ON CONSEQUENCES OF COST GROWTH Senator John Stennis, Chairman of the Senate Committee on Armed Services said: "If we can afford a permanent force structure of only one-fifth as many fighter aircraft or tanks as our potential adversaries-because our systems are about five times more expensive than theirs—then a future crisis may find us at a sharp numerical disadvantage." The Senate Committee on Armed Services expressed another concern, that "the multiplying cost of weapon system development and procurement is reaching such prohibitive levels that the country may be unable to afford some of the most vital weapon systems." Deputy Secretary of Defense Kenneth Rush adds that "we too often reduce the number of units to stay within previous cost projections. We can no longer afford to reduce the quantity just because we need modern equipment to maintain our military posture.' John S. Foster, Jr., Director, DDR&E recently said that "We can no longer continue to buy adequate quantities of needed weapons if the unit procurement and lifetime costs of more weapons continue to soar." The Brookings Institution observes that "Between 1950 and 1968 the real cost of the average bomber and military transport plane increased three times and of the average fighter nearly eight times." These increase are attributable principally to the higher performance demanded of each system and the accompanying system complexity needed to achieve it. Brookings warns that the cost-numbers tradeoff cannot continue indefinitely. ON COST ESTIMATING In a recent report on cost estimating for major acquisitions, we stated that: "For the acquisition programs we reviewed, *** [detailed] estimates were consistently understated. *** Without realism and objectivity in the cost estimating process, bias and over-optimism creep into the estimates prepared by advocates of weapon systems and the estimates tend to be low." The Blue Ribbon Defense Panel reported that: "The implicit assumption that technical risks can be foreseen prior to commencement of development has proved wrong. *** It follows that the belief that detailed pricing techniques for the total systems acquisition effort can be accomplished during Contract Definition is equally false. Only gross pricing techniques such as parametric pricing are likely to provide accurate forecasts of ultimate costs of weapon system." Mr. Packard states that "As an example, parametric cost estimates, which can predict costs within 10% or so, predicted that both the F-111 and the C-5A contract bids were much below what the costs were likely to be." IN CHANGES IN REQUIREMENTS Deputy Secretary Packard described these problems in the following words. "*** I have noted that another major contributor to cost growth consists of changes which we make in a program during both the development phase and the production phase. While I know there is a valid need for some changes, much improvement is possible in this area. Many of the changes of the type currently being made can be and must be avoided. This can be accomplished, in part, first by assuring that we do a better and more complete job of defining what we really needed in a system before entering full-scale development and, second, by the vigorous review and elimination of the many 'nice' or 'desirable' features which so often creep into these systems as they proceed through development and production." On the subject of concurrency, he wrote: "Almost without exception the programs in trouble had been structured so that production had been started before development was complete ***. Of all the major programs which we examined, there was hardly even one which kept to the original schedule. In every case if more time had been taken to complete the development before production was started, the new weapon would in fact have been available to the forces just as soon but with fewer problems and at a lower cost." GAO's 1971 report on system acquisition made the following points on engineering changes. "Incomplete descriptions of initial performance specifications and changes required to bring system performance up to expected standards have resulted in substantial need for engineering changes. Of the $4 billion in engineering changes reported by the three Services, about $3.1 billion was accounted for by the Air Force for the F-111, the C-5A, and the MINUTEMAN programs. Engineering changes totaling $1.8 billion were required to bring the F-111 and C-5A to expected standards, and $730 million involved changes in the MINUTEMAN to upgrade the system to meet an increased threat." ATTACHMENT 3 SOLUTIONS TO WEAPON SYSTEMS ACQUISITION PROBLEMS PROPOSED BY VARIOUS AUTHORITIES a. In July 1970 the Blue Ribbon Defense Panel suggested five actions. -Introduce more flexibility. -Rely more on hardware development than on paper studies. -Increase the number of decision points in the acquisition cycle. -Develop sybsystems and components not necessarily tied to a given system. -Avoid concurrency between development