DATE:  07/28/2000
   SUBJECT:  Weapons systems
	     Military cost control
	     Military procurement
	     Schedule slippages
	     Cost overruns
	     Department of Defense contractors
	     Defense capabilities
	     Operational testing
	     Procurement planning
IDENTIFIER:  155mm Howitzer
	     Army Working Capital Fund
	     Navy Milestone II Program

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GAO/NSIAD-00-182

Appendix I: Lightweight Howitzer Fiscal Year 2001 Budget
Request

24

Appendix II: Comments From the Department of Defense

27

Table 1: Key Program Events 8

Table 2: Changes in Schedule for Delivery of Eight Developmental Lightweight
Howitzers (as of May 2000) 9

Table 3: Lightweight Howitzer Fiscal Year 2001 Defense Budget
Request, Schedule for Production Quantities, and
Revised Marine Corps Procurement Schedule 25

Figure 1: Lightweight 155 mm Howitzer Manufacturing Program
Events 15

DOD Department of Defense

National Security and
International Affairs Division

B-285565

July 28, 2000

The Honorable Richard J. Durbin
The Honorable Peter G. Fitzgerald
The Honorable Charles E. Grassley
The Honorable Tom Harkin
United States Senate

The Honorable Lane Evans
The Honorable James A. Leach
House of Representatives

This report responds to your January 31, 2000, request concerning the Marine
Corps' development of the 155 mm lightweight howitzer. The lightweight
howitzer, which will be procured for use by both the Marine Corps and the
U.S. Army, is intended to provide greater mobility and improved operational
characteristics while retaining the same range and accuracy as the current
155 mm howitzer, the M-198. The Marine Corps entered into a
cost-plus-incentive-fee development contract for the howitzer in March 1997.
The contract has a target price of $33.5 million and requires the
development and manufacturing of eight howitzers. The program is currently
in the engineering and manufacturing development phase,1 and the Department
of Defense currently plans to make a decision to go to full-rate production
in March 2002.

A British company, BAE SYSTEMS,2 is the lightweight howitzer prime
contractor; the cannon barrels are being produced under a separate contract
at the U.S. Army's Watervleit Arsenal and will be provided as
government-furnished equipment. Although contract provisions do not require
it to do so, BAE SYSTEMS plans to subcontract 70 percent of the howitzer's
production to subcontractors in the United States. On April 14, 2000, we
sent you our response to your concerns about compliance with the Arsenal
Act3 and congressional direction that the Department of Defense prepare a
plan to include the Army's Rock Island Arsenal in the lightweight howitzer
program. At that time, we also provided preliminary information on the
howitzer's development cost, schedule, and performance. This report provides
updated information in response to your request that we examine (1) whether
the program is on schedule;
(2) whether costs have increased and if there is sufficient funding; (3)
what the extent of design changes is and how these changes have affected
system testing; and (4) what effect the exclusive production of the howitzer
by a foreign contractor could have on the Marine Corps' and Army's ability
to maintain the weapon following its procurement, particularly during
wartime.

The lightweight howitzer program has experienced several schedule delays,
and current schedules may not provide the Department of Defense sufficient
information by March 2002 to make an informed decision to begin full-rate
production. Following a change in prime contractors, the contract was
restructured in 1998, and the production decision was delayed 21 months to
September 2001. Manufacturing of the development howitzers has begun at the
prime contractor's plant in Great Britain, but manufacturing problems have
caused schedule delays in the delivery of the eight development models.
These delays caused corresponding delays in the developmental test program,
and in June 2000, the production decision was again delayed an additional 6
months (to March 2002). Further, the contractor was unsuccessful in
selecting U.S. subcontractors by August 1999 as scheduled, and as of June
2000, selections still had not yet been made to produce the howitzer. Even
with this latest production decision delay, the program may not have
sufficient time to move the howitzer's production from Great Britain to the
United States and adequately demonstrate manufacturing processes and
management controls in the United States before the decision date. Our
reviews of commercial best practices have shown that the inability to
validate the production processes and management controls before a
production decision constitutes a cost and schedule risk that successful
commercial firms consider unacceptable.

There has been significant cost growth in the lightweight howitzer prime
development contract. This cost growth represents a significant part of the
total $142.6 million development costs. In June 2000, the program office
projected the cost of the lightweight howitzer prime development contract to
be about $43.4 million--$9.9 million over the contract target cost. This
estimate prompted BAE SYSTEMS to propose restructuring the development
contract from a cost-plus-incentive-fee arrangement to a firm fixed-price
arrangement, under which the company would be responsible for costs
exceeding a new presumed higher fixed price, which would be negotiated. As
of June 2000, the program office was discussing this proposal with Defense
officials and negotiating specific contract provisions with the contractor.
In addition, projected costs for producing the lightweight howitzer cannon
barrels for the Marine Corps have increased. The Marine Corps is procuring
the barrels from the Army's Watervliet Arsenal, which is required to include
all costs, including overhead, in prices charged to non-Army customers.
Because of increased Watervliet overhead rates, as of March 2000, unit cost
estimates for the barrels for the Marine Corps had more than doubled--from
$106,000 to over $260,000--since the original 1996 cost estimate. By May
2000, Department of Defense cost cutting measures had reduced these overhead
estimates, but the Marine Corps still expects costs to exceed its original
budget by $20.5 million.

