Input:
	Background

		EXIM Financing Product Types

As described in figure 1, to support U.S. exports, EXIM offers four major  types of financing products: direct loans, loan guarantees, export-credit  insurance, and working capital guarantees. Regardless of type, EXIM’s  financing products generally have one of three maturity periods: Short- term transactions are for less than 1 year; medium-term transactions are  from 1 to 7 years long; and long-term transactions are more than 7 years.
As we reported in July 2018, for all financing types, EXIM currently  conducts a number of preauthorization and postauthorization antifraud  activities. See the examples shown in figure 2.

		Fraud Risk Management

Fraud and “fraud risk” are distinct concepts. Fraud—obtaining something  of value through willful misrepresentation—can be challenging to detect  and adjudicate because of its deceptive nature. Fraud risk exists when  individuals have an opportunity to engage in fraudulent activity, have an  incentive or are under pressure (e.g., financial pressures) to commit  fraud, or are able to rationalize committing fraud. When fraud risks can be  identified and mitigated, fraud may be less likely to occur. Although the  occurrence of fraud indicates there is a fraud risk, a fraud risk can exist  even if actual fraud has not yet been identified or adjudicated.
According to the Standards for Internal Control in the Federal  Government, executive-branch agency managers are responsible for  managing fraud risks and implementing practices for combating those  risks. Specifically, federal internal control standards call for agency  management officials to assess the internal and external risks (including  fraud risks) their entities face as they seek to achieve their objectives.  The standards state that as part of this overall assessment, management  should consider the potential for fraud when identifying, analyzing, and  responding to risks. Risk management is a formal and disciplined  practice for addressing risk and reducing it to an acceptable level.
The leading practices in the Fraud Risk Framework call for agencies to  identify inherent fraud risks affecting the program, examine the suitability  of existing fraud controls, and then prioritize mitigating “residual” fraud  risks—that is, risks remaining after antifraud controls are adopted.  Specifically, according to the assess component of the Fraud Risk  Framework, managers who effectively assess fraud risks attempt to fully  consider the specific fraud risks the agency or program faces, analyze the  potential likelihood and impact of fraud schemes, and then ultimately  document prioritized fraud risks. Moreover, managers can use the fraud  risk assessment process to determine the extent to which controls may  no longer be relevant or cost-effective. Leading practices that are  consistent with this component include  conducting quantitative or qualitative fraud risk assessments at  regular intervals, or both, of the likelihood and impact of inherent risks  on the program’s objectives, and determining the agency’s risk  tolerance for the inherent fraud risks;  identifying specific sources for gathering information about fraud risks,  including information on fraud schemes that are reflected in  adjudicated cases of fraud; examining the suitability of existing fraud controls for preventing fraud  and mitigating fraud risks identified; and documenting in the program’s fraud risk profile the analysis of the  types of inherent fraud risks assessed, their perceived likelihood and  impact, managers’ risk tolerance, and the prioritization of the inherent  fraud risks and any residual fraud risks.
As we reported in July 2018, the Fraud Reduction and Data Analytics Act  of 2015 requires the Office of Management and Budget (OMB) to  establish guidelines that incorporate the leading practices of GAO’s Fraud  Risk Framework. The act also requires federal agencies to submit to  Congress a progress report each year, for 3 consecutive years, on  implementation of the risk management and internal controls established  under the OMB guidelines. OMB published guidance under OMB  Circular A-123 in 2016 affirming that federal managers should adhere to  the leading practices identified in the Fraud Risk Framework. As we  reported in December 2018, EXIM identifies itself as subject to the act,  and, as such, follows it. The Fraud Risk Framework is also aligned with  federal internal control standards, specifically Principle 8 (“Assess Fraud  Risk”) of the Green Book.
Federal internal control standards also state that excessive pressures,  such as financial pressures (e.g., delinquent federal debt), can pose a  fraud risk factor to agency programs as these pressures can provide an  incentive or motive to commit fraud. Although the existence of financial  pressure alone does not necessarily indicate that fraud exists or will  occur, financial pressure is often present when fraud does occur.

		Delinquent Federal Debt and EXIM Financing Programs

Applicants for EXIM programs who have delinquent federal debt may not  be able to obtain certain types of financing until they resolve their debts.  Specifically, under 31 U.S.C. § 3720B, applicants who are delinquent on  federal nontax debts may not receive federal financial assistance,  including such assistance provided by EXIM, until they satisfactorily  resolve the delinquency (e.g., pay in full or negotiate a new repayment  plan). However, 31 U.S.C. § 3720B also provides that an agency head  may waive this restriction. Additionally, OMB’s Circular No. A-129,  Policies for Federal Credit Programs and Non-Tax Receivables,  prescribes to agencies the policies, procedures, and standards for  screening program participants to determine whether they are delinquent  on any federal debt when applying to federal credit programs.

	EXIM Reported Antifraud Controls for Mitigating Fraud Risks Identified and a Fraud Risk Assessment That Considered Those Risks Closed Cases of Fraud Generally Involve Four Fraud Risk Factors

We identified fraud risks—generally involving four overall fraud risk  factors—by examining EXIM-associated court cases of fraud adjudicated  from calendar year 2012 through calendar year 2017. We then  communicated these fraud risks to EXIM, and EXIM officials reported  examples of existing controls it uses to help detect and mitigate these  fraud risks. EXIM also provided documentation reflecting its efforts to  conduct a fraud risk assessment that considered various fraud risks  affecting its major financing product lines, including fraud risks we  identified during this review.
We identified fraud risks—generally involving four overall fraud risk  factors—by examining 44 EXIM-associated closed court cases of fraud  adjudicated from calendar year 2012 through calendar year 2017.  Specifically, the various fraud risks we identified overall involved one or  more of the fraud risk factors illustrated in figure 3 below: opportunities to falsify self-reported information on applications or  financial pressures that potentially incentivized participants or  employees to commit fraud; opportunities to circumvent or take advantage of EXIM or lender opportunities to circumvent the intent of EXIM’s programs by diverting  loan proceeds and other EXIM financing for personal use or benefit  instead of for the export of U.S. goods.
See appendix I for a summary of these 44 cases we reviewed.
These 44 cases illustrate the financial risks associated with fraud against  EXIM. Federal and state courts combined have ordered restitution of  $82.4 million in the 44 adjudicated cases, but much of that restitution has  not yet been paid. For example, as of October 2018, the total remaining  unpaid restitution amount is $71.6 million, or over 80 percent. In one fraud  case we reviewed, which was adjudicated in 2013, a federal court  ordered a convicted U.S. exporter to pay EXIM $8.6 million in restitution  for the fraud that he committed in a loan guarantee program. Since 2013,  the participant has paid back $25.00 of this amount.

		EXIM Reported Antifraud Controls for Mitigating Fraud Risks Identified in Closed Cases

EXIM reported having existing antifraud controls to mitigate the fraud  risks we identified. Specifically, we communicated to EXIM the fraud risks  we identified from our review of the 44 adjudicated cases. In response,  EXIM officials described general antifraud controls the agency currently  uses to help detect and mitigate each of the fraud risks we identified. The  officials stated that EXIM has experience with all the fraud risks we  identified and stated that they were generally confident that EXIM’s  antifraud controls were appropriate for mitigating the risks. EXIM officials  consider many of the fraud risks that we identified as risks that could  impact any of the agency’s financing programs (i.e., credit insurance, loan  guarantees, direct loans, or working capital guarantee programs).
EXIM officials provided examples of the general antifraud controls that  they said EXIM uses to mitigate the fraud risks we identified across all  agency financing products. According to EXIM officials and as illustrated  in figure 4 below, these controls include: fraud prevention and detection  procedures; due diligence standards; and a list of “red flags” that EXIM  staff should be aware of and is used to identify indicators of potential  fraud and corruption that may appear on EXIM transaction documents.  Officials said that their confidence in the controls stems from seeing a  reduction in fraud cases since the early 2000s after these antifraud  controls were put in place.
EXIM officials clarified that this confidence does not stem from completing  a comprehensive fraud risk assessment of fraud risks impacting all of its  financing products consistent with the leading practices in the Fraud Risk  Framework.

		EXIM’s Fraud Risk Assessment Considered Fraud Risks Identified

EXIM also provided documentation reflecting its efforts to conduct a fraud  risk assessment that considered various fraud risks affecting its major  financing product lines, including fraud risks we identified during this  review. EXIM officials said that the fraud risks we identified were  generally already known to EXIM as they relate to or are very similar to  those fraud risk factors contained in EXIM’s list of red flags. EXIM officials  acknowledged that assessing its fraud risks and evaluating the agency’s  existing antifraud controls may indicate opportunities for EXIM to further  adapt EXIM’s antifraud controls to mitigate any residual fraud risks within  its tolerance level. Such assessments can further help EXIM mitigate  fraud and the resulting effects across all product lines before they occur,  which includes the length of time it can take for EXIM to fully recover from  restitution losses after fraud has been perpetrated, as illustrated in the 44  cases presented in appendix I.

	EXIM Has Procedures for Detecting Delinquent Federal Debt Owed by Applicants and Participants but Is Missing Additional Opportunities to Use Readily Available SAM Data to Do So

EXIM has procedures for detecting delinquent federal debt owed by EXIM  applicants and participants. However, EXIM is missing additional  opportunities to use readily available SAM data to identify ineligible  applicants or participants that may have delinquent federal debt, and to  use such data to determine eligibility or assess repayment fraud risk.

