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Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program (Letter Report, 06/04/97, GAO/NSIAD-97-156).

Pursuant to a congressional request, GAO reviewed the Air Force's
February 1997 plans to restructure the F-22 program, focusing on the:
(1) estimated cost of the restructured program and viability of cost
reduction initiatives; (2) planned timing for realization of benefits
from initiatives; and (3) criteria for approving initiation and
continuation of production.

GAO noted that: (1) GAO's reviews of various weapon system acquisitions
have shown that initial program schedules and cost estimates have
historically been optimistic and have not often been achieved; (2) the
F-22 program is not an exception; (3) further, GAO believes the February
1997 restructuring plan reflects revised costs goals that may be
optimistic because: (a) the planned reductions in F-22 production unit
costs are greater than those experienced by prior fighter programs; and
(b) actions intended to reduce production costs have not been fully
defined and validated; (4) GAO's comparison of the projected reduction
in F-22 production unit costs with the historical unit costs of the
F-15, F-16, and F-18 programs indicates that the F-22 reductions exceed
those that have been achieved on these other programs; (5) also, to
achieve the overall cost avoidance projected by the Joint Estimate Team,
the unit cost of full-rate aircraft must be reduced by 54 percent from
the unit cost of the low-rate initial production (LRIP) aircraft instead
of by 27.9 percent, as projected before the program restructure; (6) an
aspect of cost reduction that has been previously reviewed and should
continue to be considered is the potential savings from reducing F-22
performance requirements; (7) Joint Estimate Team members told GAO that,
although they considered performance reductions in the study as a means
of reducing costs, and that potential reductions had been considered in
at least a dozen past reviews, no performance reductions were made as a
result of their study; (8) the cost reduction initiatives are not
planned to achieve significant net savings until F-22 full-rate
production, now planned to begin in fiscal year (FY) 2004; (9) the F-22
cost estimate developed by the Joint Estimate Team and endorsed by the
Air Force recognizes unit cost increases of 40 percent in F-22 LRIP
aircraft through FY 2003; (10) the program exit criteria that were
required before awarding each lot of LRIP aircraft and the first
full-rate production contract have been revised as part of the program
restructuring; and (11) although aircraft performance parameters are
reported in the Selected Acquisition Report and other Air Force and
Department of Defense reports, GAO believes specific aircraft
performance parameters should be included in the exit criteria for each
low-rate initial production lot to: (a) maintain visibility of aircraft*

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

 REPORTNUM:  NSIAD-97-156
     TITLE:  Tactical Aircraft: Restructuring of the Air Force F-22 
             Fighter Program
      DATE:  06/04/97
   SUBJECT:  Advanced weapons systems
             Air Force procurement
             Fighter aircraft
             Defense cost control
             Cost analysis
             Future budget projections
             Military budgets
             Defense capabilities
IDENTIFIER:  DOD Quadrennial Defense Review
             F-22 Aircraft
             F-16 Aircraft
             F-15 Aircraft
             F-18 Aircraft
             Eagle Aircraft
             Falcon Aircraft
             Hornet Aircraft
             
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Cover
================================================================ COVER


Report to the Honorable
Dale Bumpers, U.S.  Senate

June 1997

TACTICAL AIRCRAFT - RESTRUCTURING
OF THE AIR FORCE F-22 FIGHTER
PROGRAM

GAO/NSIAD-97-156

F-22 Restructuring

(707246)


Abbreviations
=============================================================== ABBREV

  CAIG - Cost Analysis Improvement Group
  DOD - Department of Defense
  JET - Joint Estimate Team
  LRIP - low-rate initial production

Letter
=============================================================== LETTER


B-276815

June 4, 1997

The Honorable Dale Bumpers
United States Senate

Dear Senator Bumpers: 

In response to your request of February 24, 1997, we reviewed the Air
Force's February 1997 plans to restructure the F-22 program.  This
report presents our observations regarding the estimated cost of the
restructured program and viability of cost reduction initiatives,
planned timing for realization of benefits from initiatives, and
criteria for approving initiation and continuation of production. 