Several design changes have been made to the lightweight howitzer; however,
testing of the modified weapon will be delayed by the late delivery of the
howitzers to the test program. Based on the results of tests conducted on
the lightweight howitzer prototype since 1996, design modifications have
been made to strengthen the assembly that holds the cannon barrel and to
enlarge the spades used to anchor the weapon securely against recoil.
However, testing of the intended production configuration that incorporates
these changes will not be possible until the third of eight development
units is manufactured and delivered. The third unit, originally scheduled
for delivery in June 2000, is now scheduled for delivery in November 2000.
The program office is adjusting its test plans to complete the testing
needed to verify system performance and initial operational capabilities
before the production decision.

The effect of production by a foreign contractor on the Marine Corps' and
Army's ability to support the howitzer cannot be assessed until the
contractor determines where production models will be built. There is no
contract requirement to produce the howitzer in the United States; however,
if subcontractor costs can be held within the production contract's ceiling
price, BAE SYSTEMS said that it plans to subcontract
70 percent of the howitzers' production in the United States. To provide
assurances that the howitzer can be supported in wartime, program officials
are requiring the company to provide a plan to manufacture
100 percent of the howitzer's parts in the United States.

The Department of Defense had no comments on the report, but provided
technical clarifications and comments, which we incorporated as appropriate.

The Department of Defense (DOD) is acquiring the lightweight 155 mm howitzer
to replace its M-198 towed howitzer. The new howitzer will be a lighter,
more transportable, and mobile weapon for strategic and tactical movements.
Weapon performance requirements include a maximum weight of 9,000 pounds,
reduced time to place the weapon in a firing position, and increased rate of
fire compared with current weapons. The program is currently scheduled to
complete development in March 2002 and begin production under an option in
the development contract. Current plans call for the procurement of 450
lightweight howitzers for the Marine Corps and 273 for the Army. However,
Army quantities could rise to
387 under new force structure plans now being finalized. Great Britain and
Italy intend to procure about 70 lightweight howitzers each.

The original engineering and manufacturing development contract was signed
with Cadillac Gage Textron, Inc., in March 1997. Textron, however, had
extensive management problems, and in December 1998, Vickers Shipbuilding
and Engineering Limited--which had been responsible for design of the
howitzer under Textron--took over responsibilities as the prime contractor.
Renegotiating the development contract required establishing a new program
baseline schedule and increased overall program costs by about $43 million,
to a total of $1,129.9 million.

BAE SYSTEMS acquired Vickers Shipbuilding in November 1999 and took over as
the prime development contractor. BAE SYSTEMS is developing the lightweight
howitzer under a cost-plus-incentive-fee contract with a current target
price of $33.5 million. This contract requires the development and
manufacturing of eight howitzers and established ceiling prices for the
first two production options. Under the contract, BAE SYSTEMS receives a
6-percent fee if it meets the target cost and up to $900,000 in additional
fees if the final cost is below the target. If the target cost is exceeded,
the contractor pays 30 percent of the increased cost. Initially, the
30-percent share is deducted from the contractor's fee until the fee is
gone, at which point the contractor is liable for up to $5 million of the
final cost. The contract also provides for annual award fees based on
performance in specific technical areas designated by program management.

The development contract also includes long lead procurement and production
options for the first (70 units) and second (120 units) production lots.
Each option has a unit target price and a unit ceiling price,4 with a unit
price reduction of about 12 percent for the second lot. If BAE SYSTEMS
exceeds the ceiling price for these lots, the company bears full
responsibility for the additional cost.

The lightweight howitzer cannon barrel is to be produced under separate
contract at the U.S. Army Watervliet Arsenal and will be provided to BAE
SYSTEMS as government-furnished equipment. The development program is funded
and led by the Marine Corps through the lightweight howitzer program office,
which manages both the BAE SYSTEMS and Watervliet contracts for the
government. The lightweight howitzer will also incorporate the towed
artillery digitization upgrade, which is a precise location and targeting
system being developed by the Army. The Army will provide this upgrade as
government-furnished equipment and assume program management
responsibilities for the lightweight howitzer program upon completion of
deliveries to the Marine Corps.