		EXIM Has Procedures to Detect Delinquent Federal Debt Owed by Applicants and Participants

EXIM has procedures to detect delinquent federal debt owed by  applicants and participants that include reviewing their credit reports and  requiring applicants to certify that they and other participants do not have  such delinquent debt. Under 31 U.S.C. § 3720B, applicants who are  delinquent on federal nontax debts may not receive federal financial  assistance, including direct loans, loan guarantees, or loan insurance until  they satisfactorily resolve the delinquency (e.g., pay in full or negotiate a  new repayment plan). 31 U.S.C. § 3720B does not address delinquent  federal tax debt; however, such delinquent federal debt may also pose a  fraud risk or repayment fraud risk to EXIM’s financing programs.  Additionally, OMB Circular No. A-129 prescribes to agencies the policies,  procedures, and standards for screening program participants to  determine whether they are delinquent on any federal debt when applying  to federal credit programs, including  recommending that agencies ask applicants to self-certify on their  applications that they have no delinquencies;  requiring agencies to obtain and review applicants’ credit reports; and encouraging agencies to use appropriate databases, such as the  Department of the Treasury’s Do Not Pay portal sources to identify  delinquent federal debtors during the application screening process.
According to EXIM officials, the agency employs procedures to ensure its  policies and processes meet these requirements for applicable financing  products. Specifically, and as illustrated in figure 5 below, these  procedures include reviewing the following:
Self-certifications: EXIM applications for relevant financing programs  include a self-certification by the applicant that the applicant does not  have delinquent federal debt. However, as we have reported in the  past, relying on applicants to self-report adverse actions on their  applications, instead of verifying such information, could cause an  agency to miss opportunities to develop a more-complete picture of  the applicants.
Credit reports: EXIM obtains credit reports for applicants and  participants in some financing products. In particular, EXIM’s  internal Loan Guarantee and Credit Insurance Manual of 2015  communicates the 31 U.S.C. § 3720B restriction to loan officers and  instructs them to review the borrower’s credit report to check whether  the borrower is delinquent on any federal debt. If the loan officer finds  that the credit report reflects such delinquent federal debt, the manual  further instructs the loan officer to advise and request guidance from  EXIM’s Trade Finance Director and the Office of General Counsel.  However, as we have reported in the past, some delinquent federal  tax debt may not appear on the credit reports unless the Internal  Revenue Service has filed a lien on the delinquent federal tax debt.
World Check: EXIM, through the assistance of a third-party vendor,  also makes use of some data sources listed in the Do Not Pay  sources as part of its prescreening application process and possibly  during postauthorization risk-based reviews. Specifically, EXIM  officials told us that EXIM uses Thomson Reuters’s World Check  database to identify federal debts owed by applicants as part of its  Character, Reputational, and Transaction Integrity (CRTI) review  process that is managed by EXIM’s Credit Review and Compliance  Division. The World Check database currently checks over 20  different watch lists and other databases, including lists of entities  excluded from doing business with the federal government maintained  in GSA’s SAM. According to EXIM, other sources in the World  Check database that reveal such federal debts could also lead  indirectly to the discovery of delinquent federal debt. However, as  discussed below, this check of SAM does not involve a check of  delinquent federal debt. This CRTI review process is conducted  during the underwriting (i.e., the preauthorization review) phase and  may occur throughout the life cycle of transactions, such as during  EXIM’s postauthorization risk-based reviews. EXIM officials told us  that, as part of this process, loan officers or other EXIM officials send  the names of applicants to EXIM librarians, who perform a manual  search of the World Check database, review results, and return  relevant results to EXIM officials for their consideration. EXIM officials  noted that this process can be challenging, particularly when librarians  perform searches on applicants with common names, which produce  many results that are not useful.
EXIM officials told us that EXIM does not track information on instances in  which an applicant’s delinquent federal debt prevents a transaction from  moving forward or prevents a specific applicant’s participation in a  transaction. Consequently, EXIM officials told us that EXIM has no  records of this happening. However as described in greater detail below,  EXIM does not make use of readily available SAM data to identify  delinquent federal debts owed by applicants and participants, which could  limit its ability to detect instances in which applicants and participants owe  these debts.

		EXIM Is Missing Additional Opportunities to Use Readily Available SAM Data to Detect Applicants and Participants That May Have Delinquent Federal Debt

EXIM is missing additional opportunities to use readily available SAM  registration data to identify potentially ineligible applicants and  participants that may have delinquent federal debt or may otherwise  pose a repayment fraud risk. Specifically, while EXIM employs  procedures that may reveal applicants’ delinquent federal debts, as  described above, EXIM’s procedures for identifying applicants and  participants with delinquent federal debt do not include a search of a  specific data element in the SAM database that can be used to detect  delinquent federal debtors. The data element we refer to here is the Debt  Subject to Offset flag, which may reflect both nontax and tax delinquent  federal debts owed. As mentioned previously, SAM is a government-wide  information system that federal agencies can use to obtain information on  businesses that do business with the federal government, including an  entity’s Debt Subject to Offset status. The Debt Subject to Offset data  element in SAM indicates that the entity potentially has a delinquent  federal debt subject to collection under the Treasury Offset Program.
The GSA officials who maintain the SAM database told us that all federal  agencies have the legal authority to use the SAM registration database  free of charge. Specifically, all federal agencies can use this database to  manually search by an entity’s name, Data Universal Numbering System  number, or Tax Identification Number for the purpose of detecting  whether the entity potentially has delinquent federal debt, such as by  identifying whether an entity’s SAM record contains the Debt Subject to  Offset flag. Further, GSA officials also told us that all federal agencies  are able to request batches of SAM registration data free of charge, for  the purpose of matching these data to agency data by entities’ names,  Data Universal Numbering System numbers, or Tax Identification Numbers for the purpose of identifying entities that may have the Debt  Subject to Offset flag in SAM, among other available data.
Performing data analytics, such as batch matching, on available data is  a leading practice cited in the Fraud Risk Framework that we have  reported can help improve agency efforts to combat fraud. In particular,  we have found in prior work that using available data to verify that EXIM’s  transaction applicants are not delinquent on federal debt can help EXIM  assure applicant eligibility is consistent with federal guidance, provide  reasonable assurance of repayment, and help prevent fraud. We have  also found that using available data to independently verify self-reported  delinquent federal debt information, such as self-reported information on  delinquent federal tax debt owed, is a key detection and monitoring  component of fraud prevention.
We identified additional opportunities for EXIM to manually use SAM’s  online database or data-matching approaches to identify applicants or  participants with potential delinquent federal debt. Specifically, we  registered in SAM to conduct several manual searches (by entities’ Data  Universal Numbering System numbers, Tax Identification Numbers, and  names) and confirmed that it can be used to conduct such searches  without incurring any external costs charged by GSA. For example, we  conducted two Data Universal Numbering System number searches and  found two active EXIM participants appearing in SAM’s registration  database with a Debt Subject to Offset flag. We also obtained historical  SAM data from GSA and EXIM transaction data and confirmed that these data sources could be used to identify EXIM applicants and participants  with potentially delinquent federal debt in a batch match (rather than  manual, case-by-case searches). As illustrated in our batch-matching  results below, we found this data-matching process can provide an  opportunity to match these data sets using the Tax Identification Numbers  and Data Universal Numbering System numbers for the entities in both  data sets.
Our batch-matching analyses indicated that, from calendar year 2014  through calendar year 2016, EXIM authorized transactions that had an  aggregate authorization value of approximately $34.3 billion. Of that  amount, we found the following:
An aggregate authorization value of about $1.7 billion was associated  with 32 U.S.-based companies that had a delinquent federal debt  indicator in SAM in the same month that these transactions were  authorized. The transactions mostly involved U.S.-based applicants  and exporters. As mentioned above, associated parties we reviewed  included not only the applicant, but also participants involved,  including the borrower, buyer, and exporter, which may or may not be  the applicant. While the results of this analysis do not mean that EXIM  should have suspended these transactions in accordance with 31  U.S.C. § 3720B, these results nonetheless indicate that the data in  SAM that indicate delinquent federal debt could provide an  opportunity for EXIM to identify important indicators of applicants or  other transaction participants with potential delinquent federal debt  when determining their program eligibility and assessing any related  fraud risks or repayment risks they present during EXIM’s  preauthorization CRTI reviews. Because the Debt Subject to Offset  flag may indicate either nontax debts or tax debts, it is possible that  some of these entities owed delinquent federal nontax debts that are  applicable under 31 U.S.C. § 3720B, indicating EXIM should have  considered suspending these transactions. However, it is also  possible that some of these entities owed delinquent federal tax debts  that are not applicable under 31 U.S.C. § 3720B, but that may pose a  fraud risk or repayment risk nonetheless. By using the Debt Subject to  Offset flag as an indicator of these delinquent federal debts and  gathering additional information on the specific facts and  circumstances of each case, EXIM would be better positioned to  assess the relevant compliance, fraud, and repayment risks an  applicant’s or participant’s delinquent federal debt may pose.
An aggregate authorization value of about $4.1 billion was associated  with 97 U.S.-based companies that had a delinquent federal debt  indicator in SAM during the transaction maturity period (i.e., after the  month they were approved, but before the transactions’ maturity  date). These transactions mostly involved U.S.-based applicants  and exporters. As mentioned above, associated parties we reviewed  included not only the applicant, but also participants involved,  including the borrower, buyer, and exporter, which may or may not be  the applicant. 31 U.S.C. § 3720B may prevent applicants with federal  financial debts from obtaining loans, guarantees, and insurance; thus,  it does not apply to any delinquent federal debt accrued after loan  approval. However, we looked at potential delinquent debt accrued  after approval because delinquent debt accrued after approval and  during the transaction maturity period might affect EXIM’s view of a  financing product’s repayment risk. Further, EXIM already conducts  similar postauthorization monitoring to identify such risks through its  use of World Check as part of its CRTI process described above.  Thus, these results nonetheless illustrate that EXIM can use SAM  data during EXIM’s postauthorization CRTI reviews to identify  transaction participants with potential delinquent federal debt and  determine the extent to which they may pose a repayment fraud risk.
Prior to sharing our results with EXIM, EXIM officials told us that they  have access to SAM entity registration records, but they believe  searching the SAM registration database is a time-consuming process  that should be reserved for rare circumstances. Further, EXIM officials  also told us that using the SAM registration database to identify  applicants or participants that have the Debt Subject to Offset flag in SAM  would yield few results because the vast majority of their financing  program participants are foreign-based entities, and thus would not also  be contractors for the U.S. government and registered in SAM.  However, we identified many U.S.-based entities that had a delinquent  federal debt indicator either in the month a transaction was approved, or  during the transaction’s maturity period, by searching in the SAM  database and analyzing SAM data for EXIM applicant and participants, as  described above. Further, it is not clear whether performing manual  searches or batch matches with SAM data to identify delinquent federal  debtors would be any more time-consuming than EXIM’s current  procedures for doing so, which include manual searches of World Check  and obtaining and reviewing credit reports, as described above.
When we met with EXIM officials to communicate our batch-matching  results above, they expressed concern that these results could imply that  EXIM is doing business with applicants or participants with delinquent  federal debt. They then indicated that they were interested in obtaining  SAM registration data so that they could determine whether it would be  feasible for them to perform the same type of analysis that we performed.  In a subsequent meeting, EXIM officials informed us that they were also  able to obtain current SAM registration data, analyze the SAM data  against active EXIM participant data, and find dozens of active EXIM  participants with the Debt Subject to Offset flag in SAM.
The results of our analyses, as well as EXIM’s own experience with the  SAM data, suggest EXIM also has an additional and practical opportunity  to incorporate searches of SAM entity registration data as part of its  postapproval monitoring of transactions to enhance its monitoring of and  response to risks in ongoing transactions. Standards for Internal Control  in the Federal Government state that management should use quality  data to achieve agency objectives. For example, this could include  agencies obtaining relevant operational, financial, or compliance-related  data from reliable internal and external sources in a timely manner based  on identified information requirements, and then using such data to make  informed decisions and evaluate performance in achieving program  objectives and addressing risks.
Without also pursuing available debt data in SAM’s registration database,  as an additional layer of due diligence, to identify applicants with  delinquent federal debt during underwriting and compliance reviews,  EXIM is potentially forgoing practical opportunities to use such data when  determining applicants’ program eligibility and to adopt leading practices  for managing repayment fraud risks across EXIM’s financing programs. In  particular, such available SAM data can provide opportunities to  verify independently the applicants’ self-certification of delinquent  federal debts they owe and assess whether the applicants may have  misrepresented their delinquent federal debt status on their  applications, which is a fraud risk in the application process; detect potential delinquent federal debts that are not apparent in credit make informed eligibility decisions during preauthorization CRTI  reviews and assess repayment fraud risk during postauthorization  CRTI reviews.