An important factor that will significantly impact the cost of the
restructured program, and the viability of cost reduction initiatives
discussed in this report is the Quadrennial Defense Review, which was
released in mid-May.  This review calls for reductions in the F-22
low-rate initial production (LRIP) quantity, the total production
quantity, and the production rates.  Because the production
quantities and rates were basic assumptions guiding the February 1997
F-22 restructuring plan, changes in the F-22 program that result from
the review will require reevaluation of the cost of the program, the
potential for cost reductions, and the contract strategy. 
Nevertheless, the information in this report provides an important
historical and contextual framework for decisionmakers as they debate
the issues surrounding the F-22. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The F-22 is an air superiority aircraft with a capability to deliver
air-to-ground weapons.  Advanced technology being developed for the
F-22 makes it ".  .  .  a very ambitious, challenging program,
probably the most challenging program in recent times," according to
the Department of Defense's (DOD) Defense Science Board.  The most
significant features include supercruise, the ability to fly
efficiently at supersonic speeds without using fuel-consuming
afterburners; low observability to adversary systems that have the
objective of locating and shooting the F-22; and integrated avionics
to significantly improve the pilot's battlefield awareness. 

The F-22 program began the engineering and manufacturing development
phase of the acquisition process in 1991.  According to the fiscal
year 1997 President's budget, the Air Force planned to develop the
F-22 and build nine development aircraft, two nonflying structural
test articles, and four preproduction aircraft at a cost of about
$17.4 billion.  The Air Force planned to buy 76 aircraft during the
LRIP phase of the program and 362 aircraft during the full-rate
production phase.  The total estimated production cost was about $48
billion. 

The Assistant Secretary of the Air Force for Acquisition engaged a
Joint Estimate Team (JET) because management reviews of the F-22
program indicated potential cost growth.  In February 1997, the Under
Secretary of Defense for Acquisition and Technology approved the Air
Force's proposed plan to restructure the F-22 program based on the
results of the JET's review.  JET concluded that the F-22 engineering
and manufacturing development program would require additional time
and funding to reduce risk before the F-22 enters production.  JET
estimated that the development cost would increase by about $1.45
billion.\1 Also, JET concluded that F-22 production cost could grow
by about $13 billion (from $48 billion to $61 billion) unless offset
by various cost avoidance actions, identified as tier I and tier II
initiatives.  These initiatives are being further defined by a study
team chartered by the Assistant Secretary of the Air Force for
Acquisition.  That team is scheduled to report its conclusions in the
fall of 1997.  We have not reviewed the basis for the revised savings
estimates that are now being devised by the team. 

We have issued a number of reports concerning the F-22 fighter
program.  (See Related GAO Products at the end of this report.) In an
April 1995 report,\2 we recommended that the Secretary of Defense
reduce the degree of concurrency between development and production
of the F-22 and minimize commitments to production until after
successful completion of operational testing. 


--------------------
\1 JET estimated the increase at $2.2 billion; however, a decision to
delete preproduction aircraft, estimated to cost $706 million,
reduced the estimated development cost increase to $1.45 billion. 

\2 Tactical Aircraft:  Concurrency in Development and Production of
F-22 Aircraft Should Be Reduced (GAO/NSIAD-95-59, Apr.  19, 1995). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Our reviews of various weapon system acquisitions have shown that
initial program schedules and cost estimates have historically been
optimistic and have not often been achieved.  The F-22 program is not
an exception.  Further, we believe the February 1997 restructuring
plan reflects revised cost goals that may be optimistic because (1)
the planned reductions in F-22 production unit costs are greater than
those experienced by prior fighter programs and (2) actions intended
to reduce production costs have not been fully defined and validated. 

Our comparison of the projected reduction in F-22 production unit
costs with the historical unit costs of the F-15, F-16, and F-18
programs indicates that the F-22 reductions exceed those that have
been achieved on these other programs.  Also, to achieve the overall
cost avoidance projected by the Joint Estimate Team, the unit cost of
full-rate aircraft must be reduced by 54 percent from the unit cost
of the low-rate initial production aircraft instead of by 27.9
percent, as projected before the program restructure.  Further,
although the Air Force and DOD agree that unit production costs will
increase through 2003, DOD was not convinced that the substantial
manufacturing cost savings projected by the Air Force for fiscal year
2004 and beyond would be achieved.  Considerably more information
about the initiatives and their incorporation into a production
contract is necessary before it can be determined that they will
produce the desired outcome. 