The Army's two manufacturing arsenals, Watervliet, New York, and Rock
Island, Illinois, were established in the 1800s to provide a primary
manufacturing source for the military's guns and other war-fighting
equipment. In 1920, the Congress enacted the Arsenal Act (10 U.S.C. 4532),
which requires the Army to have its supplies made in U.S. factories or
arsenals provided they can produce the supplies on an economical basis. Use
of the arsenals has declined significantly since World War II because the
private sector has assumed an increasingly larger share of this work. In
November 1998, we reported that since the end of the Cold War, workloads and
employment at these two remaining Army arsenals had declined substantially,
and operating costs had escalated as fixed costs were spread among
increasingly smaller amounts of workload.5

When Vickers assumed prime contractor responsibility for the program in
December 1998, the program office established a new baseline schedule for
the program. Under this schedule, the decision to begin the production phase
of the program (Milestone III) was delayed 21 months, from December 1999 to
September 2001. Also, the initial operational capability--the availability
of the first Marine Corps unit that is equipped and trained to operate the
howitzer--was delayed 20 months, from March 2002 to November 2003. The
December 1998 schedule delays for major program events are shown in table 1.

 Program event              Original        December 1998     Months
                            baseline        baseline          delayed
 First test howitzer
 delivery                   June 1998       May 2000          22
 Production approval
 (Milestone III review)     Dec. 1999       Sept. 2001        21
 Production contract award  Dec. 1999       Oct. 2001         22
 First production howitzer  Mar. 2001       Jan. 2003         22
 Marine Corps initial
 operational capability     Mar. 2002       Nov. 2003         20
 Army initial operational
 capability                 Mar. 2005       Mar. 2005         0

Source: Lightweight howitzer program office.

In August 1999, BAE SYSTEMS prepared a plan to make up for delays that had
occurred at that time, but the company was unable to keep up the pace needed
to maintain the schedules, and delays continued. Fabrication of eight
development howitzers is underway in Great Britain, but due to manufacturing
difficulties, scheduled deliveries of development howitzers will be delayed
up to 7 months.

In February 2000, an inspection revealed manufacturing quality problems with
the first developmental howitzer. The primary source of the problems was in
welding and fabricating critical titanium components. To reduce the
howitzer's weight, the basic structural elements are made of titanium. As a
result, extensive use of precision, high-technology titanium welding
techniques will be required in the manufacturing process. Following
engineering review, BAE SYSTEMS revised its manufacturing procedures and
tooling to incorporate necessary changes, and delivery schedules were
revised. Fixing these problems will require reworking the welding process
and will delay other manufacturing activities. Program officials said that
they are learning important lessons regarding welding techniques, heat
treatment, and the use of fixtures in the howitzer's production. In May
2000, the contractor and program office agreed to revise the schedule for
delivering eight developmental howitzers. (See table 2.)

 Developmental howitzer   Original         Revised         Calendar months
 (unit number)            delivery date    delivery date   delayed
 1                        05/00            06/00           1
 2                        05/00            10/00           5
 3                        06/00            11/00           5
 4                        06/00            01/01           7
 5                        10/00            02/01           4
 6                        10/00            02/01           4
 7                        10/00            02/01           4
 8                        10/00            02/01           4

Source: Lightweight howitzer program office.

The revised schedule shows the last four lightweight howitzers−50
percent of the development effort--are to be delivered on the same date.
Program officials said the delivery date shown represents the last day that
these four howitzers can be made available to the government to support
preparations for operational testing. Program officials told us that they
anticipate that final assembly and integration of the four howitzers will
actually be staggered by a few weeks. They expect initial test firings of
each weapon by the contractor to occur in January and February 2001, prior
to delivery to the government.

The delays in deliveries of developmental lightweight howitzers necessitated
a delay in the production decision to accommodate completion of
developmental and operational testing. The production decision was initially
delayed 3 months, but the requirements for cold weather testing required an
additional 3-month delay to March 2002. First production delivery is
currently scheduled for January 2003. Other program milestones remain the
same.

BAE SYSTEMS plans to subcontract up to 70 percent of its lightweight
howitzer production work at U.S. facilities. In 1999, the contractor
solicited bids from U.S. contractors with the intention of selecting U.S.
participants by August 1999. Bids were received from the U.S. Army Rock
Island Arsenal and a private contractor, but both were rejected because the
proposed costs were too high for BAE SYSTEMS to meet the production contract
ceiling price. BAE SYSTEMS has restructured the content of the subcontractor
packages and has again solicited bids from U.S. contractors.

