	DOD’s Approach to Managing Follow-on Modernization May Hinder Transparency and Oversight

The F-35 program has begun planning and funding the development of  new capabilities, known as follow-on modernization, but our ongoing work  indicates that DOD’s current plan for managing the development of these  new capabilities may limit transparency and oversight. Although the requirements are not yet final  and no official cost estimate has been developed for Block 4, DOD’s fiscal  year 2017 budget request indicates that the department expects to spend  nearly $3 billion on these development efforts over the next 6 years (see  figure 1). Our preliminary analysis indicates that F-35 Block 4 development costs of  this magnitude would exceed the statutory and regulatory thresholds for  what constitutes a major defense acquisition program (MDAP), and it  would be larger than many of the MDAPs in DOD’s current portfolio. However, in August 2015, the Under Secretary of Defense for Acquisition,  Technology, and Logistics issued an Acquisition Decision Memorandum  directing the F-35 program office to manage Block 4 development under  the existing F-35 acquisition program baseline and not as a separate  incremental acquisition program. Best practices recommend an incremental  approach in which new development efforts are structured and managed  as separate acquisition programs and that a business case should match  requirements with resources—proven technologies, sufficient engineering  capabilities, time, and funding—before undertaking a new product  development. In March 2005 we found that the Air Force  was managing its multi-billion dollar F-22 modernization efforts as part of  the program’s existing acquisition baseline and had not established a  separate knowledge-based business case. As a result, the F-22 baseline  and schedule were adjusted to reflect the new timeframes and additional  costs, comingling the funding and some content for the baseline  development and modernization efforts—some content that had not been  achieved under the baseline program were deferred into the  modernization program. Program Continues to Face Affordability Challenges

Although the estimated F-35 program’s total acquisition costs have  decreased since 2014, the program continues to face affordability  challenges. The program expects to reach peak production rates for U.S. aircraft in  2022, at which point DOD expects to spend more than $14 billion a year  on average for a decade. At the same time, DOD will be operating and  sustaining an increasing number of fielded F-35 aircraft. Developmental Flight Testing Is Nearing Completion with Challenging Mission Systems Software Testing Remaining

The F-35 program is nearing the completion of the initial developmental  test program with about 20 percent of its flight sciences and mission  systems testing remaining; however our ongoing work indicates that the  remaining testing is likely to be challenging as it will require complex  missions and stressing environments. Ongoing Manufacturing and Reliability Progress Continue

Our ongoing work has shown that the F-35 airframe and engine  contractors continue to report improved efficiency and supply chain  performance, and program data indicates that reliability and  maintainability are also improving. In conclusion, our preliminary results indicate that, although the F-35  development program is nearing completion, the program is not without  risks. DOD’s plan to manage Block 4 under the current  acquisition program baseline presents oversight challenges because key  reporting requirements and oversight mechanisms will not be initiated;  therefore, the two efforts will be comingled. Without setting up the  modernization as a separate program with its own baseline and regular  reporting as best practices recommend, it will be difficult for Congress to  hold DOD accountable for achieving F-35 Block 4 cost, schedule, and  performance goals. In light of our ongoing work,  we are not making any recommendations to DOD at this time. We plan to  issue our final report in April 2016. We look forward to  continuing to work with the Congress as we to continue to monitor and  report on the progress of the F-35 program.
Why GAO Did This Study

With estimated acquisition costs of nearly $400 billion, the F-35 Joint Strike Fighter—also known as the Lightning II — is DOD's most costly acquisition program. Since 2001, GAO has reported extensively on the F-35 program's cost, schedule, and performance problems. The program plans to begin increasing production rates over the next few years.
The National Defense Authorization Act for Fiscal Year 2015 contains a provision for GAO to annually review the F-35 acquisition program. Today's testimony is based on ongoing work for the first report under this mandate, which GAO expects to issue in April 2016.This testimony focuses on GAO's preliminary observations regarding the F-35 program's (1) future modernization (2) affordability, remaining development, and ongoing manufacturing plans.
GAO analyzed program documentation including management reports, test data and results, and internal DOD program analyses. GAO collected data on F-35 development and test progress, and analyzed total program funding requirements. GAO also collected and analyzed production and supply chain performance data, and interviewed DOD, program, and contractor officials.
In light of its ongoing work, GAO is not making any recommendations at this time.

What GAO Found

GAO's ongoing work on the F-35 Joint Strike Fighter (F-35) program shows that the Department of Defense (DOD) has begun planning and funding significant new development work to add to the F-35's capabilities, an effort known as Block 4. The funding needed for this effort is projected to be nearly $3 billion over the next 6 years (see figure below), which would qualify it as a major defense acquisition program in its own right.
DOD does not currently plan to manage Block 4 as a separate program with its own acquisition program baseline but rather as part of the existing baseline. As a result, Block 4 will not be subject to key statutory and regulatory oversight requirements, such as providing Congress with regular, formal reports on program cost and schedule performance. A similar approach was initially followed on the F-22 Raptor modernization program, in which the funding and content were comingled making it difficult to separate the performance and cost of the modernization from the baseline program. Best practices recommend an incremental approach in which new development efforts are structured and managed as separate acquisition programs with their own requirements and acquisition program baselines. The F-22 eventually adopted such an approach. If the Block 4 effort is not established as a separate acquisition program, cost, schedules, and the scope of the baseline and modernization efforts will be comingled. Therefore, it will be difficult for Congress to hold DOD accountable for achieving its cost, schedule, and performance requirements.
GAO's ongoing work indicates that although the F-35 total program acquisition costs have decreased since 2014, the program continues to face significant affordability challenges. DOD plans to begin increasing production and expects to spend more than $14 billion annually for nearly a decade on procurement of F-35 aircraft. Currently, the program has around 20 percent of development testing remaining, including complex mission systems software testing, which will be challenging. Program officials continued to address many of the key technical risks, but the Autonomic Logistics Information System continues to be a challenge. At the same time, the contractors that build the F-35 airframes and engines continue to report improved manufacturing efficiency and supply chain performance.