An aspect of cost reduction that has been previously reviewed and
should continue to be considered is the potential savings from
reducing F-22 performance requirements.  Joint Estimate Team members
told us that, although they considered performance reductions in the
study as a means of reducing costs, and that potential reductions had
been considered in at least a dozen past reviews, no performance
reductions were made as a result of their study.  The Defense Science
Board indicated in 1995 that the Air Force should seriously consider
reducing F-22 performance requirements to resolve problems that occur
in the program, noting that rigid adherence to specifications would
generally be unproductive and very costly. 

The cost reduction initiatives are not planned to achieve significant
net savings until F-22 full-rate production, now planned to begin in
fiscal year 2004.  The F-22 cost estimate developed by the Joint
Estimate Team and endorsed by the Air Force recognizes unit cost
increases of 40 percent in F-22 low-rate initial production aircraft
through fiscal year 2003.  The increases reflect cost growth in
manufacturing F-22s and the cost of funding projects during low-rate
initial production to achieve future cost reductions.  The cost
estimate projects substantial program efficiencies that offset the
cost growth during low-rate initial production and achieve reductions
in unit production costs only after the F-22 is in full-rate
production.  Thus, achieving the cost reductions, and closely
monitoring them are essential to defining an F-22 funding profile for
fiscal year 2004 and beyond (full-rate production) that meets the Air
Force's cost objectives. 

The program exit criteria that were required before awarding each lot
of low-rate initial production aircraft and the first full-rate
production contract have been revised as part of the program
restructuring.\3 Some key measures concerning avionics were added;
however, the elements of exit criteria concerning aircraft
performance--including maneuverability, combat radius, and
supercruise--that were previously considered exit criteria for moving
to each subsequent low-rate initial production lot have been deferred
until the beginning of full-rate production.  Although aircraft
performance parameters are reported in the Selected Acquisition
Report and other Air Force and DOD reports, we believe specific
aircraft performance parameters should be included in the exit
criteria for each low-rate initial production lot (1) to maintain
visibility of aircraft performance as production rates are
accelerated and (2) ensure that adequate progress is being made to
fully demonstrate the aircraft's capabilities.  We believe the
restructured program should maintain the integrity of the prior exit
criteria. 


--------------------
\3 Exit criteria serve as gates that, when successfully passed or
exited, demonstrate that the program is on track to achieve its final
program goals and should be allowed to continue with additional
activities within an acquisition phase or be considered for
continuation into the next acquisition phase. 


   ESTIMATED COSTS APPEAR
   OPTIMISTIC
------------------------------------------------------------ Letter :3

Cost growth and schedule delays are among the most prevalent, oldest,
and most visible problems associated with weapon systems.  Our weapon
system reviews over a 15-year period indicate that it takes longer
and costs more to develop and produce weapons than the estimates on
which the programs were initially approved.\4 Program cost increases
on the order of 20 to 40 percent have been common on major weapon
programs, as have schedule delays of over 2 years. 

Our review of the Air Force's restructuring plan for the F-22 program
indicates that the projected costs are optimistic.  The planned
reductions in F-22 production unit costs are greater than achieved on
prior fighter programs, and the initiatives to reduce the production
costs are not fully developed. 


--------------------
\4 Weapons Acquisition:  A Rare Opportunity for Lasting Change
(GAO/NSIAD-93-15, Dec.  1992). 


      COST REDUCTION INITIATIVES
---------------------------------------------------------- Letter :3.1

JET reported that projected costs for the F-22 grew because (1)
making the first three of nine development aircraft was taking
substantially more labor than planned, (2) the flight test program
did not allow enough time for solving problems likely to be
identified in avionics tests, (3) avionics integration was expected
to take more time than first thought due to slips in the baseline
schedule and loss of experienced software personnel, and (4) the
number of engineering changes on the engine was expected to increase
over earlier projections. 

JET also evaluated the cost impact on the production aircraft that
could occur because the cost of the first three development aircraft
was increasing above projections and the test program needed to be
extended.  As a result of these changes, production would have to
begin later and at a slower pace, and the cost of production aircraft
would reflect the increased costs of the development aircraft.  JET
concluded that cost growth of about $13 billion in the production
program (from $48 billion to $61 billion) was possible unless offset
by various cost reduction actions identified as tier I and tier II
initiatives.  JET's recommendations have been endorsed by the Air
Force and essentially approved by the Under Secretary of Defense for
Acquisition and Technology.  JET's recommendations are listed in
appendix I. 