On April 25, 2000, BAE SYSTEMS asked U.S. companies to indicate their
interest in the lightweight howitzer production program by May 10, 2000. The
company sought statements of interest for the manufacture of subassemblies
and for final assembly and testing of the completed howitzer for delivery to
the government. A total of 51 contractors, including Rock Island Arsenal,
indicated interest in some or all of the lightweight howitzer subcontracting
packages, and BAE SYSTEMS identified 19 of these as competent to meet the
requirements. BAE SYSTEMS intends to select the subcontractors and complete
negotiations by November 2000.

BAE SYSTEMS' decision to select U.S. subcontractors for lightweight howitzer
production is contingent on holding costs to the production ceiling
contained in the development contract options. If U.S. manufacturers' prices
do not meet these constraints, BAE SYSTEMS may retain all of the
manufacturing and assembly effort in Great Britain. Program officials stated
that on the basis of the costs of U.S. suppliers during the 1999
solicitation (prior to the addition of contractor overhead rates), BAE
SYSTEMS is confident that production contracts can be obtained in the United
States.

If BAE SYSTEMS completes selection of U.S. subcontractors for production of
the lightweight howitzer in November 2000, there will be less than 18 months
to meet the numerous challenges involved in moving and establishing
manufacturing processes for the production units in the United States.
Although manufacturing the development prototypes is underway in Great
Britain, different facilities, personnel, and tooling are planned for the
production units. Manufacturing processes established in a single location
during development may have to be divided and dispersed to multiple
facilities prior to the start of production. Manufacturing drawings and
specifications will have to be converted to U.S. measurements and
producibility standards. Finally, the howitzers manufactured at new
facilities must demonstrate that they meet the same performance standards as
the prototypes used in the development and initial operational testing to
verify system performance.

If U.S. subcontractors are selected, the lightweight howitzer program office
must avoid the manufacturing and schedule problems experienced in an earlier
attempt to produce a British-designed howitzer in the United States. In
1984, DOD selected a 105 mm lightweight howitzer designed by Royal Ordnance,
a British contractor, to be built for the Army by the Watervliet and Rock
Island Arsenals. Although the howitzer, designated the M-119, was being
produced in Great Britain, converting the British design, metric
measurements, and manufacturing approach to U.S. measurements and DOD's
rigorous producibility standards cost about $30 million and caused a 2-year
delay in the original production schedule.

M-119 manufacturing problems were caused principally by the British
technical data package6 supplied to the arsenals because it did not meet DOD
producibility standards. Specific problems included inadequate design
drawings and conversion of metric measurements, as well as problems with the
British approach of tailoring (hand fitting) parts to each weapon during
production, rather than the U.S. approach of having standard parts produced
for all weapons. These problems required time-consuming reengineering to
meet U.S. requirements. Program officials stated that to prevent these
problems on the 155 mm lightweight howitzer, they have required BAE SYSTEMS
to provide an "Americanized" technical data package (including drawings to
U.S. non-metric standards) as part of the development contract. They are
also using private U.S. contractors and Rock Island Arsenal officials to
review technical data for producibility.

While some U.S. subcontractor tasks sought by BAE SYSTEMS may require little
preparation, others may require extensive production preparation. For
example, titanium welding is a precision, high-technology procedure that is
critical to the lightweight howitzer manufacturing process. During
development, BAE SYSTEMS is doing this welding by hand, without the
mechanical guides and controls that experts say will be needed for higher
rate production manufacturing. Expert consultants from the Edison Welding
Institute estimate that establishing the processes, tooling, and expertise
required for production rate capability in a U.S. plant will take
18 to 24 months before work on the first production article can be started
if the contractor has no previous titanium welding experience. Program
officials stated that BAE SYSTEMS is considering only firms with titanium
welding experience for this portion of the manufacturing effort; this should
reduce the preparation time needed.

Government funds to finance production preparations required for the new
U.S. subcontractors will not be made available to the prime contractor until
the production contract is awarded; this is not scheduled until March 2002.
BAE SYSTEMS said that it intends to provide up to $10 million of its own
money in advance of award of the production contract to finance production
start-up activities by the selected subcontractors to ensure that production
manufacturing capability is available on schedule. BAE SYSTEMS has proposed
to use this money to fund the manufacture of three to five
production-configured lightweight howitzers as a means of initiating and
qualifying subcontractor operations. Once completed and tested to ensure
compliance with performance standards and contractual requirements, these
weapons could be delivered to the government as production items.
Contractual provisions for this arrangement would be negotiated and
incorporated in the development contract or formalized through a Memorandum
of Understanding between the program office and BAE SYSTEMS, according to
program officials.

Program officials stated that the agreement currently being negotiated with
BAE SYSTEMS involves funding of three advanced production weapons. Transfer
of manufacturing would begin upon completion of subcontractor selection in
November of 2000 and would continue until July 2001, when fabrication of the
first advanced production (AP-1) howitzer is begun. The three advanced
production weapons will be completed in December 2001, April 2002, and June
2002 (see fig. 1). Following their completion, these weapons would be used
for contractor testing.

