In June 1998, the Air Force plans to proceed into the final development phase with the primary purpose of fabricating launch vehicles and activating the launch sites. More importantly, the methodology itself is inadequate for measuring potential program savings because it does not include the investment costs that DOD plans to incur in EELV system development to achieve cost savings. A net present value (NPV) analysis, which would use total program costs, is preferred. Methodology Used for Measuring Recurring Cost Reduction

The Air Force’s methodology for measuring recurring cost reduction is described in the following way: EELV recurring costs, meaning production and launch costs, should be a minimum of 25 percent less, with an objective of 50 percent less, than the recurring costs of using existing expendable launch vehicles—the Delta, Atlas, and Titan class systems. These costs are based on projected government launch requirements for fiscal years 2002 through 2020. Fluctuations in Mission Model Contents Make Cost Savings Uncertain

Since program inception in 1995, the total number, type, and timing of launches contained in the Air Force’s EELV mission model have fluctuated considerably, making a cost reduction estimate, based on the model, uncertain. The major reasons for the fluctuations were (1) assignment of satellites to the wrong type of launch vehicle, (2) inclusion of unverified launch requirements, and (3) reductions in the number of heavy-lift launches because of satellite downsizing. In commenting on a draft of this report, DOD stated that the Air Force is in the process of developing a new launch cost baseline, built around the most current EELV mission model, in preparation for the milestone II review. The standard criterion for deciding whether a government program can be justified on economic principles is NPV, which would include both recurring and nonrecurring costs, as well as the time value of money. Revised Acquisition Approach Contains Challenges, Risks, and Benefits

The use of a relatively new acquisition method, called other transactions, will challenge DOD in determining how best to protect the government’s interests. Also, risks are inherent in the program because of (1) DOD’s plan to limit its investment and the contractors’ resulting unwillingness to guarantee a system to meet the government’s launch requirements and (2) a chance that certain launch facilities may not be available as currently scheduled. Other Transaction Instruments Will Challenge DOD to Protect Government’s Interests

Initially, under DOD’s revised acquisition approach, the Air Force planned to award firm-fixed-price contracts to both EELV contractors for the development effort. This unwillingness is because DOD’s financial risk is to be capped at $500 million per contractor, while the contractors’ financial risk would be an open-ended commitment. We did not reassess these factors for this report; however, current Air Force planning documentation identifies meeting launch site facility preparation schedules as the primary program risk. Other Air Force planning documents show the continued use of certain launch facilities for several months after they are scheduled to undergo site preparations for EELV. In addition, we obtained DOD’s planned investment costs based on a combination of congressional appropriations and funds programmed by the Air Force for EELV development.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Evolved Expendable Launch Vehicle (EELV) program, with emphasis on the Department of Defense's (DOD) revised acquisition approach, focusing on whether: (1) DOD's goal of reducing recurring space launch costs could be achieved; (2) DOD's planned investment would result in commensurate benefits; and (3) there are risks that could affect the program.

What GAO Found

GAO noted that: (1) DOD's goal in acquiring the EELV system is to reduce recurring production and launch costs by at least 25 percent for fiscal years 2002 through 2020 from the costs that would be incurred if the existing Delta, Atlas, and Titan launch vehicles were used; (2) using DOD's methodology, GAO estimated that the program would exceed the 25-percent goal; (3) however, the number, type, and timing of launches specified in the vehicle's mission model have continued to fluctuate, making a cost reduction estimate, based on the model, uncertain; (4) the major reasons for the fluctuations were that: (a) satellites were assigned to the wrong type of launch vehicle; (b) launch requirements were unverified; and (c) satellite downsizing has changed launch requirements; (5) the Air Force is in the process of developing a new launch cost baseline and cost reduction estimate, based on the most current EELV mission model, in preparation for the DOD milestone II review in June 1998; (6) more importantly, the Air Force's recurring cost methodology does not adequately measure the economic benefits of the program; (7) the reason is that nonrecurring investment costs, which DOD plans to incur to develop the system in order to achieve a cost savings, are not included; (8) the standard criterion for deciding whether a government program can be justified on economic principles--the primary purpose of this program--is net present value (NPV), which would include both recurring and nonrecurring costs and the time value of money; (9) DOD has not yet officially performed a NPV analysis and has not identified all government costs to do so; (10) the use of other transaction instruments for EELV development will challenge DOD in determining how best to protect the government's interests; (11) under DOD's revised acquisition approach, the contractors are not willing to guarantee system performance because their financial risk would be open ended and DOD's investment would be limited; (12) despite this position, the Air Force is counting on the contractors to provide launch services to satisfy the government's requirements, based on their financial interest in a growing commercial market for launch services; (13) in addition, the Air Force planning documentation states that the primary program risk is in meeting launch site facility preparation schedules; and (14) other Air Force planning documentation shows the continued use of certain launch facilities for several months after the facilities are scheduled to undergo site preparation for the vehicle.