JET concluded that savings of $6.6 billion in production costs could
be achieved through the tier I initiatives.  Although these
techniques have the potential to reduce costs, the amount of savings
that can be achieved from each will not be known until the
initiatives are more specifically defined and production contracts
are negotiated for F-22s.  The tier I initiatives were those defined
by JET in some detail, as shown in table 1. 



                                Table 1
                
                 Tier I Initiatives and Estimated Cost
                                Savings

                         (Dollars in billions)

Description                                                    Savings
------------------------------------------------------  --------------
Manage subcontracts and material more aggressively                $0.5
Initiate multiyear procurement with approval of full-              2.2
 rate production
Reduce warranty cost                                               1.0
Initiate producibility enhancements                                2.9
======================================================================
Total                                                             $6.6
----------------------------------------------------------------------
Tier II initiatives were less defined and were expected to provide an
additional $6.6 billion in savings.  Examples given of additional
initiatives include (1) corporate consolidation opportunities; (2)
full contractor depot support; and (3) others, including foreign
military sales, and efficiencies in dealing with out-of-production
parts. 


      PLANNED REDUCTIONS IN
      PRODUCTION COST
---------------------------------------------------------- Letter :3.2

Based on prior fighter aircraft programs' experience, we are
skeptical the Air Force can achieve production cost reductions of $13
billion.  The planned reductions in F-22 production unit costs are
greater than have been experienced by prior fighter programs.  Our
comparison of the planned reductions in F-22 production unit costs
with the historical unit costs of the F-15, F-16, and F-18 programs
indicates that the projected reduction in the unit cost of the F-22
exceeds the reductions that have been achieved on these other
programs. 

The Air Force plans to acquire the first full-rate production lot of
aircraft (the 71st through the 118th aircraft) at an average unit
cost of about 18 percent of the cost of the first lot of LRIP
aircraft.  Prior programs, such as the F-16, have taken advantage of
multiyear procurement and other techniques similar to those proposed
for the F-22 program and have achieved significant reductions. 
However, these reductions were not of the magnitude projected for the
F-22.  For example, the average unit cost of the first full-rate lot
of F-18s was about 31 percent of the cost of the first LRIP lot. 

Figure 1 compares the projected change in F-22 unit procurement cost
to the actual changes in unit procurement cost of the F-15, F-16, and
F-18 and plots the average procurement cost for each succeeding
production lot of each aircraft.  None of the other programs achieved
the degree of unit cost reductions projected for the F-22.  DOD
officials said F-22 unit cost reductions are a result of production
cost reduction business plans for the tier I and tier II initiatives. 
Air Force officials noted that an important factor is that no
configuration changes, except for safety-of-flight changes, are to be
made during LRIP of the first 70 aircraft.  However, by not making
configuration changes in the first 70 aircraft, the likelihood for
cost growth in the first full-rate production lot may increase when
the changes are made. 

   Figure 1:  Change in Average
   Unit Production Costs Between
   First and Succeeding Production
   Aircraft Lots

   (See figure in printed
   edition.)

Source:  DOD Selected Acquisition Reports. 


      COST REDUCTION INITIATIVES
      STILL BEING DEVELOPED
---------------------------------------------------------- Letter :3.3

JET's tier I and tier II initiatives primarily consist of techniques
that have been used on prior programs.  Subsequent to JET's report,
the Assistant Secretary of the Air Force for Acquisition chartered a
team to better define JET's initiatives.  The team's findings are not
scheduled to be finalized until the fall of 1997.  Considerably more
information about the initiatives and their incorporation into a
production contract is necessary before it can be determined whether
the initiatives will produce the desired outcome. 

Even though tier I and tier II initiatives have not been fully
defined, our prior work, a DOD Cost Analysis Improvement Group (CAIG)
report, and recent developments allow us to make observations about
the initiatives dealing with multiyear procurement, warranty costs,
depot maintenance, subcontract management, and producibility
enhancements.  In addition, our discussions with Air Force officials
confirmed that tradeoffs in F-22 performance were considered but not
recommended by JET. 