and production, ban total-package procurement, eliminate gold-plating, simplify paper work, etc. b. In 1970, NSIA found that basic improvements in weapons acquisition required: Early consultation between DOD and industry "as to the state-of-the-art, schedules, costs, and attendant risks." -Use of cost-reimbursement contracts until all significant technical unknowns have been resolved. -Simplification of specifications. -Elimination of unnecessary layers of management and greater continuity in program manager assignments. -Reduction of management systems and reports. The above proposals, issued on the same data as the Blue Ribbon Defense Panel report, closely parallel those of the Panel. c. GAO, responding to the growing concerns of the Congress, began a series of case studies of problems of cost growth, scheduling, and performance slippage in selected weapon systems. In addition to these individual studies, overall reports to the Congress were published on February 6, 1970, March 18, 1971, and July 17, 1972, each entitled 'Acquisition of Major Weapons Systems" (B-16-163058). The first two reports stressed the importance of: —More effective procedures in determining what weapon systems were needed in relation to DOD missions. -Better preparation and use of cost-effectiveness studies. -Strong management control over major systems programs. The 1972 report (pp. 58 and 59) reiterated the importance of those actions but gave additional attention to (1) the need for appropriate testing and evaluation prior to key decision points in the acquisition cycle and (2) consistent and effective cost-estimating procedures. The 1971 report (p. 1) made the observation that: "GAO has found that generally the newer weapon procurements are following a slower development pace and procurement practices are more conservative than those of earlier periods *** evidence of the results of the changed concepts is not yet available to adequately assess them, but the outlook is brighter.” d. The Commission on Government Procurement, after an intensive study, outlines a comprehensive group of proposals. Some of the Commission's key recommendations are: -Start acquisition programs with the Secretary of Defense's statement of needs and goals and responsibility assignments to agency components. -Begin annual congressional reviews with agency mission deficiencies and the needs and goals for new acquisition programs. -Create systems candidates by sponsoring the most promising industry proposals from all qualified sources. -Authorize and appropriate research and development funds for exploring system candidates by agency mission. -Maintain competition between the most promising system candidates by annual fixed-level awards and careful agency monitoring. -Choose preferred systems using mission performance test data and projected ownership costs. -Approve (by the agency head) systems chosen without competition and subject then to special controls. -Support full production decisions by independent and strengthened test organizations. -Use contracting function as an important tool of systems acquisition but not as a substitute for management control; use guidelines in lieu of detailed procurement regulations. -Unify policy and monitoring at top and intermediate management levels. These levels would integrate policy decisionmaking and monitoring funetions, such as those now in Installations and Logistics and in Research and Engineering. These proposals reconfirm and reinforce many of those made by other authorities in recent years. The Commission places great stress on measures needed to avoid the premature lock-in to a single-system approach without thoroughly evaluating the basic need for a new level of capability and what it is worth before less costly systems alternatives are eliminated. The Commission states that "one of the main reasons new defense systems have become increasingly complex and costly is that current acquisition procedures tend to say from the outset that they are the minimum kind 'needed.'" e. The RAND Corporation, summarizing its many reports on system acquisition, said that, although cost-estimating methods could be improved, the result would be fewer unpleasant surprises about cost growth but would do little to improve the acquisition process itself. RAND believes that the following changes are necessary. -a. Separate the development phase from the production phase both sequentially and contractually. -b. Conduct the initial segment of development in an austere manner. Concentrate first on demonstrating system performance. Defer detailed production design and proof of reliability. ATTACHMENT 4 SOLUTIONS TO WEAPON SYSTEMS ACQUISITION PROBLEMS UNDERWAY BY THE DOD In the last several years, the DOD has begun new policies and procedures highlighted by Directive 5000.1, to govern major acquisitions. -The Defense Systems Acquisition Review Council (DSARC) was established to formalize Secretary of Defense decisions on individual systems. This deliberating