	Conclusions

EXIM assumes the credit and country risks that the private sector is  unable or unwilling to accept, including the risk of losses due to fraud.  EXIM’s financing products face various fraud risks, and EXIM has begun  to take steps to consider these fraud risks as part of a full fraud risk  assessment, as we recommended in July 2018. However, because it  remains unclear whether EXIM’s actions fully respond to the  recommendations of our July 2018 report, we will continue to monitor  EXIM’s progress in fully assessing its fraud risks. EXIM also employs  procedures to detect delinquent federal debt owed by EXIM applicants  and participants. However, EXIM is missing opportunities to use readily  available SAM data to identify applicants or participants that may  misrepresent their delinquent federal debt status and pose a repayment  fraud risk to EXIM financing programs. Applicants or participants with  delinquent federal debt could be one of many repayment fraud risks that  could indicate an increased risk of nonrepayment and incentives to  commit fraud against EXIM. EXIM officials believe searching SAM is a  time-consuming process that would yield few results. However, manually  searching SAM’s online registration database for the purpose of  determining whether an applicant or participant may have a Debt Subject  to Offset flag may not be any more time-consuming than what EXIM  currently performs through its preauthorization or postauthorization CRTI  reviews. Nevertheless, we demonstrate in this report the practicality and  illustrate results of using such data through multiple approaches, such as  batch matching, without incurring any external costs charged by GSA. By  assessing the practicality of searching SAM data, EXIM may determine  that this source of data provides an additional tool for combating fraud.  Implementing these antifraud activities could further help EXIM verify  program eligibility, identify repayment fraud risk, and provide EXIM with  reasonable assurance that it is effectively and efficiently carrying out its  mission of supporting U.S. jobs and the export of U.S. goods.

	Recommendations for Executive Action

We are making the following two recommendations to EXIM:  EXIM’s chief operating officer should direct EXIM’s Credit Review and  Compliance Division to assess and document the practicality of  incorporating into its preauthorization CRTI reviews searches of data  elements in SAM that indicate delinquent federal debts owed by  applicants, and, if practical, implement relevant approaches—such as  manual searches or batch matching. (Recommendation 1)
EXIM’s chief operating officer should direct EXIM’s Credit Review and  Compliance Division to assess and document the practicality of  incorporating into its postauthorization CRTI reviews searches of data  elements in SAM that indicate delinquent federal debts owed by  applicants and participants, and, if practical, implement relevant  approaches—such as manual searches or batch matching.  (Recommendation 2)

	Agency Comments and Our Evaluation

We provided a draft of this report to EXIM for review and comment. In its  written comments, reproduced in appendix II, EXIM concurred with our  recommendations and stated that it will move forward to implement them.  EXIM also provided technical comments, which we incorporated as  appropriate.
In its written comments, EXIM noted a number of points it referred to as  “key concerns.” These points do not disagree with our findings,  conclusions, or recommendations. Specifically, EXIM stated that the 44  cases we reviewed involved transactions that were approved between  2002 and 2012 and that it will continue to work with the Department of  Justice to collect restitution payments. Additionally, EXIM stated that it is  in full compliance with 31 U.S.C. § 3720B and the related provisions of  OMB Circular A-129 guidance regarding restrictions on doing business  with delinquent federal debtors. However, assessing EXIM’s compliance  with 31 U.S.C. § 3720B or OMB Circular A-129 was outside the scope of  this report.
Finally, for the purpose of implementing our recommendations, EXIM  requested the data pertaining to the U.S.-based companies that we found  to have a delinquent federal debt indicator in SAM. To identify those  companies, we used (1) an extract of data that EXIM provided to us, and  (2) GSA SAM data, which EXIM told us it can and has already obtained  directly from GSA. We will provide EXIM with a copy of the EXIM data it  requested. However, we believe EXIM will be better positioned to assess  the practicality of checking the SAM delinquent federal debt flag by  continuing to obtain the SAM data directly from GSA.
We are sending copies of this report to the appropriate congressional  committees, the president and board chairman of EXIM, and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

Appendix I: Summary of GAO Review of 44 Cases Adjudicated from Calendar Years 2012 through 2017

The table below summarizes the information we reviewed during our  review of the 44 Export-Import Bank of the United States (EXIM)- associated cases of alleged fraud that we were able to identify and  determine were adjudicated from calendar years 2012 through 2017.  Such information includes financing product types, dates adjudicated,  fraud schemes, fraud risk factors involved, and the amount of EXIM  restitution owed and paid to EXIM. As mentioned earlier, the fraud risks  we identified in these 44 cases related to one or more of the following four  fraud risk factors: (1) opportunities to falsify self-reported information on  applications or transaction documents, (2) financial pressures that  potentially incentivized participants or employees to commit fraud, (3)  opportunities to circumvent or take advantage of EXIM or lender controls,  or (4) opportunities to circumvent the intent of EXIM’s financing programs  by diverting loan proceeds and other EXIM financing for personal use or  benefit instead of for the export of U.S. goods.

Appendix II: Comments from the Export- Import Bank of the United States

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Jonathon Oldmixon (Assistant  Director), Flavio Martinez (Analyst in Charge), Mason Calhoun, Marcus  Corbin, Anthony Costulas, Adam Cowles, David Dornisch, Heather  Dunahoo, Paulissa Earl, Colin Fallon, Dennis Fauber, Jennifer Felder,  Dragan Matic, Maria McMullen, Christopher H. Schmitt, Albert Sim,  Sabrina Streagle, and Steve Westley made key contributions to this  report.


Input:
	Background

In the early 2000s, the Navy conceived of a new small surface combatant  concept known as LCS. This ship was intended to offer the Navy an  affordable, flexible platform that would be able to swap out surface  warfare, anti-submarine warfare, or mine countermeasure mission  packages to provide for one of those mission needs. As we found in  multiple reports, the Navy’s vision for LCS evolved significantly over time  in response to diminished capability expectations and significant cost and  schedule growth. In 2014, the Secretary of Defense directed the Navy to  evaluate alternatives to LCS, citing survivability and lethality concerns.  This represented the beginning of the Navy’s pursuit of a solution to  address LCS shortcomings and the evolving threat environment  acknowledged by the department.
The Navy initially envisioned quickly fielding a frigate—referred to as the  FF program—based on a minor modified LCS design. The ship was  expected to provide a more lethal and survivable multi-mission ship  capable of simultaneous surface and anti-submarine warfare, with a  planned contract award for the lead ship in 2018. In 2016, we found that  the Navy’s planned upgrades for FF did not significantly improve certain  survivability areas and lacked capabilities that were prioritized by fleet  operators, such as the ship’s range of travel without refueling. Then, in  April 2017 we found the Navy’s aggressive FF acquisition schedule  increased risk to the government because it included a commitment to  buy ships in advance of adequate knowledge. In May 2017, the Navy  announced it was revising its frigate plans and began pursuing FFG(X).