         MULTIYEAR PROCUREMENT
-------------------------------------------------------- Letter :3.3.1

JET attributed about $2.9 billion in savings to multiyear
procurement,\5 but CAIG estimated $2.4 billion savings based on the
recent experience of the C-17 program.  Multiyear procurement has
been a source of significant savings in the past and could provide
savings for the F-22 program.  A major portion of the savings from
multiyear procurement typically results from the lower prices on
economic purchase orders from vendors or subcontractors. 


--------------------
\5 Multiyear procurement, when authorized, uses one contract to
procure up to 5 years of requirements for a major weapon system and
its components. 


         REDUCING WARRANTY COST
-------------------------------------------------------- Letter :3.3.2

The amount of cost reductions that can be achieved by implementing a
different warranty clause is unclear.  JET concluded that savings of
$1 billion could be achieved.  However, the contractors' more recent
estimate of the savings available is about $0.7 billion, which seems
more realistic.  By applying the average cost of warranties we
identified in past work, about 0.87 percent of the total contract
value,\6 we believe that about $400 million to $500 million in costs
could be avoided if the warranty clause were eliminated.  Air Force
officials explained that they do not intend to eliminate the warranty
and have provided about $200 million in the estimate of the cost for
a warranty that is more limited, but complies with statutes.  Thus,
the projected $1 billion in savings is not likely to occur. 


--------------------
\6 Weapons Acquisition:  Warranty Law Should Be Repealed
(GAO/NSIAD-96-88, June 28, 1996). 


         DEPOT MAINTENANCE
-------------------------------------------------------- Letter :3.3.3

JET envisioned that, by allowing for full depot maintenance by the
contractor, DOD could avoid $2.5 billion in acquisition costs. 
According to Air Force officials, contractor depot maintenance is no
longer being considered a cost reduction initiative.  Therefore, the
potential for the JET initiatives to achieve $13 billion in cost
reductions may be more difficult. 


         POTENTIAL OVERLAP OF
         ESTIMATED SAVINGS
-------------------------------------------------------- Letter :3.3.4

Initiatives regarding multiyear procurement, more aggressive
management of subcontracts, and producibility enhancements all have
applicability to subcontractors.  A significant portion of multiyear
procurement savings on other programs have been achieved by acquiring
products from subcontractors on an economic order quantity basis. 
Further, to achieve savings of the magnitude projected, producibility
enhancements will involve subcontractors.  More aggressive management
of subcontracts overlaps both of these initiatives.  Because the
initiatives were not well defined by JET, we are uncertain whether
the identified savings are counted more than once. 


         REDUCING AIRCRAFT
         PERFORMANCE
-------------------------------------------------------- Letter :3.3.5

Although JET members told us they considered performance reductions
in their study as a means of reducing costs, no such reductions were
made.  The Defense Science Board, in a 1995 review of the concurrency
and risk in the F-22 program concluded that such reductions may be
appropriate if problems are encountered in the program.  The Board
concluded in April 1995 that the ".  .  .  best approach to handling
problems that do arise is to seriously consider accepting some
reduced F-22 performance, slip in the schedule, or some combination
of both." The Board also stated that F-22 performance in many areas,
if it fell short of that specified, would still represent a major
increase in military capability, and that rigid adherence to the
current specifications and goals would generally be unproductive and
very costly. 


   BENEFITS OF INITIATIVES ARE NOT
   PLANNED TO BE REALIZED UNTIL
   AFTER FISCAL YEAR 2003
------------------------------------------------------------ Letter :4

The restructuring plan recognized substantial cost growth in the LRIP
phase of the program.  The plan also projected substantial cost
reductions in the full-rate production phase of the program that will
offset the earlier cost growth and investment in cost reduction
techniques. 


      COST GROWTH IN LRIP
---------------------------------------------------------- Letter :4.1

As a result of restructuring, the average estimated unit cost of LRIP
aircraft increased from $142.6 million to $200.8 million, or about 40
percent.  Table 2 shows a reduction in the number of LRIP aircraft
from 76 to 70 aircraft but an increase of $3.2 billion in the
estimated cost of LRIP.  Before restructuring, the Air Force
estimated that 76 LRIP aircraft could be purchased for $10.8 billion. 
With the February 1997 restructured program, the Air Force estimated
that 70 aircraft could be purchased at $14 billion.  The
restructuring plan eliminated the preproduction aircraft and changed
the production plan for LRIP, as shown in table 2. 