Validating the manufacturing processes and management controls needed to
manufacture hardware items that conform consistently is a critical objective
of the development phase. A successful production readiness review7 to
document completion of this activity is a primary criterion for approval of
the lightweight howitzer's production. To ensure that all key manufacturing
processes are under control so that quality, volume, and cost of the output
is proven and acceptable, the best commercial firms accumulate the necessary
knowledge of actual processes and eliminate unknowns well ahead of
production. Defense guidance states that it is important that physical
facilities, personnel, and manufacturing documentation be evaluated during
this review.

As shown in figure 1, the extent of U.S. manufacturing start-up prior to the
production decision is highly dependent on BAE SYSTEMS advanced funding. The
production readiness review will start in April 2001, 2 months after the
scheduled completion of development manufacturing. The review will be
completed in January 2002, 2 months before the scheduled production
decision. The only manufacturing activity that will be ongoing during the
production readiness review would be the advanced production, if funded by
BAE SYSTEMS. If BAE SYSTEMS funds advanced production and completes it as
the program office currently expects, the first advanced production
lightweight howitzer would be completed and tested by the contractor, but
not by the government, by March 2002, the production decision date.

It is uncertain, however, to what extent the production readiness review
will be able to validate lightweight howitzer production processes and
controls before the production decision is made. To date, subcontractor
selection has not been completed, renegotiation of the development contract
is still in process, and specifics of the advanced production program are
unknown. Until manufacturing arrangements are known, subcontractor processes
are defined and integrated, and management and quality controls are in
place, the program office cannot demonstrate lightweight howitzer production
readiness.

For example, contractor management controls, subcontractor manufacturing
processes, and quality control systems will be important to the lightweight
howitzer production effort, particularly in the early stages, when BAE
SYSTEMS integrates the multiple U.S. production efforts. Development
manufacturing was conducted in one location in Great Britain, but must be
split up to multiple locations for U.S. participation and then reintegrated
to provide a single production effort. Defining the individual processes,
setting up and proving multiple U.S. manufacturing efforts, and integrating
the individual management control systems to provide a reliable information
and control system prior to the production decision will be a major
challenge.

Major events in the lightweight howitzer manufacturing program plans are
shown in figure 1.

Source: Lightweight howitzer program office.

Production Decision

Under DOD's acquisition process, the production decision represents final
permission to produce, deploy, and support a weapon system and provides
approval for award of a production contract. In our past work on the
application of commercial best practices to DOD weapon acquisitions, we have
pointed out the need for the Department to obtain better knowledge of the
producibility of new products and better control of manufacturing processes
before initiating production.8 The Department traditionally has not had the
same level of knowledge commercial firms generally require before starting
production and, as a result, has experienced turbulence in outcomes as it
moves to production. We have also pointed out that successful commercial
programs consider that, without this knowledge, they face an unacceptable
risk of delays and increased costs.

A production review is a critical part of assessing readiness for
production. However, production approval and award of a production contract
based on review of plans and in-process manufacturing preparations, as in
the case of the lightweight howitzer, represents a substantially higher risk
than actions based on established performance. Our work on commercial best
practices has shown that successful commercial firms consider not having
knowledge of the producibility of a new product and control of manufacturing
processes prior to initiating production an unacceptable risk.

The lightweight howitzer program office is currently engaged in efforts to
manage significant cost growth in both the development contract and the
production of the government-furnished cannon barrels. The program office
projects that the BAE SYSTEMS development contract will overrun its current
$33.5-million target price by about $10 million, or 30 percent, and is
considering a contractor proposal to renegotiate the contract. At the same
time, projected increases in the cost of cannon barrels for the Marine
Corps' production program has resulted in a $20.5-million deficit in Marine
Corps funding.

As of June 2000, the lightweight howitzer program office projected that the
development contract will cost $43.4 million, $9.9 million over the target
price. Under contract provisions, 30 percent of this cost growth, or
$3 million, is the responsibility of BAE SYSTEMS ($1.8 million loss-of-fee
plus $1.2 million in increased costs = $3 million).9 The contractor's May
2000 proposal to renegotiate this contract would increase the cost to the
government, but BAE SYSTEMS would be responsible for 100 percent of any
costs that exceed the new contract price. The program office is currently
discussing renegotiation of the development contract with Defense
procurement officials and is negotiating specific contract modifications
with BAE SYSTEMS officials. There would be no change in the price of the
howitzer's production options.