		Shipbuilding Best Practices

In 2009, we identified commercial shipbuilding best practices that could  be adapted for use by the Navy. We found that successful shipbuilding  programs have sound business cases built on attaining critical levels of  knowledge at key points in the shipbuilding process before significant  investments are made, as shown in figure 1.
Regardless of the differences between Navy and commercial  shipbuilding, knowledge attainment is crucial to success. Executable  business cases use realistic cost and schedule targets to meet  performance and quality expectations by balancing inherent uncertainties  in acquisition programs. A solid business case provides for the resources  necessary to mitigate challenges, such as immature technologies and  design requirements. The greater the potential for challenges to occur,  the more time and money should be factored into the business case to  address them. The Navy has previously agreed, in principle, that  knowledge should be attained prior to key milestones to better ensure  ships are built to established cost, schedule, quality, and performance  standards.

		Navy Shipbuilding Acquisition Framework

In general, the Department of Defense (DOD) acquires new weapon  systems, such as Navy surface combatants, through a management  process known as the Defense Acquisition System. Under this system,  programs typically complete a series of milestone reviews and other key  decision points that authorize entry into a new acquisition phase. To  execute shipbuilding acquisition programs, the Navy uses the acquisition  processes included in the DOD Instruction 5000 series, as well as  acquisition instructions established by the Secretary of the Navy. The  Navy’s guidance supports a seven-gate review process intended to  ensure that requirements align with acquisition plans, and to improve  collaboration among stakeholders. Figure 2 provides an overview of the  notional framework for Navy shipbuilding acquisition programs described  by the DOD and Navy guidance.
This acquisition framework includes decision reviews and milestones at  key junctures in the acquisition cycle. The Milestone Decision Authority is  the individual responsible for determining what events and documentation  requirements will apply to an acquisition program, as well as providing  approval for a program to proceed to the next acquisition phase. The  acquisition framework and Milestone Decision Authority’s purpose is to  support careful assessment of a program’s readiness to proceed to the  next stage of acquisition activities.
The gates and milestones that will be included in an acquisition program’s  schedule can be customized based on its circumstances and needs. We  have previously found that shipbuilding programs typically have different  decision points than other DOD weapon systems. For example,  Milestone B for ship programs usually occurs after development of ship  specifications and system diagrams is well under way and is typically  aligned with the decision to authorize the start of detail design. While  Milestone C generally represents the decision to start production for  weapon systems, several of the Navy’s more recent shipbuilding  programs either do not include a Milestone C review or changed the  sequencing of the review to occur after delivery of the lead ship.  Programs can receive approval to tailor the requirements for information  that must be developed to support this process and to have the decision- making authority delegated to other individuals for acquisition decisions  and approvals.

	Navy Expects That FFG(X) Requirements Will Provide a More Capable Small Surface Combatant, but at Increased Cost

The Navy expects that its current plans for FFG(X) will result in a small  surface combatant with considerable capability improvements compared  to LCS. To achieve this increased capability, the Navy is committing to  construct a larger, more expensive ship than LCS. To help refine FFG(X)  requirements and identify opportunities for cost savings, the Navy used a  conceptual design phase, in which it awarded $75 million in contracts to  industry.

		FFG(X) Requirements Reflect Limitations of LCS and Evolution in Capability Needs

The Navy’s FFG(X) requirements represent the department’s recognition  of its need for a more capable small surface combatant and the limitations  of LCS. For LCS and its mission packages, the Navy has devoted nearly  $28 billion (constant fiscal year 2018 dollars) to develop and buy a ship  that has fallen far short of demonstrating it can meet the minimum level of  capability defined at the beginning of the program. Specifically, LCS was  designed with reduced survivability requirements as compared to other  surface combatants. Over time the Navy lowered several survivability and  lethality requirements further and removed some design features— making the ships less survivable in their expected threat environments  and less lethal than initially planned. As shown in figure 3, the Navy  arrived at its FFG(X) plans after spending several years developing and  evaluating a variety of inputs to address problems with LCS and emerging  capability needs.
The Small Surface Combatant Task Force study report maintained the  Navy’s need for 52 small surface combatants, which was revalidated in  the Navy’s 2016 Force Structure Assessment. In recognition of LCS’s  shortcomings, the Navy significantly reduced the total number of LCS,  and began planning for the new frigate based on minor modifications to  an LCS design—referred to as FF—to fulfill the 52-ship need.
While the FF program was developing its acquisition plans and moving  toward a contract award for the lead ship scheduled for 2018, the  maritime operating environments continued to rapidly evolve, becoming  increasingly complex and contested. In recognition of this, the Chief of  Naval Operations directed the Navy to conduct another study, increasing  air defense and survivability beyond the FF baseline. In response, the  Navy convened a Frigate Requirements Evaluation Team from January to  June 2017. The purpose of this team was to build upon FF requirements  by analyzing options for air defense and vulnerability upgrades to help  determine top-level mission requirements that would yield a more capable  frigate. The results of this review led the Navy to cancel its FF acquisition  plans and focus on meeting increased requirements through a new  FFG(X) Guided Missile Frigate program.
Both the FF and FFG(X) requirements reflect the 2015 Small Surface  Combatant Task Force report findings that identified a need for increased  capabilities for small surface combatants to address evolving threats. As  we reported in June 2016, an FF based on a minor modified LCS only  partially fulfilled the small surface combatant capabilities that the task  force identified as most valued by the fleet. In particular, FF  requirements supported a multi-mission ship with some of the fleet’s  highest priority mission capabilities, such as surface and anti-submarine  warfare, but did not provide air warfare capability. For FFG(X), the Navy  maintained the FF requirements and added local air defense as a  capability. Table 1 outlines the requirements evolution that the Navy  undertook to support a more lethal and capable small surface combatant.

		Requirements Drive Higher FFG(X) Cost than for Previous Small Surface Combatants

To achieve the increased capability expectations for FFG(X), the Navy  committed to acquiring a larger, more expensive ship than LCS or the  previously planned FF. Figure 4 provides average shipbuilding cost  estimates for the three different ships, with costs shown in same-year  dollars for comparison.
Although the FFG(X) requirements have been finalized, the Navy plans to  make final cost and capability tradeoffs through the process of evaluating  proposed designs before selecting which one will be built.

		The Navy Used Conceptual Design Phase to Better Understand Ship Requirements and Associated Costs

In an effort to focus on the relationship between requirements and cost,  the Navy undertook a conceptual design phase for FFG(X), which  enabled industry to inform requirements and identify opportunities for cost  savings. In February 2018, the Navy competitively-awarded FFG(X)  conceptual design contracts valued at nearly $15 million each to five  industry teams. These 16-month contracts were intended to enable  industry to mature parent ship designs—designs for FFG(X) that are  based on ships have been built and demonstrated at sea—and help  refine technical and operational program requirements.
The purpose of the conceptual design phase has parallels with the  purpose of pre-contractual negotiations in commercial shipbuilding. As we  previously have reported, these pre-contractual practices minimize ship  buyer risk prior to awarding construction contracts by developing the ship  concept and specifications based on negotiations between the ship buyer  and the shipyard. The practices include specifying the expected  performance and the major equipment on the ship. As part of these  activities, commercial shipbuilders and ship buyers analyze one or more  ship concepts to identify areas of potential risk and either mitigate these  risks or remove the risky elements from the ship before signing a  contract. Figure 5 provides an overview of the industry teams and  shipyards participating in the FFG(X) conceptual design.
Each industry team performed ship development, ship design, workforce  planning, and shipyard improvement planning, among other activities, in  support of FFG(X) requirements refinement and cost reduction efforts.  Industry teams updated the Navy regularly on their design progress and  technical approach to fulfill requirements through monthly technical  exchange meetings and two design review meetings. Navy officials stated  that these meetings were intended to provide information to support the  program’s Preliminary Design Review in May 2019 and mitigate risk prior  to the Navy’s release of its request for proposal in June 2019 for the  FFG(X) detail design and construction competition.
Our prior work on shipbuilding best practices emphasizes the importance  of having a full understanding of the effort needed to design and construct  a ship before awarding a contract for ship construction in order to reduce  cost and schedule risk. Navy and industry officials stated that the  conceptual design phase facilitated dialogue and information sharing that  helped ensure FFG(X) requirements were more fully understood by  industry and the government. Specifically, industry officials noted that  communication and activities during conceptual design improved their  understanding of the impetus for specific Navy requirements, allowing  industry the opportunity to get clarification on the intent of some  requirements, propose less costly alternatives, and get government  feedback on the proposed alternatives. It also improved their  understanding of the linkages between FFG(X)’s approved capability  requirements and system specifications. In particular, industry officials  told us that one-on-one opportunities with the Navy aided knowledge  sharing and provided them with a means to ask questions without  concern that disclosing such information could jeopardize their  competitive position. They emphasized that in other cases where the  request for proposals process is their primary means for communicating  with the Navy (as opposed to having a conceptual design phase),  submitting questions about requirements or system specifications can be  challenging because those inquiries are available to the public. As a  consequence, contractors may opt to infer more about the intent of  requirements to avoid compromising their competitive interests.
The conceptual design phase included a formal cost savings effort, with  the Navy seeking proposals internally and from industry participants to  reduce cost through requirement and system specification refinement. To  support this effort, Navy officials stated they established a Frigate  Affordability Board to review potential cost reduction measures submitted  by both contractors and government that responded directly to Navy  requirements and specifications. Navy officials said the Board—co- chaired by the Program Executive Office for Unmanned and Small  Combatants and the Naval Sea System Command’s Naval Systems  Engineering Directorate, as well as the Chief of Naval Operations’  Surface Warfare Directorate—assessed the potential cost and capability  trade-offs of these proposed changes to requirements, and accepted or  declined them. Before going to the Board, relevant Navy subject matter  experts reviewed the technical and requirements implications of cost  reduction measures. The program office subsequently worked with Navy  engineering and requirements officials to balance cost with capabilities. If  the program office, Navy engineers, and requirements officials could not  reach agreement on the appropriate cost and capability mix, then their  different positions were presented to the Board.
For cost reduction initiatives submitted by industry, the Navy provided  feedback on the Board’s decision, and incorporated fully or partially  accepted cost reduction initiatives into the FFG(X) system specifications.  Navy officials said they informed all industry teams of any changes to the  specifications on a monthly basis. Navy officials also stated that industry  submitted about 350 cost reduction ideas, with roughly 60 percent  partially or fully accepted by the Navy. They estimated $86 million in  savings per ship (constant year 2018 dollars) based on changes made in  response to the cost reduction measures submitted by industry or  government-initiated cost savings measures influenced by engagement  with industry.