group advises, at critical milestones, on a system's readiness to move into the next phase of acquisition. -In many cases, DOD is requiring hardware demonstration with actual prototypes and relying less on paper analysis to support weapon program decisions. -Cost reimbursement type contracts are becoming the rule instead of fixedprice contracts. There is now more leeway to tradeoff among performance, time, and cost considerations. -DOD has begun separating development from production on programs already in progress, e.g., the F-15 and B-1 programs. Testing or "fly before buy" is being stressed. -The testing function is being separated from the developing function in the -A mixed capability force termed a "high-low force mix" is emerging. A small number of high performance weapon systems will augment larger standard force for less total costs. For example, the new XM-1 tank will be supplemented by the older M-60's. Further tightening of control being considered by the Deputy Secretary of Defense is embodied in the proposed Directive 5000.2. It would -Establish OSD-Service agreement on the operational need for a new system, and the limit of resources to support the need -Plan a much more thoroughly advanced development analysis of system alternatives. It would be done before the system choice is made and before engineering development resources are committed. B-115398. COMPTROLLER GENERAL OF THE UNITED STATES, Hon. WILLIAM B. SAXBE, Subcommittee on Budgeting, Management, and Expenditures, Committee on Government Operations, U.S. Senate. Dear SENATOR SAXBE: Enclosed are the answers relating to the questions you submitted in your letter of May 8, 1973. I appreciated the opportunity to appear before the Subcommittee and trust that these comments will be useful during the markup session. Sincerely yours, ELMER B. STAATS, Comptroller General of the United States. QUESTIONS For ComptrollER GENERAL ELMER B. STAATS RELATIVE TO HEARING MAY 1, 1973, SUBCOMMITTEE ON BUDGETING, MANAGEMENT, AND EXPENDITURES SUBMITTED BY SENATOR SAXBE-AND HIS RESPONSE Q. The Joint Study Committee expressed its concern with the so-called “back door authority." One example was the back of appropriation limitation on loan guarantees. In your statement, you concur in the need for controlling contingent liabilities under such programs. What recommendations would you have to limit and specify these accrued liabilities? A. Loan guarantees are a type of Federal activity which create contingent. liabilities. These contingent liabilities arise as a result of possible loan defaults. We believe these contingent liabilities, to the extent practical, should be recognized in accounting systems. Accounting information on these contingent liabilities together with actual experience on loan defaults would permit improving the control over these activities. The proposed budget committees would be in a position to consider the funding limitation on loan guarantees and, at the same required for estimated loan defaults. Q. You recommend advance authorizations and multi-year appropriations. Could you give us a list of items you have in mind? A. We support the recommendation of the Joint Study Committee on Budget Controls which would require authorizations to be made in the year before appropriations. The major purpose of authorizing programs in the year before appropriations is to allow the proposed budget committees and the appropriations committees to start to establish targets, set priorities, make allocations, and start considering appropriations as soon as possible after receipt of the President's Budget. We believe most programs are subject to such advanced authorization. Multi-year appropriations will allow (1) full funding of projects or phases of projects which cannot be effectively evaluated after one year effort and (2) funding of several years of operations of relatively stable programs which do not require annual review. Following are a few examples of programs and agencies which could be appropriate for advance authorization and/or multi-year appropriation: PUBLIC WORKS, INSURANCE PROGRAMS, INTERNAL REVENUE OPERATIONS Q. In the latter part of your statement, you refer to the assistance GAO could provide such as, "Make studies of the costs and benefits of existing programs.' This is in itself a post audit function. In the evaluation process, there is an internal audit function required. There must be a determination made, if the intent of the legislation is being carried out, or are new programs being initiated by departments merely because excess appropriation authority is available or because they incorrectly defined the intent. What in your opinion is necessary for this evaluation? A. The following are required to effectively evaluate programs as to their cost and benefits and the extent to which the legislative intent is being carried out. -Clear statement of the goals and objectives of the program. -Adequate and reliable information on: Resources consumed (inputs)-dollars, manpower, facilities, etc. -Expertise for conducting program evaluations. We have found that our program reviews and those of the agencies, are often hampered by lack of specific statements of program goals and objectives. Prerequisites for program evaluation are clarity and specificity in stating program objectives. Unfortunately, in many programs, the legislative process does not develop a clear statement of program goals or objectives nor does the subsequent administrative process develop goals of the necessary clarity. Differences between the Congress and the executive regarding the program may, in some instances, confuse rather than clarify program objectives. We recognize the difficulty of clearly and specifically setting forth program goals and objectives either by legis lative or administrative action but believe that we should all keep this in mind as programs are established or modified. In addition to the difficulties created by the lack of clear statements of program goals and objectives, the lack of adequate and reliable information on performance and results of program operations adds to the difficulty in making program assessments. In my testimony on May 1, 1973, I briefly discussed this information problem. In this question you mention the internal audit function. The essential difference between our work and that of the internal auditor is that our reporting responsibility is to the Congress whereas internal auditors are responsible to the department or agency management. Studies of the costs and benefits of programs are proper subject areas for coverage by either GAO or the internal audit staffs of the executive departments and agencies. However, we have generally been more active than internal audits in making evaluation of whether existing programs are accomplishing the intent of the authorizing legislation. Q. You state you are having difficulty in your assessments particularly in the social action areas due to (1) the lack of clearly specifically stated program goals and objectives. What examples do you have of these and what would be your recommendation for correction? A. Several GAO reports have previously identified the problem of unclear and poorly stated program goals and objectives. For example: 1. Improvements Needed in Management of Projects to Develop Business Opportunities for the Poor (B-130515 of July 20, 1971) which states: Other problems involving one or more of the projects included. Unrealistic goals established in view of the amount of funds and the period of time available under the grant... OEO's and project's disagreements on program objectives (p. 2). 2. Criteria Needed for Measuring Technical Assistance Results and Contractor Performance (B-160789 of October 20, 1971) which states: Neither AID's project planning and programing documents nor the contracts themselves provided specific targets, goals, or objectives. AID therefore, could not evaluate progress and contractor performance objectively. (p. 1.) 3. Assessment of the Teacher Corps Program at the University of Southern California and Participating Schools in Tulane County Serving Rural-Migrant Children (B-164031(1) of August 25, 1971) which states: The Secretary of HEW should clarify for Teacher Corps officials the intent of the enabling legislation with respect to the use of corps members. (p. 4.) 4. Demonstration Grant Program Has Limited Impact on National Solid Waste Disposal Problem (B-166506 of February 4, 1972) which states: GAO attributes the limited effectiveness of the program to the failure of the Office of Solid Waste Management Program to: Establish specific program objectives (p. 2). Stated that they had not made a specific effort to design their programs to reach this goal and had not received any guidelines or instructions concerning it from the BIA central office. (pp. 1-2). 5. Management of Health Research and Teaching Facilities Construction Programs (B-164031(2) of June 16, 1972) which states: We recommend that HEW determine systematically health research needs and establish program objectives and priorities so that the needs can be met within the constraints of available funding limitation. (Annual Report, of the Comptroller General of the United States, Appendix, 1972, p. 32). 6. Review of the Administration of a Special Provision Contained in the Appropriation Act, 1972, Public Law 92-78, for the Veterans Administration (13–160299 of March 16, 1972) which states: We examined into the administration of a special provision of the Veterans Administration (VA) medical care appropriation, contained in Public Law 92-78, to determine whether the administration of this law was in full accord with the intent of the Congress. We reported that the intent of the Congress was to have VA operate at an average daily patient census of 85,500, with 97,500 operating beds during fiscal year 1972. The intent was clearly established in the language of the bill passed by the House of Representatives on June 30, 1971, and the bill passed |