DOD has also reduced a projected shortfall in the Marine Corps funds
budgeted for the lightweight howitzer production. The shortfall was caused
by an increase in cost for the government-furnished cannon barrels. The
cannon barrels are being produced under a separate contract with the U.S.
Army Watervliet Arsenal. Under Army Working Capital Fund provisions,
overhead rates at Watervliet Arsenal must be included in the price of cannon
barrels manufactured for the Marine Corps.10 As a result of increased
overhead costs, Watervliet Arsenal's estimated cost to the Marine Corps for
cannon barrels more than doubled, from $106,000 to more than $260,000, since
the original program estimate.

Increased cannon barrel costs threatened to increase the cost of the Marine
Corps lightweight howitzer production program to $70 million beyond the
amount budgeted by the Marine Corps. To reduce these costs, in March 2000,
the lightweight howitzer program office explored alternative cannon barrel
procurement approaches. The program office requested cost information and
manufacturing data on cannon production from Watervliet Arsenal and two
commercial contractors.

In its proposal, Watervliet Arsenal outlined a program to reduce personnel,
decrease excess facilities, and control costs. In addition, Watervliet has
received new contracts that have increased its projected business base and
will further reduce overhead charges to the lightweight howitzer program.
Reduced overhead projections lowered the estimated cost to about $183,600
per cannon barrel. This cost, while still significantly higher than the
original estimate, would lower the Marine Corps' budget deficit by about 70
percent to $20.5 million. Army officials stated that other factors could
further reduce the projected Marine Corps funding deficit. These include
additional efforts currently being considered to reduce facility, personnel,
and other operating costs at Watervliet; future increases in business at the
arsenal; and an acceleration of the Army's lightweight howitzer production.

Defense cost experts and lightweight howitzer program office personnel
analyzed the three proposals to determine the validity of the cost data and
the potential program risk involved in each proposal. In early May 2000,
Navy acquisition officials responsible for the Marine Corps procurement
budget decided to maintain howitzer production at the Watervliet Arsenal. At
the same time, the Marine Corps has proposed slowing its scheduled
production delivery rate from that shown in the fiscal year 2001 budget. On
the basis of this delivery schedule, the Army and the Navy finalized an
agreement on lightweight howitzer cannon barrel costs on June 14, 2000.
Under this agreement, the Army committed to an average fixed price of
$183,600 per barrel to the Marine Corps. The Army would fund any higher cost
or retain any savings, depending on the actual cost of cannon barrels when
delivered.

Details of the fiscal year 2001 lightweight howitzer congressional budget
request and the proposed revised Marine Corps delivery schedule are in
appendix I.

Delays in lightweight howitzer deliveries to the test program will reduce
the time available to test design changes made to the prototype design. The
impact of these delays will not be known until the program office realigns
its test program. Testing prior to the production decision must successfully
demonstrate that the lightweight howitzer design to be built in the
production program will comply with performance specifications and meet
mission needs. Recent delivery schedule changes caused the Marine Corps to
extend the test program by 6 months to accommodate performance testing in a
cold-weather environment. This extension required a corresponding delay in
the Milestone III production decision to March 2002. The program office is
now adjusting its test plans to complete the testing needed to verify system
performance and initial operational capabilities before the production
decision.

Primary among the modifications made to the lightweight howitzer prototype
are enhancements to improve the howitzer's accuracy and stability by
strengthening the saddle component that holds the cannon barrel and to
better anchor the weapon against recoil. These changes have been
incorporated in the development design. However, because the modified saddle
will not be available in time for incorporation on the first two development
models, it will have to be retrofitted to the weapons after delivery of the
final development howitzer (scheduled for February 2001). Modifications,
however, have increased the howitzer's weight, and current projections are
that the actual weight of development models will be very close to the limit
of 9,000 pounds. At the same time, no existing prototype incorporates all
the development design changes, and no testing of full production design
will be possible until the third development unit is manufactured and
delivered to the test program in November 2000.

Program officials are confident the production design will meet performance
requirements. They said that lengthy testing of the prototypes greatly
facilitated the design and improvement process, and because Vickers has been
the primary design contractor from the beginning of the development program,
this effort was not significantly affected by program management changes.

The lightweight howitzer development test program calls for the first four
howitzers to be used primarily to verify over 300 specific system
performance requirements contained in the development contract. The final
four development howitzers will be used primarily to conduct the initial
testing of the systems' capabilities in an operational environment; this
testing is required before the production decision is made. The initial
priority in the test program will be given to safety testing and the testing
needed to begin operational testing. In June 2000, program officials told us
that because of climate conditions required for cold-weather testing, the
late deliveries of production-configured test howitzers required a 6-month
delay in the test program to provide for winter testing in Alaska in 2002.