	Streamlined Acquisition Approach Accelerates Planned FFG(X) Schedule, but Reduces Knowledge Available for Key Program Decisions

In an effort to accelerate the time between FFG(X) acquisition planning  and the fielding of ships, the Navy streamlined the program’s acquisition  approach and leveraged knowledge obtained from industry during the  conceptual design phase. While the program may benefit from the  streamlining efforts, the acquisition approach for FFG(X) required the  Navy to submit its budget request for lead ship construction before the  program had a comprehensive understanding of the potential ship  designs and cost. Recent Navy policy changes have created some  uncertainty for Navy cost estimation activities by altering roles and  responsibilities within the Navy for completing component cost positions  and independent cost assessments.

		Navy Streamlined FFG(X) Program Acquisition Approach in an Effort to Accelerate Fielding of Ships

As permitted by DOD and Navy policy, the Navy has streamlined the  FFG(X) acquisition approach to move from planning to ship delivery and  fielding quicker than in a more traditional acquisition program. The  accelerated schedule reflects the Navy’s desire to field a minimum of 52  small surface combatants, which the Navy’s long-range shipbuilding plan  states will be achieved by fiscal year 2034. Navy officials stated that the  significant amount of knowledge that already existed to inform the  program’s early activities and the use of parent designs helped enable the  streamlined approach for FFG(X). For example, Navy officials cited previous efforts by the Small Surface Combatant Task Force and the  Frigate Requirements Evaluation Team to determine appropriate ship  requirements, as well as activities performed in support of the FF frigate  acquisition plan that immediately preceded the shift to FFG(X). The Navy  also leveraged industry input received from a request for information in  2017 to understand cost drivers and the potential shipbuilders’ abilities to  meet top level FFG(X) requirements and incorporate Navy-defined  equipment into ship designs. Figure 6 provides a high-level schedule of  key activities for the program.
To support its decision to pursue an accelerated acquisition schedule, the  Navy used the previously discussed conceptual design phase as well as  its decisions to limit FFG(X) to parent ship designs and minimize  technology development. Navy officials noted the use of parent designs is  allowing the program to proceed at a much faster pace from early  assessment of capability options to detail design and construction  contract award. They added that the parent designs provided a higher- fidelity design baseline from which the conceptual design industry teams  incorporated Navy systems and other requirements. Use of parent  designs is consistent with our best practices work in shipbuilding, which  has found that commercial shipbuilders use previous ship designs to the  extent possible. Doing so can reduce technical, schedule, and cost risk  in building a ship as compared to a “clean sheet” new ship design.  FFG(X) program officials noted the latter approach can take up to 9 years  to complete an analysis of alternatives and move through the acquisition  process to construction contract award.
Navy officials said the program also used opportunities available as an  Acquisition Category (ACAT) 1B program to shorten the approval timeline  for specific acquisition requirements. For an ACAT 1B program, the  head of the DOD component is generally the Milestone Decision Authority  but, as appropriate, may delegate approval authorities to lower level  offices under its jurisdiction. In the case of FFG(X), the Assistant  Secretary for the Navy for Research, Development, and Acquisition  serving as the Milestone Decision Authority delegated specific approval  authorities to the Program Executive Office for Unmanned and Small  Combatants. These approval authorities applied to the program’s life  cycle sustainment plan, independent logistics assessment, program  protection plan, and a compliance schedule addressing environmental  considerations.
The Navy also took advantage of opportunities to alter or waive some  significant early acquisition activities. For example, the Milestone  Decision Authority waived the formal Analysis of Alternatives and  Affordability Analysis, decided not to conduct a Milestone A review, and  deferred the full “Should-Cost” Analysis to later in the acquisition  process. Table 2 defines the purpose of these DOD acquisition program  elements and provides an overview of the Navy’s actions related to them.
As the first major milestone for many major acquisition programs,  Milestone A is a review by the Milestone Decision Authority of key  program documents that support the materiel solution and risk reduction.  We have previously found that DOD officials place a high value on the  information developed for some of these documents, including the  Analysis of Alternatives, Affordability Analysis, and Should-Cost  Analysis. The Navy’s decision to not conduct a Milestone A review also  eliminated a formal opportunity to bring the broad set of FFG(X)  stakeholders within the Navy and the Office of the Secretary of Defense  together at a relatively early stage to assess the program’s acquisition  strategy and affordability and feasibility, as well as technical, cost, and  schedule risks. Further, it reduced the FFG(X) acquisition approach to a  single milestone decision point—Milestone B—for the broader group of  DOD stakeholders to evaluate program progress and readiness to  proceed to the detail design and construction contract award planned in  July 2020.
In the absence of Milestone A, the Navy’s Gate 3 review for FFG(X)  provided an opportunity to communicate the program’s progress toward  developing requirements and acquisition expectations, albeit to a more  limited audience than typically would participate in a Milestone A. In  particular, the Navy used Gate 3 to discuss top-level requirements  changes and receive capability development document approval from the  Chief of Naval Operations. It also included cost discussion related to  FFG(X) affordability within the overall Navy shipbuilding portfolio. The  gate’s participants included officials from the Navy and the Office of Cost  Assessment and Program Evaluation (CAPE) within the Office of the  Secretary of Defense.
The Navy’s Gate 4 conducted in February 2019 focused on a review of  the FFG(X) system specification before the draft detail design and  construction request for proposal release. Gate 4 documentation for  FFG(X) indicates that participants were limited to stakeholders from the  office of the Deputy Assistant Secretary of the Navy for Ships; Naval Sea  Systems Command Cost and Design Directorates; Program Executive  Office for Unmanned and Small Combatants; the FFG(X) program office;  and the Chief of Naval Operations Surface Warfare Directorate. This  excludes a number of key stakeholders that Navy guidance calls on to  attend and certify gate reviews, such as the Assistant Secretary of the  Navy (Financial Management and Comptroller) and the testing  community. As a result, the Navy would not have received insight from  several key stakeholders during the Gate 4 review for acquisition  activities, such as the program life cycle cost estimate development and  release of the draft request for proposal. These activities are generally relevant to this gate review, as Navy guidance notes program affordability  as a focus and the Navy’s streamlining documentation indicates that the  gate was focused on reviewing the FFG(X) system specification before  releasing the draft request for proposal. Navy officials noted that  stakeholders have regularly received insight into FFG(X) activities  through other prior program reviews and will have additional opportunities  to review program costs and sustainment plans leading up to Milestone B.
We also found that some key stakeholders did not provide formal  approval for the initial FFG(X) life cycle sustainment plan that was  approved in March 2019. Specifically, only FFG(X) program officials and  the Program Executive Officer for Unmanned and Small Combatants— the delegated approval authority—signed the plan. However, as stated in  DOD guidance, representatives from the relevant sustainment command  and the Program Executive Office for Integrated Warfare Systems are key  stakeholders that should provide their signed concurrence when  approving the life cycle sustainment plan. The FFG(X) life cycle  sustainment plan is a key document outlining the Navy’s plans to address  the program’s sustainment needs and costs, as typically around 70  percent of a weapon system program’s total cost is in the sustainment  phase after procurement. Navy officials stated that the plan has been  reviewed by the independent logistics assessment team members that  are evaluating the FFG(X) program’s integrated product support activities,  and noted that the Program Executive Office for Integrated Warfare  Systems has separate life cycle sustainment plans for government  furnished equipment systems included in the FFG(X) design. Navy  officials also said that FFG(X) sustainment plans would be reviewed by  stakeholders as part of Gate 5 and the Milestone B independent logistics  assessment.

