Science Applications International  Corporation (SAIC) has a contract with Boeing to provide assistance in  performing the LSI functions. The Army established a number of  key tenets that it wanted to achieve on the FCS program, in partnership  with the LSI. The Army not only went forward with FCS, it did so with a planned  schedule less than that of a single new system. The Army determined that  with its existing acquisition workforce and organizations, it did not have  the agility, capability, or capacity to manage the program without an LSI to  assist with certain aspects of program management. In addition to the complexity of the integration task, the Army also  outlined an unprecedented timeline for FCS’s development—about   5½ years—a shorter timeline than typical for a single weapon system  development. Hence, the Army would not have  the capacity to manage a multi-system effort like FCS with separate  program offices and likely would have had to turn to contractors to fully  staff the program offices. Army leadership noted that  traditionally, once the Army hired a prime contractor, that contractor  would bring its own supplier chains. On the one  hand, the LSI plays the traditional role of developing a product for its  customer, the Army, and on the other hand, the LSI also performs certain  program management and integration responsibilities for the entire  program and has a partner-like relationship with the Army. In forging a  close partner-like relationship with the LSI, the Army sought to gain  advantages such as maintaining flexibility to deal with shifting priorities. At the same time, this relationship, coupled with the vast scope of FCS and  the synonymy of the program with the future Army, poses risks for the  Army’s ability to provide independent oversight over the long term. OSD is  in a position to provide this oversight, but thus far has largely accepted the  program and its changes as defined by the Army, even though it is at wide  variance from the best practices embodied in OSD’s own acquisition  policies. OSD did not adopt  this estimate. Contract Provides Incentives for Best Effort but Not Accountability for Program Outcomes

The Army has structured the FCS contract consistent with its desire to  incentivize development efforts and make it financially rewarding for the  LSI for making such efforts. As  with many cost-reimbursable research and development contracts, the LSI  is responsible to put forth its best effort on the development of the FCS  capability. The definitized contract  between the Army and the LSI is a cost-reimbursable contract that is  valued at $17.5 billion, comprised of $15.2 billion in cost and up to a   15-percent fee of $2.3 billion. Majority of Program Fees and Costs Are Available to the LSI before FCS Systems Demonstrate Their Performance

Under the terms of the FCS contract, the LSI can earn over 80 percent of  its $2.3 billion fee by the time the program’s critical design review is  completed in 2011, and roughly 80 percent of contract costs will have been  paid out by the Army by that point. We have found that most cost growth on weapon system development  programs occurs after the critical design review. The FCS contract is a cost-reimbursement research and development  contract. For example, FCS is not the first system-of-systems  program DOD has proposed, but it is arguably the most complex. We are sending copies of this report to the Secretary of Defense; the  Secretary of the Army; and the Director, Office of Management and  Budget. Appendix I: Scope and Methodology

To identify factors that led to the Army’s decision to use an LSI for the  FCS program and to determine the work performed by the LSI, we  performed the following:    We obtained and analyzed the program documents including the  FCS system development and demonstration contract, statement of  work, Army FCS acquisition strategy report, and FCS operational  requirements document to gain an understanding of the terms and  conditions of LSI responsibilities, the structure and processes of the  program, and goals of the Army. To evaluate the Army’s criteria for assessing the LSI’s performance, we  conducted the following:    We reviewed the financial terms of the contract, the criteria for  assessing the LSI’s performance at program incentive events  contained in the contract and integrated master plan and conducted  quantitative analyses of the contract’s fixed and incentive fees;    We reviewed the LSI’s presentations for the Army’s assessment and  also interviewed Army officials, who were responsible for reviewing  the LSI’s performance.
Why GAO Did This Study

The Army's Future Combat Systems (FCS) program features multiple new systems linked by a first-of-a-kind information network. The Army contracted with a lead systems integrator (LSI) for FCS that could serve in a more expansive role than a typical prime contractor would. In response to a congressional mandate, this report addresses (1) why the Army decided to employ an LSI for the FCS program; (2) the nature of the LSI's working relationship with the Army; and (3) how FCS contract fees, provisions, and incentives work. In conducting its work, GAO reviewed extensive program documentation and held discussions with key officials at DOD and throughout the FCS program.

What GAO Found

In 2003, the Army contracted with an LSI for FCS because of the program's ambitious goals and the Army's belief that it did not have the capacity to manage the program. The original timeframe for FCS's development was a shorter time frame than for an individual weapon system program, let alone a complex systems-of-systems program with a high number of immature technologies at program start. The Army realized that its compartmentalized workforce did not lend itself to the kind of crosscutting work that the FCS program would demand. The Army workforce also did not have the expertise needed to develop the FCS information network or enough people to support the program had it been organized into separate program offices. In contracting with the Boeing Company as LSI, the Army believed it found a management partner who could define and develop FCS and reach across the Army's organizations. Boeing subcontracted with another company, Science Applications International Corporation, to assist with its responsibilities as LSI. The working relationship between the LSI and the Army is complex. The LSI is a traditional contractor in terms of developing a product for its customer, the Army, but also serves like a partner to the Army in management of the FCS program. In its management role, the LSI makes decisions collaboratively with the Army. An advantage of this arrangement is that the LSI and Army can maintain flexibility when dealing with shifting priorities. However, that relationship may pose significant risks to the Army's ability to provide oversight over the long term. The Office of the Secretary of Defense is in a position to provide this oversight but thus far has allowed the Army to depart significantly from best practices and the Office's own policy for weapon system acquisitions. For example, the Office of the Secretary of Defense has also allowed the Army to use its own cost estimates rather than independent--and significantly higher--cost estimates when submitting budget requests. The Army's experience with the LSI on the FCS program may provide the Office of the Secretary of Defense insights on broader acquisition management issues. The Army has structured the FCS contract consistent with its desire to incentivize development efforts. The definitized cost-reimbursable research and development contract valued at $17.5 billion contains up to a 15 percent total fixed/incentive fee, or about $2.3 billion. As with many research and development contracts, the FCS contract obligates the contractor to put forth its best efforts, but does not assure successful outcomes. Assuming that critical design review is completed in 2011, the Army will have paid the LSI over 80 percent to cover the contract costs, plus a possible 80 percent of its fee or profit. GAO has previously reported that most cost growth in DOD weapon system programs occurs after critical design review. Therefore, it is possible for the LSI to have garnered most of its payouts in costs and fees early next decade, even if despite its best efforts, the FCS capability ends up falling far short of the Army's goals. The Army notes that its fee structure is intended to encourage good performance early in the program.