                                Table 2
                
                  Planned LRIP Aircraft Quantities and
                  Costs Before and After Restructuring

                    (Then-year dollars in millions)

                              Fiscal year
                      ----------------------------
                                                    LRIP
                                                    tota   LRIP   Unit
Estimate              1999  2000  2001  2002  2003     l   cost   cost
--------------------  ----  ----  ----  ----  ----  ----  -----  -----
Before restructure       4    12    24    36     0    76  $10,8  $142.
                                                             37      6
After restructure        2     6    12    20    30    70  14,05  200.8
                                                              7
Difference              -2    -6   -12   -16    30    -6  $3,22  $58.2
                                                              0
----------------------------------------------------------------------

      COST REDUCTIONS PLANNED FOR
      FULL-RATE PRODUCTION PHASE
---------------------------------------------------------- Letter :4.2

Some savings from tier I and tier II initiatives are expected to
begin during LRIP.  However, the costs of investment to implement the
initiatives are expected to exceed any savings achieved during LRIP. 
Most savings are not planned to be achieved until full-rate
production that is scheduled to begin in 2004.  As shown in table 3,
the unit price of LRIP F-22s before restructuring was $142.6 million,
and the unit price of full-rate aircraft was $102.8 million--a
decrease of 27.9 percent.  After restructuring the program and
implementing the JET initiatives, the unit price of LRIP aircraft is
projected to be $200.8 million, and the unit price of full-rate
aircraft is projected to be $92.4 million--a decrease of 54 percent. 
Therefore, to achieve the overall cost avoidance projected by JET,
the unit cost of full-rate aircraft must be reduced by 54 percent
from the unit cost of the LRIP aircraft instead of by 27.9 percent,
as projected before the program restructure. 



                                Table 3
                
                   Comparison of DOD's Projected Unit
                 Prices Before and After Restructuring

                                    Production
                            --------------------------
                              Low-rate     Full-rate
                            ------------  ------------
                                                            Unit price
                                                              decrease
                                                             from LRIP
                            Unit    Unit  Unit    Unit        to full-
Estimates                      s    cost     s    cost            rate
--------------------------  ----  ------  ----  ------  --  ----------
Before restructuring          76  $142.6   362  $102.8           27.9%
Restructured without          70  $200.3   368  $128.2           36.0%
 initiatives
Restructured with             70  $200.8   368  $ 92.4           54.0%
 initiatives
----------------------------------------------------------------------
In December 1996, the Air Force, Lockheed, and Pratt & Whitney
entered into a memorandum of agreement that summarizes their
intentions for implementing the restructured program.  The memorandum
of agreement describes a contract strategy requiring negotiation of a
target price curve that is to permit production of 438 F-22s at a
cost of about $48 billion.  In February 1997, the Under Secretary of
Defense for Acquisition and Technology, in approving the Air Force's
plan to restructure the F-22 program, required the Air Force to
clarify the contractual implications of the memorandum of
understanding. 

According to DOD officials, six factors are critical to maintaining
the production cost at the planned level: 

  -- maintaining stable funding throughout the production phase of
     the program,

  -- procuring a total of 438 aircraft in 13 lots;

  -- attaining a production rate of 48 aircraft per year in fiscal
     year 2004;

  -- achieving cost savings at the levels estimated by JET;

  -- maintaining a single configuration for aircraft produced through
     the LRIP program, except for changes for safety reasons; and

  -- negotiating a target price curve that is tied to a production
     lot profile as recommended by JET and endorsed by the Air Force. 

In view of the announced reduction of F-22 production quantities from
438 to 339, it appears that the contract strategy may require change. 

CAIG also evaluated the cost of the F-22 program and concluded in
March 1997 that the production cost could approach $64.4
billion--about $3 billion higher than the Air Force's estimate. 
However, CAIG was not convinced that the JET-identified initiatives
would achieve $13 billion in cost savings and accepted as valid only
an estimated $2.4 billion of savings--those associated with multiyear
procurement.  That savings lowered CAIG's estimate to about $62
billion for production compared with the Air Force's $48 billion
estimated cost after considering the JET-identified initiatives. 