		Budget Request for FFG(X) Lead Ship Preceded the Completion of Key Cost Estimation Activities That Should Inform Funding Decisions

The FFG(X) acquisition approach required the Navy to submit its nearly  $1.3 billion budget request for lead ship construction before the program  had established a comprehensive understanding of the potential ship  designs and estimated cost for the program. Our shipbuilding and  acquisition best practices call for resource decisions to be timed to align  with the availability of requisite cost, schedule, and technical knowledge  in order to inform key program decisions. Navy officials stated that they  had sufficient knowledge to inform key program decisions based on cost  estimation and conceptual design efforts that had previously been  completed. Navy officials said this included development of an FFG(X)  cost estimate by November 2018 to support a realistic budget request for  the lead ship. However, at the time of the Navy’s fiscal year 2020 budget  request to fund detail design and the lead ship, the Navy had not  completed its component cost position, which will formalize the life cycle  cost expectations for FFG(X). Further, CAPE had not completed the  independent cost estimate for the program. The GAO Cost Estimating  and Assessment Guide says that comparing the component cost position  with an independent cost estimate to validate methodologies produce  similar results reinforces the credibility of a cost estimate.
In addition to key cost estimating best practices that had not been  completed, the Navy had not received final design review information  from the industry teams participating in the conceptual design phase  before requesting lead ship funds from Congress. Figure 7 reflects the  budget request timeline for the FFG(X) detail design and lead ship  contract award, as well as notable cost and design-related program  activities that were planned to be completed after the request.
The considerable cost growth that we have previously reported is  common to many shipbuilding programs, as well as challenges in  deviating from shipbuilding plans once a program has begun procuring  ships, emphasize the importance of having a strong understanding of  program expectations to back the initial procurement decision for  FFG(X). Given the timing of the Navy’s budget request for lead ship  funding, Congress faces a decision on whether to authorize funding for  FFG(X) detail design and lead ship based on a budget request that was  not informed by key cost and design information.
If Congress authorizes and appropriates FFG(X) funding as the Navy  requested in March 2019, it will be critical that the Navy demonstrate the  program’s acquisition program baseline reflects the results of the  component cost position and independent cost estimate before awarding  the detail design and construction contract. Doing so before the contract  award will help ensure a more reliable acquisition program baseline upon  which future costs and variances are measured and funding decisions are  made. Further, it will help mitigate remaining risk that stems from the  Navy not being able to account for the actual FFG(X) design and  associated estimated cost for ship construction until after the planned July  2020 contract award. Specifically, as currently planned, the Navy’s  budget requests for fiscal years 2020 and 2021—which are intended to  fund the first 3 ships—will be made before the Navy has agreed to  contract pricing for FFG(X).
Navy officials stated that they have completed a robust program life cycle  cost estimate. They noted that the estimate was informed by Navy  modeling of a notional ship design that leveraged data received from  industry during conceptual design and reflected ship design elements  needed to meet program requirements Navy officials also said that, as of  May 2019, some additional work remains for the cost estimate to account  for training and military construction considerations, as well as address  any needed changes related to the final industry design reviews for the  conceptual design phase. They also said that the program life cycle cost  estimate informed the Gate 4 review in February 2019, and an updated  version of the estimate will provide a basis for the Navy’s efforts to  establish the component cost position in October 2019. As of the  issuance of this report, we have requested the program life cycle cost  estimate from the Navy, including the estimate’s criteria and underlying  assumptions, but have not yet received this information.

		Recent Navy Changes in Cost Estimation Policy and the FFG(X) Program Schedule Create Uncertainty for Remaining Cost Estimation Activities

Recent policy changes by the Navy related to cost analysis and  estimation have created some uncertainty for Navy cost estimation  activities going forward. Specifically, a March 2019 Secretary of the Navy  instruction for acquisition program cost analysis shifts the Naval Center  for Cost Analysis’s role and responsibilities for Navy cost estimation to the  Navy’s systems commands. Previously, the Naval Center for Cost  Analysis—organizationally residing completely outside of the systems  command structure—would provide an independent cost assessment of  the program life cycle cost estimate. The Naval Center for Cost Analysis  and the acquisition program, in coordination with the relevant systems  command, would discuss and adjudicate any differences between the  program life cycle cost estimate and the independent cost assessment to  produce the Navy’s component cost position. This independent cost  assessment by the Naval Center for Cost Analysis was an important  verification of the program office estimates, which were often found to be  too optimistic, prior to the Navy finalizing its component cost position. The  Navy’s recent changes for cost estimation and analysis may pose a risk  of overly optimistic estimates carrying forward in programs.
Navy officials stated that they believe Naval Sea Systems Command cost  estimators can provide an independent cost estimate, as they are  intended to provide technical support to acquisition programs  independent of programmatic authority and report to a separate chain of  command. However, as stated by the Naval Sea Systems Command, the  collective mission of its organizations is to build, buy, and maintain the  Navy’s ships. Based on this, we believe, as do CAPE officials with whom  we spoke, that shifting independent cost assessment activities to the  systems commands diminishes the Navy’s ability to independently verify  a program life cycle cost estimate. As a result, the program life cycle cost  estimate essentially will become the component cost position based on  the lack of additional cost estimation input, such as what the Naval Center  for Cost Analysis previously provided.
Furthermore, CAPE officials stated that having a systems command  execute cost analysis responsibilities for an acquisition program within the  same system command effectively eliminates the Navy’s capacity to  perform independent cost estimates for its programs based on their  shared overarching mission. This position is consistent with the GAO  Cost Estimating and Assessment Guide, which states that an  independent cost estimate should be conducted by an organization  independent of the acquisition chain of command. The Director of CAPE  is required to conduct or approve independent cost estimates and cost  analyses for all major defense acquisition programs. As noted by CAPE  officials, CAPE has previously delegated certain cost estimation  responsibilities to the Naval Center for Cost Analysis. With the recent  Navy policy changes, CAPE may no longer choose to delegate  independent cost estimation activities to Navy cost estimators.
For FFG(X), CAPE intends to complete an independent cost estimate to  verify the Navy’s component cost position. These plans include site visits  and data collection from the shipyards participating in the conceptual  design contracts. CAPE confirmed that the final independent cost  estimate will reflect the content of the winning proposal, indicating that  any FFG(X) proposals that the Navy receives from contractors not  involved in the conceptual design phase will be evaluated to ensure the  independent cost estimate accounts for those cost and design plans.
CAPE officials also stated that their timeline for finalizing the independent  cost estimate for FFG(X) is tied to when the Navy decides on the winning  proposal for detail design and construction and communicates this  information to CAPE. Specifically, CAPE’s final independent cost estimate  will reflect only the winning FFG(X) design, so completion of the estimate  will occur after the Navy informs CAPE about the FFG(X) design for  which it intends to pursue a contract award. CAPE officials said that  because the Navy’s decision may not be made in advance of the planned  February 2020 Milestone B review for FFG(X), CAPE would likely just  provide input to support the milestone and complete the independent cost  estimate after that review.

	The Navy Has Taken Steps to Reduce Design and Technical Risk, but Technology Integration and Testing Will be Key to Meeting Program Expectations

The Navy’s decision to pursue a parent ship design for FFG(X) was  intended to reduce design uncertainty for the program. The Navy’s  planned use of existing technologies for the ship’s mission and combat  systems also supports reduced technical risk, though further maturation  of some key systems and successful integration and testing will be critical  to demonstrate the ship provides required capability within cost and  schedule expectations.

		Use of a Parent Ship Design Was Intended to Increase Design Certainty

Adopting a parent design requirement for FFG(X) provided the conceptual  design industry teams with a proven baseline ship design. This enabled  them to focus on incorporating modifications to meet the Navy’s specific  FFG(X) requirements rather than designing a new ship. The Navy did not  set any limitations on the extent contractors could modify or deviate from  the parent design. However, Navy officials stated they actively reviewed  parent design modifications through contract deliverables, technical  exchange meetings, and design reviews with industry teams. The design  reviews included an interim report in October 2018 and a final report in  May 2019 from each industry team on their design progress.
FFG(X) program officials noted that the design maturity reviews provided  sufficient information to support the Navy’s decision that the designs were  mature enough to release the request for proposals for the detail design  and construction contract award. In addition, some industry officials told  us that the conceptual design work on parent designs enabled them to  develop more mature and refined designs than typical for this stage of the  shipbuilding acquisition process. They also noted that continuing work in  response to the pending competition should move at least some design  elements closer to a detail design-level of maturity, and may provide the  Navy with greater confidence in the contract proposals it receives from  industry.

		Technology Re-Use Should Reduce Some Risk, but Integration and Testing Remain to Demonstrate Critical Systems

The FFG(X) program’s design concept requires the use of many existing,  more mature combat and mission systems to reduce technical risk. As  stated in the approved acquisition strategy for FFG(X), the program has a  requirement for all integrated systems to have achieved maturity of a  technology readiness level (TRL) 6 or higher. TRL 6 is defined by GAO  as the capability to produce a prototype system in a production-relevant  environment. Program officials confirmed that, as of May 2019, many  but not all FFG(X) integrated systems were at TRL 6 or higher. For  selected key systems planned for FFG(X), Navy officials stated they will  have achieved TRL 7 or higher by the planned July 2020 detail design  and construction contract award. Doing so would be consistent with our  acquisition best practices, which include maturing new key ship  technologies into actual system prototypes and demonstrating them in a  realistic environment—achieving a TRL 7—before the award of the  contract for lead ship design and construction. This practice helps reduce  the likelihood of costly design changes later.

