Arctic Capabilities: Coast Guard Is Taking Steps to Address Key Challenges, but Additional Work Remains

The Coast Guard—a component of the Department of Homeland Security (DHS)—is a multimission, maritime military service that is responsible for maritime safety and national security, among other missions. Given the Arctic region's expansive maritime domain, the Coast Guard plays a significant role in Arctic policy implementation and enforcement. The Coast Guard is also the sole provider and operator of the U.S. polar icebreaking fleet—a critical component in ensuring year-round access to the Arctic. The Coast Guard is developing the first of three heavy polar icebreakers—the Polar Security Cutter—it has acquired in over 40 years.

This statement addresses (1) the Coast Guard's assessment of capability gaps in the region, and (2) key risks facing the Polar Security Cutter acquisition. This statement is primarily based on GAO's June 2016 report examining capability gaps in the Arctic and its September 2018 report examining the Coast Guard's polar icebreaker acquisition.

In fiscal year 2012, the Coast Guard—the primary federal maritime agency in the Arctic—assessed its capability to perform its missions in the region and identified a number of capability gaps. These gaps, which still exist today, include communications, infrastructure, maritime domain awareness, and icebreaking. The Coast Guard has worked to mitigate these gaps with its Arctic partners, such as other federal agencies. For example, during a 2015 annual operation in the Arctic, the Coast Guard took steps to enhance maritime domain awareness by testing the Department of Defense's communications equipment, extending communications capabilities further north than previously possible. However, in June 2016, GAO found that the Coast Guard did not systematically assess the extent to which its actions helped to mitigate these gaps. In response to GAO's recommendation, the Coast Guard is currently developing an implementation plan and corresponding metrics for its April 2019 Arctic Strategy.

In September 2018, GAO found that the Coast Guard faced four key risks when it established the Polar Security Cutter program in March 2018: technology, design, cost, and schedule. For example, the Coast Guard's initial planned delivery dates of 2023, 2025, and 2026 for the three ships were not informed by a realistic assessment of shipbuilding activities. The schedule was driven, instead, by the potential gap in icebreaking capabilities once the Coast Guard's only operating heavy polar icebreaker—the Polar Star —reaches the end of its service life (see figure).

GAO recommended in September 2018 that the program develop a realistic schedule and determine schedule risks for the program. In response, the Coast Guard is now tracking additional schedule risks for the program and is in the process of updating its program schedule. GAO will continue to monitor the Coast Guard's progress in addressing this recommendation and other recommendations GAO made to address key risks, such as design and cost, facing the Polar Security Cutter program.

In June 2016, GAO recommended, among other things, that Coast Guard develop measures for assessing how its actions have helped to mitigate Arctic capability gaps. In September 2018, GAO recommended that the Polar Security Cutter program develop a program schedule according to best practices. DHS concurred with all of the recommendations, and the Coast Guard is in the process of addressing them.

I am pleased to be here today to discuss key challenges that the Coast  Guard faces in the Arctic, including its capability gaps in the region and  efforts to recapitalize the nation’s polar icebreaker fleet—a key step in  addressing these gaps.

The Coast Guard, a component within the Department of Homeland  Security (DHS), is the primary federal maritime agency in the Arctic and is  currently developing the first heavy polar icebreaker it has acquired in  over 40 years. As we reported in September 2018, the Coast Guard, in  collaboration with the Navy, plans to invest up to $9.827 billion for the  acquisition, operation, and maintenance of three heavy polar  icebreakers—also known as the Polar Security Cutters—over their entire  30-year life cycle. In April 2019, the Navy awarded an approximately  $750 million detail design and construction contract to a shipbuilder for  the first icebreaker. As the Coast Guard’s only operating heavy polar  icebreaker—the Polar Star—nears the end of its service life, the Polar  Security Cutters will play a critical role in the Coast Guard’s ability to  ensure year-round access to the Arctic. Such access affects U.S.  economic, maritime, and national security interests in this region.

My statement today will address (1) the Coast Guard’s role in the Arctic,  including its assessment of capability gaps in the region, and (2) key risks  facing the Coast Guard’s acquisition of the Polar Security Cutters.

This statement is based primarily on our June 2016 report examining  capability gaps in the Arctic and our September 2018 report examining  the Coast Guard’s polar icebreaker acquisition. For the reports cited in  this statement, among other methodologies, we analyzed Coast Guard  and Navy guidance, data, and documentation, and interviewed Coast  Guard and Navy officials. Detailed information on our scope and  methodology can be found in the reports cited in this statement. Since the  issuance of these reports, we received and reviewed information from the Coast Guard on the actions it has taken in response to our  recommendations. In addition to our prior work, for this statement we  reviewed the Coast Guard’s 2019 Arctic strategic outlook.