   REVISED EXIT CRITERIA RESULTED
   FROM RESTRUCTURING
------------------------------------------------------------ Letter :5

The program exit criteria that were required to be met before
awarding contracts for F-22 production aircraft have been revised in
the restructured program.  In 1991, when approving the F-22 program
to begin the engineering and manufacturing development phase, the
Under Secretary of Defense for Acquisition required the Air Force to
establish exit criteria that needed to be met before awarding
production contracts.  The Air Force established exit criteria for
each lot of LRIP aircraft and the first lot of full-rate production
aircraft.  As part of the program restructuring, the Air Force
revised these criteria, increasing the emphasis on avionics but
removing criteria concerning aircraft performance. 

In the previous criteria, aircraft performance parameters for combat
radius, maneuverability, and supercruise were required to be
validated by analysis, test, or demonstration before contracts for
lot 1 and subsequent production lots could be awarded.  Air Force and
DOD officials noted that key aircraft performance parameters are
routinely reported in periodic Air Force and DOD reports, such as the
Selected Acquisition Report, to acquisition and other executives. 
Accordingly, the officials said that reporting the performance
parameters as part of the exit criteria is duplicative and not
encouraged by DOD directives. 

The revised exit criteria include no specific requirements regarding
aircraft performance as the program advances from one LRIP lot to the
next.  Although we recognize that reporting the key performance
parameters occurs through other reports, we believe aircraft
performance should be included as exit criteria because analysis and
demonstration of aircraft performance are important factors in
determining whether to proceed to the next production lot.  We
believe exit criteria for aircraft performance equivalent to those
established when the program entered engineering and manufacturing
development are still valid and should be retained in the
restructured program. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

Since the Air Force plans to request approval for the first
production lot of F-22 aircraft in fiscal year 1999, we recommend
that the Secretary of Defense, as part of the budget justification
for fiscal year 1999, provide financial plans and cost estimates that
clearly identify the basis for cost savings initiatives that have
been approved for the program at that time.  Because of the potential
for cost growth in the F-22 program, we also recommend that the
Secretary reconsider the potential savings that can be achieved by
reducing the performance requirements of the F-22, as previously
suggested by the Defense Science Board.  Finally, we recommend that
the Under Secretary of Defense for Acquisition and Technology
reevaluate the exit criteria for the F-22 to ensure that the
integrity of the prior criteria are maintained. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In commenting on a draft of this report, DOD indicated that our
recommendations were appropriate areas for consideration due to the
restructuring and reduction of the F-22 program, as called for in the
May 1997 Quadrennial Defense Review.  DOD acknowledged the importance
of updating the production cost estimate and incorporating
information from restructuring activities and program reductions into
the budget process as quickly as practical.  DOD also stated that it
would make every effort to complete the detailed F-22 costing data in
time to influence the fiscal year 1999 President's budget.  In
addition, DOD said that it does not believe that a substantial
reduction in F-22 required performance is currently justified, but it
indicated that cost-effectiveness analyses will be done to determine
whether it is appropriate to lower requirements that are not met
during testing.  DOD acknowledged that certain aircraft performance
measures had been deleted from exit criteria.  However, DOD stated
that the exit criteria had been simplified and reordered to conform
to the restructured schedule but not at the expense of either the
quality or difficulty of the events and performance levels that
determine whether the program should be allowed to proceed to the
next acquisition phase.  Moreover, DOD indicated that the new
criteria related to the demonstration of avionics maturity had been
added. 

After considering DOD's comments, we believe our recommendation is
still valid because the original exit criteria required intermediate
validation of the aircraft performance parameters before award of
each LRIP lot, whereas the revised exit criteria deleted the
intermediate validation requirement and only considered the
comparable requirement to enter full-rate production.  However, a
number of aircraft will have already been procured by that time. 
DOD's comments are reprinted in appendix II.  DOD also provided
technical corrections to the report, which we have incorporated where
appropriate. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We reviewed and analyzed available reports, briefings, documents, and
records and interviewed officials at the F-22 program office,
Wright-Patterson Air Force Base, Ohio; Air Force Headquarters, and
the Office of the Under Secretary of Defense for Acquisition and
Technology, Washington, D.C.  To gauge the overall viability of the
Air Force's restructuring plans, we compared the unit costs of the
F-22 before the restructuring with the unit costs after
restructuring.  We also compared the unit cost reductions planned for
the F-22 with the historical cost reductions experienced on the F-15,
F-16, and F-18 fighter aircraft programs.  We also used our prior
reports and those of other organizations to provide a historical and
contextual framework for evaluating the Air Force's planned cost
reduction initiatives.  We reviewed a Defense Science Board report
regarding concurrency and risk in the F-22 program and reports on
F-22 restructuring by CAIG and the Congressional Budget Office. 