			Technology Re-Use

Many of the systems planned for FFG(X) have been demonstrated and  are in use on other Navy ship classes, which helps the program fulfill  capability needs while avoiding developmental risks. Table 3 provides an  overview of some of the key existing systems planned for the ship.
In addition to the systems that have been utilized by other Navy ships, the  FFG(X) program plans to incorporate some systems that are still in  development, such as the Enterprise Air Surveillance Radar (EASR) and  a new version of the Aegis Weapon System.
Navy officials stated that EASR—a complex radar system expected to  provide long-range detection and engagement of advanced threats— is critical to FFG(X)’s air and surface warfare missions. It is a scaled  down version of the Navy’s Air and Missile Defense Radar that is in  production and scheduled for initial integration with the Aegis combat  system on a DDG 51 Flight III destroyer in fiscal year 2020. In early  2019, the Navy began testing a full-scale, single-face EASR array  engineering developmental model—the full system planned for  FFG(X) will have three array faces—at a land-based test site to  further demonstrate its functionality. The Navy expects to complete  land-based testing of the EASR engineering development model by  February 2020. The Navy also plans to integrate a rotating version of  EASR and a fixed-face version on other ship classes prior to  integrating the radar on the lead FFG(X). The Navy’s results from  planned EASR developmental testing at the land-based site will be  integral to achieving a TRL 7 and reducing risk prior to the start of  FFG(X) detail design.
The Navy is developing a new version of the Aegis Weapon System— FFG(X)’s combat management system—to coordinate radar and  weapons system interactions from threat detection to target strike. For  example, the system will support the ship’s ability to employ the Naval  Strike Missile for over-the-horizon offensive capability as well as a 32- cell vertical launch system to employ missiles for air defense. The  Aegis Weapon System for FFG(X) will leverage the Aegis common  source software that supports the combat systems found on the  Navy’s DDG 51-class destroyers and CG 47-class cruisers. Navy  officials noted that they anticipate at least 70 percent of the Aegis  Weapon System software for FFG(X) will be common to the Aegis  software used for DDG 51 Flight III ships.
Rigorous testing of the Aegis Weapon System with EASR will be critical  for FFG(X), as the radar and combat management system must work in  concert for the ship to detect, track, and assess possible targets. Given  the radar and software commonalities, the risk level for both of these  FFG(X) systems should be reduced once the DDG 51 Flight III radar and  Aegis system baseline, upon which the FFG(X) integrated system is  based, have been demonstrated through testing on a ship beginning in  2022. Specific to the Aegis Weapon System for FFG(X), software  development is expected to run from fiscal year 2022 to late fiscal year  2024. The system’s integration and testing with EASR is scheduled to  occur through fiscal year 2024.

			Integration and Testing

While the Navy is planning to use many already mature systems on  FFG(X), integration and testing of those systems will be critical to  demonstrate systems fit and work together as intended on the ship. The  Navy completed a technology readiness assessment in spring 2019 to  identify potential technical risks, and concluded that FFG(X) does not  have any critical technology elements. DOD generally defines a critical  technology element as one that may pose major technological risk during  development. Navy officials who completed the assessment stated that  they reviewed about 150 systems as part of their activities and found  none composed of new or novel technologies for which the Navy has  insufficient knowledge to demonstrate maturity. The assessment noted  one technology—the New Advanced Integrated Line-of-Sight Equipment  System (nAILES) multi-coupler for antennas—as a watch item. The Navy  would like to utilize nAILES for FFG(X), but according to Navy officials, it  is not considered a critical technology because the Navy has identified  alternative, proven technologies that will be used to meet the ship’s needs  if nAILES is not available for use.
The findings of the technology readiness assessment are consistent with  the FFG(X) program’s decision to use existing systems that do not require  technological innovation to deliver desired capability. However, the  findings do not necessarily equate to the program having no technology  risk for planned systems. For example, the Aegis Weapon System for  FFG(X) did not qualify under the parameters of the technology readiness  assessment as a critical technology element. Still, as already discussed,  the Aegis Weapon System will carry technical risk for several years until  the Navy completes development and demonstrates the system works as  intended for FFG(X). The Next Generation Surface Search Radar is  another system that is relatively mature—FFG(X) program officials  confirmed in May 2019 it is nearing a TRL 6—but requires further  development to reduce risk.
The FFG(X) test and evaluation master plan and independent technical  risk assessment are significant documents yet to be completed that will  help to further define risks and plans to address them. The test and  evaluation master plan serves to outline the program’s integrated test  program and master schedule of major test events or phases. Navy  officials expect the test plan to be approved in December 2019 to support  the Milestone B decision. They noted that the plan may need to be  updated once the FFG(X) design is selected based on the additional  information that will be available to inform test planning. The independent  technical risk assessment is intended to categorize risks that cover a  broad range of factors, including technology maturity, integration needs,  and testing. If these factors are not sufficiently accounted for, a program  is likely to have difficulty meeting cost, schedule, and performance  objectives. An official from the Office of the Under Secretary of Defense  for Research and Engineering who is participating in the technical  assessment for FFG(X) stated they plan to complete their work to identify  any risks in March or April 2020. The official added that at this early stage  of their activities, the potential for integration risks associated with the  FFG(X) combat system is an area of interest because of the extensive  number of existing systems that will need to be integrated into the new  ship design.
Navy test officials as well as DOD systems engineering and test officials  noted potential advantages and risks related to FFG(X) program’s plans  for using existing technologies. Similar to what we previously discussed  about the use of a parent design, the officials stated that the use of  existing systems can increase understanding of the ship and its systems,  which may help the FFG(X) program achieve its planned accelerated  timeline between development and delivery. However, systems  engineering and test officials also indicated that, regardless of maturity,  challenges typically arise when DOD takes systems from other platforms  and attempts to integrate and use them in new ways on a new platform.  They cautioned that programs like FFG(X) that plan to use a lot of  government-furnished equipment or non-developmental systems often  underestimate the amount of integration challenges they will face. The  officials told us this may occur because of overconfidence that the  maturity of systems demonstrated through use on other platforms  eliminates most technical risk, whereas experience confirms that it is  always challenging to get systems to fit and work together as intended on  a new platform. Officials from the office of the Director, Operational Test  and Evaluation said that the parent design approach for FFG(X) may  enable the Navy to reduce some developmental testing activities;  however, operational testing expectations would largely be unaffected  because there will still be substantial integration to be completed and  tested in order to demonstrate mission capabilities.

	Contracting Plans for FFG(X) May Help Mitigate Some Risk, and Use of Warranties Could Potentially Further Reduce Costs

The draft FFG(X) request for proposal indicates that the Navy plans to  use a fixed-price incentive contract to help control ship costs and special  performance incentive fees. In addition, the Navy plans to use  guarantees with limited liability for the shipbuilder to correct defects after  ship deliveries. Our prior work has found that using comprehensive ship  warrantees instead of guarantees could reduce the Navy’s financial  responsibility for correcting defects.

		Use of Fixed-Price Incentive Contract Provides Benefits, but Planned Contract Structure Results in the Navy Absorbing More Cost Risk

After completion of a full and open competition for FFG(X) detail design  and construction, the Navy plans to use a fixed-price incentive contract in  combination with additional special performance incentive fees to procure  the lead and follow-on ships. As we have previously reported, full and  open competition allows all responsible sources—or prospective  contractors that meet certain criteria—to submit proposals for a contract.  The use of competition in contracting is a critical tool for achieving the  best possible return on investment for taxpayers. Competitively awarded  contracts can save the taxpayer money, improve contractor performance,  and promote accountability for results. The fixed-price incentive  contracting approach for FFG(X) is intended to incentivize the contractor  to control costs and meet performance requirements. This contracting  strategy represents a significant departure from previous surface  combatant programs in which the Navy negotiated cost-reimbursement  contracts for construction of the lead ship. Under cost-reimbursement  contracts, the Navy assumes the cost risk because the shipbuilder is  reimbursed for its allowable incurred costs to the extent prescribed in the  contract, regardless of whether the work is performed to the exact level  desired by the Navy. For example, our prior work found that the Navy’s  decisions to accept the first two LCS in incomplete, deficient conditions  complied with federal acceptance provisions, largely due to the cost- reimbursement type contracts in place to construct these ships.
Fixed-price incentive contracts provide an incentive for the shipbuilder to  control costs in order to maximize profit. Fixed-price incentive contracts  generally include a profit adjustment formula referred to as a shareline, as  well as a price ceiling, target cost, and target profit. The structure of the  shareline establishes how cost overruns or underruns in relation to a  target cost are shared between the government and shipbuilder. For  example, the 70/30 shareline that the Navy is planning for FFG(X) lead  ship overruns means that the government pays 70 percent of cost and the  shipbuilder pays 30 percent when the cost exceeds the target cost up to  the price ceiling. Generally, the shareline functions to decrease the  shipbuilder’s profit as actual costs exceed the target cost. The price  ceiling is generally the maximum the government will pay under the  contract and is typically negotiated as a percentage of the target cost.  The target cost generally informs the shareline and price ceiling.
Given the unknowns associated with design and construction, the Navy  plans to account for these unresolved risks by assuming responsibility for  cost growth above DOD recommended guidance. As we reported in  March 2017, when the Navy assumes a greater share of cost overruns  above the target cost, accepts a higher price ceiling, or both, the fixed- price incentive elements may not provide sufficient motivation for the  shipbuilders to control costs. Figure 8 depicts the how risk changes as  the Navy departs from a 50/50 shareline for cost overruns and a ceiling  price of 120 percent.
As we previously noted, for the FFG(X) lead ship the Navy is planning to  have a shareline of 70/30 for target cost overruns. The Navy also plans to  have a 60/40 target cost overrun shareline for the second ship, and a  50/50 overrun shareline for the remaining seven ships included in the  detail design and construction contract award. Based on this plan, the first  two FFG(X) ships will depart from DOD’s guidance recommending a  50/50 point of departure for negotiations between the government and  shipbuilder for cost overruns up to the price ceiling. This results in more  cost risk to the government for two ships in the detail design and  construction contract. The Navy’s planned price ceiling for the 10 ships  included in the contract award may deviate from DOD’s guidance  recommending a ceiling price set at 120 percent of target cost as a point  of departure for fixed price incentive contracts. Specifically, Navy  officials stated that the maximum ceiling price could be as high as 125  percent for all of the ships. However, Navy officials stated that the request  for proposal will provide incentive for industry to propose the minimum  price ceiling that sufficiently accounts for the proposal’s level of risk,  meaning that industry may propose price ceilings below 125 percent. The  Navy also plans to include options for a special performance incentive fee  for each of the FFG(X) ships, which will be established for the final  request for proposal. These incentives have the potential to increase  shipbuilder profitability.