We conducted the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe the evidence obtained provides  a reasonable basis for our findings and conclusions based on our audit  objectives.

The Coast Guard Has Taken Actions to Help Mitigate Arctic Capability Gaps but Has Not Yet Systematically Assessed Its Progress in This Effort

The Coast Guard is a multimission, maritime military service that is  responsible for maritime safety and security, environmental protection,  and national security, among other missions. Given the Arctic region’s  expansive maritime domain, the Coast Guard plays a significant role in  Arctic policy implementation and enforcement. Therefore, as we have  reported, as more navigable ocean water has emerged in the Arctic and  human activity increases, the Coast Guard has faced, and will continue to  face, expanding responsibilities in the region.

In June 2016, we found that the Coast Guard assessed its capability to  perform its missions in the Arctic in fiscal year 2012 and identified various  capability gaps, including the following:

Communications: including the lack of communications architecture.

Harsh weather conditions, high latitude disturbances, and  geomagnetic storms combine to make communications in the Arctic  difficult.

Arctic maritime domain awareness: including limited nautical  charting, inadequate navigation systems, and insufficient surveillance.  Extremely limited operational assets and support infrastructure in the  Arctic, as well as the harsh operating environment, make achieving  maritime domain awareness a challenge.

Infrastructure: including limited aircraft infrastructure on the North  Slope in northern Alaska and limited logistical support. Facilities  located below the Arctic Circle, and even those within Alaska, provide  limited capability to support Arctic missions due to the long transits to  the Arctic region. No deepwater ports currently exist on the North  Slope or near the Bering Strait that are capable of refueling and re- provisioning polar capable cutters. This forces the Coast Guard’s  polar capable cutters to expend significant time transiting long  distances to and from replenishment ports. Development of  infrastructure to support operations is challenging, in part, due to the  high cost of transporting materials to the Arctic and short construction  seasons.

Training and exercise opportunities: including a limited pool of  Arctic-trained and experienced Coast Guard personnel, and limited  training, exercise, and educational opportunities to enhance Arctic  skills among staff. According to Coast Guard officials, few  opportunities exist to train in the Arctic, in part, because of limited  Coast Guard icebreaking capacity.

Icebreaking: including limited icebreaking capacity given the Coast  Guard’s existing active inventory of one medium and one heavy polar  icebreaker, as discussed later in this testimony.

At the time of our June 2016 review, Coast Guard officials stated that the  capability gaps were not the sole responsibility of the Coast Guard to  mitigate and did not completely impair or eliminate their ability to perform  operations. For example, while communications can be a challenge in  remote regions, the risk of lost communications can be mitigated by using  multiple assets working together to mitigate risk if lost communications is  anticipated. Coast Guard officials also stated that given its activity levels  at the time, the mobile and seasonal nature of its Arctic presence, and its  ability to leverage partners’ resources, the Coast Guard has had sufficient  resources to fulfill its Arctic responsibilities. However, Coast Guard officials stated they would reassess their approach as Arctic activity and  resulting mission requirements change over time. As we reported in June  2016, if Arctic activity continues to increase, as anticipated, the Coast  Guard may have insufficient resources to meet expanded Arctic  requirements.

In June 2016, we also found that the Coast Guard worked with its Arctic  partners—such as other federal agencies—to carry out actions to help  mitigate Arctic capability gaps. For example, the Coast Guard took steps  to enhance Arctic maritime domain awareness by testing communications  equipment belonging to DOD during a 2015 annual operation in the  Arctic, extending communications capabilities further north than  previously possible. However, we found that the Coast Guard did not  systematically assess how its actions helped to mitigate these gaps. Such  an assessment—which includes developing measures for gauging its  progress, when feasible—is critical to the Coast Guard’s understanding of  its progress towards addressing these gaps. By systematically assessing  and measuring how its actions have helped to mitigate capability gaps,  the Coast Guard will be better positioned to effectively plan its Arctic  operations, including its allocation of resources and prioritization of  activities to target the gaps.

As a result, we recommended in June 2016 that the Coast Guard (1)  develop measures for assessing how its actions have helped to mitigate  Arctic capability gaps and (2) design and implement a process to  systematically assess its progress on this. DHS concurred with our  recommendations. As of January 2020, the Coast Guard had not yet  taken action to implement these two recommendations, in part because  the Coast Guard issued its Arctic strategic outlook in April 2019 and is  currently updating its corresponding implementation plan for this  strategy. The plan is expected to provide the foundation for  systematically assessing efforts to address Arctic capability gaps. Coast  Guard officials stated that they are also developing a strategic metrics  framework for measuring progress in addressing the capability gaps.  Coast Guard officials did not identify when they plan to complete the plan  and framework, stating that these are longer-term efforts.