The extension of the lightweight howitzer test program will provide more
time for testing than was available under the original test program. The
program office is currently working on the test program revisions needed to
ensure that all 300-plus performance requirements are tested within the time
provided under the new delivery schedule. Although the first development
model was delivered to the Marine Corps in late June 2000, the new test
schedule is dependent on developmental units 5 through
8 being delivered in February 2001. As discussed above, this delivery date
is based on when the weapons are needed for operational testing
preparations. Any delay in these deliveries could compress the testing
schedule.

Until manufacturing plans are finalized, it is difficult to assess the
ability of the Army and the Marine Corps to support the lightweight
howitzer, particularly if the howitzers are produced and assembled in Great
Britain. Program officials said that if 70 percent of the howitzers are
produced in the United States, as BAE SYSTEMS plans, the weapon could be
supported in wartime. In addition, BAE SYSTEMS will conduct an analysis to
ensure that all howitzer parts (including those produced in Great Britain)
can be produced in the United States, should the need arise.

Although BAE SYSTEMS plans to produce 70 percent of the lightweight
howitzers in the United States, the contractor is not required to do so
under the terms of the production options contained in the development
contract. The production options contain fixed ceiling prices and U.S.
production is contingent on U.S. subcontractor proposals that allow BAE
SYSTEMS to ensure that the ceiling cost is not exceeded. As discussed
previously, BAE SYSTEMS is confident that it will obtain bids from U.S.
subcontractors that will keep development and production costs within the
ceiling prices.

It is unclear what the support implications for U.S. forces would be if all
lightweight howitzer production occurs in Great Britain. DOD's prior
experience with the M-119 howitzer showed that even after production
problems were resolved at U.S. facilities, differences between American and
British maintenance philosophy and organization of maintenance support
caused logistics planning and supportability problems throughout the life of
the M-119.

DOD had no comments on a draft of this report. DOD's letter is reprinted in
appendix II. DOD officials provided technical clarifications and comments on
the report that we incorporated as appropriate.

To determine the program schedule, cost and funding, and system performance
of the lightweight howitzer program, we reviewed program documents and the
fiscal year 2001 Defense budget. We also interviewed program management
personnel and representatives of the prime contractor at the lightweight
howitzer program office, Picatinny Arsenal, Picatinny, New Jersey; and
resource management personnel at Headquarters, Department of the Army,
Pentagon, and Army Materiel Command, Alexandria, Virginia. To understand
manufacturing requirements for titanium welding, we discussed the issues
with expert personnel from the Edison Welding Institute, Columbus, Ohio, who
are consultants to the program office and Rock Island Arsenal on the
program. To determine the status of issues relating to Army arsenals and
arsenal policy, we interviewed officials at Army Material Command's
Industrial Operations Command, Rock Island, Illinois. We also visited the
Army's Rock Island Arsenal and discussed issues related to the lightweight
howitzer program and the status and manufacturing capability of the arsenal
with key management personnel. To address what effect howitzer production by
a foreign contractor could have on the Marine Corps' and the Army's ability
to support the weapon, we reviewed contract requirements, discussed issues
with program officials, and examined DOD's prior experiences with a
British-designed howitzer.

We conducted our work from February through July 2000 in accordance with
generally accepted government auditing standards and generally relied upon
Defense-provided data.

We are sending copies of this report to the Honorable William S. Cohen,
Secretary of Defense; the Honorable Richard Danzig, Secretary of the Navy;
General James L. Jones, Commandant of the Marine Corps; the Honorable Louis
Caldera, Secretary of the Army; the Honorable Jacob J. Lew, Director, Office
of Management and Budget; and other interested congressional committees.
Copies will be available to others upon request.

Please contact me at (202) 512-4841 if you or your staff have any questions
concerning this report. Key contributors to this report were
Robert P. Kissel, Jr., Richard J. Price, and Mary K. Quinlan.

James F. Wiggins, Associate Director
Defense Acquisitions Issues

Lightweight Howitzer Fiscal Year 2001 Budget Request

The lightweight howitzer will eventually incorporate the Army's towed
artillery digitization upgrade, which is budgeted separately. The towed
artillery digitization upgrade, a precise location and targeting system, is
being developed by the Army and will be provided as government-furnished
equipment. The upgrade will be included on the howitzer units produced for
the Army; however, it will not be incorporated on the howitzers delivered to
the Marine Corps but will be added at a later date.

The Fiscal Year 2001 U.S. Army and U.S. Marine Corps Defense Budget Requests
for the 155 mm lightweight howitzer program and the towed artillery
digitization program are summarized in table 3. The table also shows
production quantities and the Marine Corps' May 2000 revised procurement
schedule for production quantities. Changes to the Marine Corps' budget
needed to implement this schedule will be included in the fiscal year 2002
Defense budget.

