Figure 1  below depicts a notional schedule of how the Air Force plans to replace  its current KC-135s over the next several decades. KC-46 Program Has Established Its Acquisition Strategy

The KC-46 program has established its acquisition strategy for aircraft  development and production, which includes a total cost estimate of  $51.7 billion, aircraft quantities to be procured, key milestone dates, and  test and manufacturing schedules. The KC-46 program is using a fixed- price contract for development, designed to provide a profit incentive for  the contractor to control costs, while limiting government liability for  increased costs over a certain amount. The program has also identified  nine key performance parameters (KPP) critical to enabling the KC-46 to  meet mission requirements, but has not yet fully implemented metrics that  will be used to track the achievement of these KPPs. At this price,  aircraft would cost almost $230 million on average. Table 3 provides development contract details  and the current contract and government estimates to complete  development. The target price is $4.4 billion and the ceiling  price $4.9 billion. The government’s share is 60 percent while Boeing’s is 40  percent. Legislation and defense policy now directs the Milestone  Decision Authority for a major defense acquisition program to select the  contract type for a development program at the time of a decision on  Milestone B that is consistent with the level of program risk for the  program. Also, while  designing a new tanker that uses a modified commercial platform may not  be as technically challenging as an all new weapon system, the program  still faces some technical risks, including three critical technologies that  have not yet been tested in a realistic environment. The Air Force and Boeing are both concerned about the risks in the KC- 46 development and test schedule. Software. These technologies have not yet been demonstrated in a realistic  environment, a higher level of maturity that is a best practice. Wing Aerial Refueling Pod instability. With Some Exceptions, the Program’s Development Strategy Generally Adheres to Best Practices, Acquisition Reform Legislation, and DOD Policy

The KC-46 program’s acquisition strategy and business case generally  meet GAO’s knowledge-based acquisition approach and best acquisition  practices, including those in legislation to improve the weapon system  acquisition process. Also, the contents of the program’s requirements  documentation generally comply with DOD guidance. Instead, the design review is planned for March 2012, about a year after  the start of development. Its fixed-price incentive (firm target) development  contract is designed to limit the government’s liability for increased costs. Recommendations for Executive Action

As one of only a few major acquisition programs to award a fixed-price  incentive (firm target) development contract in recent years, evaluating  performance and identifying lessons learned will be very illustrative and  important to inform decision-makers and help guide and improve future  defense acquisition programs. To determine the program’s acquisition strategy, including its contracting  approach, we reviewed briefings by program and contractor officials,  budget documents, the Acquisition Program Baseline (APB), the Selected  Acquisition Report (SAR), monthly activity reports, performance  indicators, risk assessments and other data. In order to evaluate the major schedule and technical risks faced by the  program, we reviewed the KC-46 Integrated Master Schedule and  compared it to the program’s APB and SAR in order to identify potential  concurrency in the program’s design reviews, flight testing, and low rate  production. To assess the extent the program is complying with acquisition policy,  legislation, and best practices, we also compared key program  documentation and execution with current DOD policy, GAO best  practices, and recent acquisition reform legislation to determine areas of  compliance and areas for further review as the program continues  forward.
Why GAO Did This Study

Aerial refueling is essential to global U.S. military operations. The backbone of the nations tanker forcesthe KC-135 Stratotankeris over 50 years old on average with age-related problems and increasing support costs that could ground the fleet. Given this, the Air Force has initiated the $51.7 billion KC-46 program to start replacing the current fleet. Plans are to produce 18 tankers by 2017 and 179 aircraft through 2027. Other follow-on procurements are anticipated to replace all KC-135s.
The National Defense Authorization Act for Fiscal Year 2012 requires GAO to annually review the KC-46 program through 2017. This report addresses (1) the programs acquisition strategy, including its contracting approach; (2) the major schedule and technical risks; and (3) the extent the programs acquisition strategy and documentation comply with policy, legislation, and best practices. To address these areas, GAO reviewed key documents on the programs contract and cost baseline. GAO discussed the major schedule and technical risks with program office officials and examined an independent technology readiness assessment. GAO also assessed the acquisition plan and required documentation to determine compliance with acquisition legislation, policy, and best practices.

What GAO Found

The KC-46 program has established its acquisition strategy for development and production, including total cost, procurement quantities, and key milestone dates. The program is using a $4.4 billion fixed-price incentive (firm target) development contract that provides contractor incentives to control costs and limits the governments liability for increased costs over a certain amount. While estimated development costs are currently $900 million higher than the February 2011 contract award amount, the governments share of these extra costs is limited to about $500 million. The program has identified key performance parameters, but has not yet fully implemented the metrics for tracking their achievement.
There is broad agreement that KC-46 schedule risk is a concern. In GAOs assessment, significant concurrency, or overlap, among development and production activities add risk to the program. The Air Force and contractor have assessed overall schedule risk as moderate, citing concerns about software and the ability to complete development flight testing on time. Further, the DODs chief testing official finds the testing schedule not executable as currently planned. While designing a new tanker using a modified commercial platform is not as technically challenging as a more revolutionary weapon system, the program still faces some technical risks, including technologies that have not yet been demonstrated during flight.
The KC-46 programs acquisition strategy provides a good framework for meeting GAOs knowledge-based best practices, and generally adheres to defense policy guidance and recent acquisition reform legislation. DOD waived the requirement for a preliminary design review before the program began system development and demonstration, but this design review is planned for March 2012. Although the programs three critical technologies have not yet achieved the level of maturity indicated in best practices, they have reached a level of maturity consistent with DOD policy. Given that the KC-46 is one of only a few major programs in recent years to use a fixed-price incentive contract and the importance of tanker replacement to national security, rigorous monitoring of the programs progress will be essential.

What GAO Recommends

GAO recommends DOD leadership monitor the progress and outcomes of this contract to provide lessons learned for future acquisition programs, and the program fully implement metrics to track achievement of key performance parameters. DOD fully concurred.