		FFG(X) Plan for Guaranty Use Is More Robust than Recent Shipbuilding Programs, but Use of Warranties Could Provide More Value to the Government

As outlined in the FFG(X) draft detail design and construction request for  proposal and confirmed by program officials, each frigate will have a  guaranty period that commences at ship delivery and is expected to end  18 months after delivery. Navy officials stated the guaranty is intended to  formalize a period of responsibility during which the shipbuilder must  correct defects, with the cost to the government and the contractor based  on the contract terms (cost shareline and price ceiling) associated with  the ship. During the guaranty period, the shipbuilder would be required to  correct all defects for which it is responsible, with proposals required to  include a minimum limitation of liability of $5 million per ship. Once the  total cost to correct identified defects reaches $5 million, the government  would pay the full cost to correct any additional guaranty period defects.
The $5 million minimum limitation of liability planned for FFG(X) has a  higher dollar value and covers a longer period of time than other recent  shipbuilding programs. For example, we previously found that for the  Navy’s LPD 25 amphibious transport dock construction, the contract  initially included a $1 million limitation of liability. Navy officials stated  that the final request for proposal also will include a provision allowing  industry to propose a higher liability limit, up to and including no limitation  of liability. Navy officials said that any additional liability amount proposed  beyond the $5 million guaranty will be assessed as part of the technical  evaluation criteria used to select the winning FFG(X) design.
We found in March 2016 that the use of a guaranty did not help improve  cost or quality outcomes for the Navy and Coast Guard ships we  reviewed. We also found that commercial ship buyers and Coast Guard  officials stated that warranties foster quality performance because the  shipbuilder’s profit erodes as it spends money to correct deficiencies after  delivery, during the warranty period. We further reported that the Coast  Guard has improved cost and quality by requiring the shipbuilder to pay to  repair defects by following Federal Acquisition Regulation warranty  provisions. For example, the Coast Guard paid up front for the Fast  Response Cutter warranty. The cost of the warranty amounted to 41  percent of the total defect correction costs. Although this ship does not  have the size and advanced systems planned for FFG(X), it serves to  demonstrate the potential value to the government presented by the use  of warranties. The Coast Guard also used a fixed-price incentive contract  with a warranty on its Offshore Patrol Cutter—a ship of comparable size  to FFG(X). The first Offshore Patrol Cutter has a 2-year warranty, and  follow-on ships will have 1-year warranties. The Coast Guard pays a set  amount for these warranties, and in return, the shipbuilder must fix all  applicable defects identified within the agreed-upon time period  regardless of cost.
Rather than using guarantees for the FFG(X) contract to provide for the  correction of defects, the Navy could help control costs to the government  through the use of warranties. Under warranties, the government  generally receives a contractual right for the correction of all defects for  which the shipbuilder is responsible at the shipbuilder’s expense. The  use of warranties is typically not mandatory, but federal and defense  acquisition regulations instruct contracting officers to consider various  factors when deciding whether a warranty is appropriate for an  acquisition. The regulations also instruct contracting officers to use a  warranty when it is practicable and cost-effective to do so. We  previously found that, unlike a warranty, the Navy almost exclusively paid  for defects that were the shipbuilder’s responsibility under a guaranty  because of the contract type and terms in contracts that we reviewed.  Such conditions limit the incentive to discover every deficiency during the  guaranty period, and may negatively affect quality improvements over  time.
The Navy’s FFG(X) plans suggest that the Navy may be prematurely  discounting warrantees as a mechanism to improve ship quality and  decrease cost to the government. Navy officials told us that mandating  that industry propose a warranty could result in additional costs to the  government because the initial cost of the ship could be raised  substantially to include the cost of the warranty. Additionally, Navy  officials said a requirement for warranty pricing could serve to limit  industry participation in the FFG(X) competition if offerors are unwilling to  accept the risk associated with a warranty and unable to provide  reasonable pricing. The Navy provided no analysis to support these  claims and confirm a clear understanding of whether a warranty could  provide greater value than the $5 million guaranty the Navy is proposing  for FFG(X).
As part of the competitive proposal process for FFG(X) detail design and  construction, the Navy could maintain its plans to require a guaranty but  also seek ship warranty pricing. The full and open competition for the  FFG(X) contract award may increase the potential for receiving warranty  pricing that provides a cost-effective alternative to the Navy’s guaranty  plans. By limiting the request for proposal to guarantees, the Navy misses  an opportunity to obtain information on what comprehensive warranty  coverage against defects would cost, and use it to evaluate whether  warranties could further reduce risk for the FFG(X) program.

	Conclusions

As the Navy approaches the Milestone B review for FFG(X), it is critical  that funding and other major programmatic decisions are fully informed by  the knowledge necessary to support them. This is especially important to  help ensure that the FFG(X) program does not face some of the same  cost, schedule, and performance shortfalls that have been faced by the  LCS program. The Navy’s fiscal year 2020 budget request to authorize  and appropriate funding for the lead frigate was developed and submitted  without the benefit of key cost and design information, such as the  independent cost estimate and the final results from conceptual design.  As a result, it is necessary that the Navy provide Congress with a clear  understanding of FFG(X) cost expectations, including CAPE’s  independent cost estimate, prior to awarding the detail design and  construction contract. This will help ensure that the FFG(X) program is  grounded in cost and design expectations that reflect the specific aspects  of the ship that the Navy selects for construction.
With the start of the planned $20 billion FFG(X) procurement  approaching, the Navy has limited time left to position the government to  obtain the best deal possible to fix any deficiencies discovered upon  delivery of the first 10 ships. The Navy’s guaranty plan for FFG(X) offers  some improvements compared to recent shipbuilding programs, but does  not offer the degree of coverage that could potentially be provided by a  warranty. The competitive qualities of the FFG(X) acquisition approach  present an opportunity for the Navy to, at a minimum, obtain warranty  pricing from industry so that the program may use that input to evaluate  whether a warranty would be a cost-effective means of reducing the  government’s cost risk.

	Recommendations for Executive Action

We are making two recommendations to the Secretary of the Navy:
Ensure that the Assistant Secretary of the Navy for Research,  Development, and Acquisition provides to Congress the finalized  independent cost estimate prior to award of the detail design and  construction contract and demonstrates that the estimate is consistent  with the fiscal year 2020 budget request for the lead ship.  (Recommendation 1)
Ensure that the Assistant Secretary of the Navy for Research,  Development, and Acquisition directs the FFG(X) program office to  request pricing for warranties for the lead ship and the nine follow-on  ship options planned for FFG(X) as part of the detail design and  construction request for proposals. (Recommendation 2)

	Agency Comments and Our Evaluation

We provided a draft of this report to DOD for comment. DOD provided  written comments, which have been reproduced in appendix I. In  responding to the draft report, DOD concurred and described the actions  it planned to take to address our two recommendations.
In response to the second recommendation to request pricing for  warranties for the lead ship and the nine follow-on ship options planned  for FFG(X) as part of the detail design and construction request for  proposals, DOD acknowledged that the Navy will receive guaranty rather  than warranty pricing, but stated that the solicitation allows industry to  propose a higher limitation of liability amount, up to an unlimited limitation  of liability, in its guaranty pricing for FFG(X). While this could allow for a  better value to the government than has been typical for recent  shipbuilding programs, permitting higher limitation of liability guaranty  pricing but not requesting warranty pricing from offerors means the Navy  will not have complete information on whether a warranty could be more  cost-effective than a guaranty. Our prior work found that the use of  Federal Acquisition Regulation warranty provisions improved shipbuilding  program cost and quality outcomes. As a result, we maintain our belief  that the FFG(X) program office should implement this recommendation by  seeking warranty pricing as part of the detail design and construction  request for proposals. The full and open competition for the FFG(X)  contract award may increase the potential for receiving warranty pricing  that provides a cost-effective alternative to the Navy’s guaranty plans.
DOD stated that modifying the solicitation to incorporate a warranty  pricing component would cause an unacceptable delay to the FFG(X)  program, but did not provide an analysis to support this assertion or  specify the extent of delay associated with adding a warranty pricing  request. The current FFG(X) schedule has roughly 10 months between  the request for proposals deadline and the contract award, and the  program originally had been planning for the solicitation period to end in  December 2019 before moving the deadline to September 2019 shortly  before its release. We recognize the substantial effort the proposal  development and review process requires, but we continue to believe that  the government would benefit from adding a request for warranty pricing  to the detail design and construction solicitation. While DOD stated that  the Navy will support the recommendation after award by requesting  pricing for an unlimited warranty before exercising the first ship option,  doing so would eliminate any potential warranty pricing advantages that  would occur as a result of the competitive conditions that currently exist  for the current detail design and construction contract.
In addition to DOD’s written response to the report, DOD officials and  industry representatives associated with the FFG(X) conceptual design  activities provided separate technical comments, which we incorporated  as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, and the Secretary of the Navy.  This report will also be available at no charge on GAO’s website at  http://www.gao.gov.
If you or your staff members have any questions regarding this report,  please contact me at (202) 512-4841 or oakleys@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made key  contributions to the report are listed in appendix II.

Appendix I: Comments from the Department of Defense

Appendix II: GAO Contact and Staff Acknowledgments

	GAO Contact

Shelby S. Oakley, (202) 512-4841 or oakleys@gao.gov.

	Staff Acknowledgments

In addition to the contact named above, the following staff members  made key contributions to this report: Diana Moldafsky (Assistant  Director), Lori Fields, Kurt Gurka, Stephanie Gustafson, Chad Johnson,  Jennifer Leotta, Sean Merrill, Miranda Riemer, Jillena Roberts, Hai Tran,  and Alyssa Weir.