 (dollars in millions)
                                                                          Production
                                                                          procurement        Revised
 Fiscal Year 2001 Defense budget request                                  quantity/schedule  procurement
                                                                                             quantity/schedule

         Marine    Marine      Marine Corps   Army towed    Army howitzer
 Fiscal  Corps     Corps       towed          artillery     and towed     Marine
 year    howitzer  howitzer    artillery      digitizationb artillery     Corps      Army    Marine Corps
         RDT&Ea    production  digitizationb  RDT&E         digitization
                               production                   production
 1995    $6.3
 1996    14.4
 1997    13.5
 1998    36.2
 1999    31.9                                 $1.0
 2000    27.1                                 4.8
 2001    13.2      $11.1                      17.4
 2002              90.1                       10.7          $0.1          70                 70
 2003              197.1                      9.9           7.4           185        5       120
 2004              142.4                                    26.5          195        20      130
 2005              0.2                                      42.0                     31      130
 2006                          $33.0                        103.1                    64
 2007                          18.7                         133.3                    80
 2008                                                       81.6                     51
 2009                                                       56.9                     22
 Subtotal$142.6    $440.9      $51.7          $43.8         $450.9
 Total                                                      $1,129.9      450        273     450

aRDT&E = research, development, test, and evaluation.

bTowed artillery digitization (TAD) program.

Source: Fiscal Year 2001 Department of Defense Budget, February 2000.

In addition to the lightweight howitzer budget request, the Army's fiscal
year 2001 budget request for Army arsenals includes a request for an

increase of $25 million.11 If provided, $20 million of this money would be
allocated to the Watervliet arsenal (responsible for producing the howitzer
cannon barrels) to offset costs of maintaining excess capacity. This would
reduce overhead charges at Watervliet in fiscal year 2001. However, because
major production activity for the lightweight howitzer program will not
start until fiscal year 2002, this reduction would not affect the Marine
Corps' current $20.5 million estimated funding shortfall for cannon barrels
unless annual subsidies continue through the completion of the Marine Corps'
production program in fiscal year 2005. Army budget projections, included in
the fiscal year 2001 budget submission, do not include continuation of this
subsidy.

Comments From the Department of Defense

(707508)

Table 1: Key Program Events 8

Table 2: Changes in Schedule for Delivery of Eight Developmental Lightweight
Howitzers (as of May 2000) 9

Table 3: Lightweight Howitzer Fiscal Year 2001 Defense Budget
Request, Schedule for Production Quantities, and
Revised Marine Corps Procurement Schedule 25

Figure 1: Lightweight 155 mm Howitzer Manufacturing Program
Events 15
  

1. After a weapon concept is developed, the Department of Defense manages
weapon acquisition programs in three stages: (1) program definition and risk
reduction;
(2) engineering and manufacturing development; and (3) production,
fielding/deployment and operational support. During engineering and
manufacturing development, the principal objectives are to translate the
most promising design approach into a stable, interoperable, producible,
supportable, and cost-effective design; validate the manufacturing process
or production process; and demonstrate system capabilities through testing.
In the production phase, operational and support systems are procured, items
are manufactured, operational units are trained, and the systems are
deployed.

2. Created by the merger of British Aerospace and Marconi Electronic
Systems.

3. The Arsenal Act, 10 United States Code, Section 4532, requires that
supplies needed for the Army shall be made in U.S. factories or arsenals if
they can be made there on an economical basis.

4. All prices are subject to an escalation provision.

5. Army Industrial Facilities: Workforce Requirements and Related Issued
Affecting Depots and Arsenals (GAO/NSIAD-99-31 , Nov. 30, 1998).

6. A technical data package includes the engineering drawings, technical
specifications, and production processes stated in terms suitable for
producing an item with the specified operational characteristics.

7. Production readiness review is a formal examination of a program to
determine whether the design is ready for production, production engineering
problems have been resolved, and the producer has adequately planned for the
production phase.

8. Best Practices: Successful Application to Weapon Acquisitions Requires
Changes in DOD's Environment (GAO/NSIAD-98-56 , Feb. 24, 1998).

9. The government is responsible for 70 percent of any additional cost
growth, up to a total contract cost of $56.2 million. Beyond that, the
government is responsible for all costs.

10. Under Army Arsenal pricing policy, arsenals are required to include all
costs, including indirect overhead costs and prior year losses, in
calculating labor rates to be charged to their non-Army customers. As a
result, these overhead costs are included in the price of the cannon barrels
for the Marine Corps but are not directly charged for the cannon barrels to
be produced for the Army.

11. The Army requires arsenals to maintain capacity that might be needed in
the future. To compensate the arsenals for this, the Army budget includes an
account for "underutilized capacity"; however, Army Industrial Operations
Command officials said that in recent years annual funding of this account
has provided less than 40 percent of the budget needed to cover these costs.
*** End of document. ***