We performed our review between March and May 1997 in accordance with
generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 5 days
from its issue date.  At that time, we will send copies of this
report to the Chairmen and Ranking Minority Members of appropriate
congressional committees; the Secretaries of Defense and the Air
Force; the Director, Office of Management and Budget; and other
interested parties. 

Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix III. 

Sincerely yours,

Louis J.  Rodrigues
Director, Defense Acquisitions Issues


RECOMMENDATIONS OF THE JOINT
ESTIMATE TEAM
=========================================================== Appendix I

The Joint Estimate Team recommended that the Air Force

  -- slow the manufacturing of development aircraft to ensure an
     efficient transition from development to low-rate initial
     production;

  -- increase the time available for avionics software development
     and integration;

  -- develop a more effective avionics ground test capability;

  -- implement revised avionics flight test processes;

  -- extend the flight test schedule by 9 months to allow additional
     time to identify, analyze, and resolve avionics anomalies;

  -- extend the development program by 12 months to accommodate a
     9-month flight test extension;

  -- finish development of a baseline capability before beginning
     dedicated initial operational test and evaluation;

  -- delete the plans to produce preproduction aircraft and conduct
     dedicated initial operational test and evaluation with two
     refurbished development aircraft and the first two production
     aircraft;

  -- delay initiation of full-rate production by 10 months;

  -- slow the rates of low-rate initial production to make funds
     available for development activities and increase system
     maturity; and

  -- deliver a mature avionics capability before initial operational
     capability planned for November 2004. 




(See figure in printed edition.)APPENDIX II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

David E.  Cooper
Robert D.  Murphy
David B.  Best

CHICAGO FIELD OFFICE

Leonard L.  Benson
Edward R.  Browning
Don M.  Springman

RELATED GAO PRODUCTS

Defense Aircraft Investments:  Major Program Commitments Based on
Optimistic Budget Projections (GAO/T-NSIAD-97-103, Mar.  5, 1997). 

F-22 Restructuring (GAO/NSIAD-97-100R, Feb.  28, 1997). 

Combat Air Power:  Joint Assessment of Air Superiority Can Be
Improved (GAO/NSIAD-97-77, Feb.  26, 1997). 

Combat Air Power:  Joint Mission Assessments Needed Before Making
Program and Budget Decisions (GAO/NSIAD-96-177, Sept.  20, 1996). 

Tactical Aircraft:  Concurrency in Development and Production of F-22
Aircraft Should Be Reduced (GAO/NSIAD-95-59, Apr.  19, 1995). 

Air Force F-22 Embedded Computers (GAO/AIMD-94-177R, Sept.  20,
1994). 

Tactical Aircraft:  F-15 Replacement Issues (GAO-T/NSIAD-94-176, May
5, 1994). 

Tactical Aircraft:  F-15 Replacement Is Premature as Currently
Planned (GAO/NSIAD-94-118, Mar.  25, 1994). 

Aircraft Development:  Reasons for Recent Cost Growth in the Advanced
Tactical Fighter Program (GAO/NSIAD-91-138, Feb.  1, 1991). 

Aircraft Development:  Navy's Participation in Air Force's Advanced
Tactical Fighter Program (GAO/NSIAD-90-54, Mar.  7, 1990). 

Aircraft Development:  The Advanced Tactical Fighter's Costs,
Schedule, and Performance Goals (GAO/NSIAD-88-76, Jan.  13, 1988). 

Aircraft Procurement:  Status and Cost of Air Force Fighter
Procurement (GAO/NSIAD-87-121, Apr.  14, 1987). 

DOD Acquisition:  Case Study of the Air Force Advanced Tactical
Fighter Program (GAO/NSIAD-86-45S-12, Aug.  25, 1986). 


*** End of document. ***





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