The Coast Guard highlighted the Arctic capability gaps in its 2013 Arctic  Strategy and again in its 2019 Arctic strategic outlook. The 2019  strategy highlighted the need to elevate the Arctic region’s prominence as  a strategically competitive space due to (1) the resurgence of nation-state  competition from the United States’ two nearest-peer powers, Russia and  China, and (2) reduced ice conditions in the Arctic which have led to  increased human and economic activity in the region.

In addition, the 2019 Arctic strategy highlighted three overarching goals: enhance capability to operate effectively in a dynamic Arctic domain,  strengthen the rules-based order, and  innovate and adapt to promote resilience and prosperity.

Further, the 2019 Arctic strategy noted that the Coast Guard is the sole  provider and operator of the U.S. polar icebreaking fleet—a critical  component in achieving the Coast Guard’s overarching goals in the  strategy—but currently does not have the capability or capacity to ensure  access in the Arctic region. The Coast Guard’s polar icebreaking fleet  comprises two operational polar icebreakers—the Polar Star and Healy— of which only the Healy is currently active and operating in the Arctic.  The Healy is a medium icebreaker that primarily supports Arctic research,  and while it is capable of carrying out a wide range of activities, it cannot  ensure timely access to some Arctic areas in the winter given that it does  not have the icebreaking capabilities of a heavy polar icebreaker. See  figure 1 for photographs of the Coast Guard’s active icebreakers.

In November 2018, the Coast Guard Assistant Commandant for  Acquisition testified that the Coast Guard’s current polar icebreaking fleet  provides minimal capacity to carry out current icebreaking missions and  that the nation must take swift action to rebuild and enhance this critical  national capability. To this end, DHS approved the Coast Guard’s Polar  Security Cutter acquisition program’s cost, schedule, and performance  baselines in February 2018.

The Coast Guard Has Taken Steps to Address Technology, Design, Cost, and Schedule Risks for the Polar Security Cutters

In September 2018, we found that the Coast Guard did not have a sound  business case when it established the acquisition baselines for the Polar  Security Cutter program in March 2018 due to risks in four key areas:  technology, design, cost, and schedule. Our prior work has found that  successful acquisition programs start with solid, executable business  cases before setting program baselines and committing resources. A  sound business case requires balance between the concept selected to  satisfy operator requirements and the resources—design knowledge,  technologies, funding, and time—needed to transform the concept into a  product, which in this case is a ship with polar icebreaking capabilities.  Without a sound business case, acquisition programs are at risk of  breaching the cost, schedule, and performance baselines set when the  program was initiated—in other words, experiencing cost growth,  schedule delays, and reduced capabilities.

To address the key risks we identified and help establish a sound  business case for the Polar Security Cutter program, we made six  recommendations to DHS, Coast Guard, and the Navy in our September  2018 report. The agencies concurred with all six recommendations and  have taken steps to address some of the risks, as noted below.

Technology. The Coast Guard planned to use proven technologies  for the program, but did not conduct a technology readiness  assessment to determine the maturity of key technologies prior to  setting baselines. As a result, the Coast Guard did not have full  insight into whether these technologies were mature and was  potentially underrepresenting the technical risk of the program. We  recommended that the program conduct a technology readiness  assessment, which DHS completed in June 2019. DHS determined  that two of the three key technologies were mature and the remaining  technology was approaching maturity. The Coast Guard now has  plans in place to use testing results to increase the maturity and  reduce risks for the remaining technology—the hull form.

Design. The Coast Guard set program baselines before conducting a  preliminary design review. This review is a systems engineering event  intended to verify that the contractor’s design meets the requirement  of the ship specifications and is producible. By not conducting this  review before establishing program baselines, the program is at risk of  having an unstable design, thereby increasing the program’s cost and  schedule risks. We recommended that the program update its  baselines prior to authorizing lead ship construction and after  completion of the preliminary design review. DHS and the Coast  Guard agreed and plan to take these steps by fiscal year 2022.

Cost. The cost estimate that informed the program’s $9.8 billion cost  baseline—which includes life cycle costs for the acquisition,  operations, and maintenance of three polar icebreakers—substantially  met our best practices for being comprehensive, well-documented,  and accurate. But the estimate only partially met best practices for  being credible. The cost estimate did not quantify the range of  possible costs over the entire life of the program, such as the period  of operations and support. As a result, the cost estimate was not fully  reliable and may underestimate the total funding needed for the  program. We recommended that the program update its cost estimate  to include risk and uncertainty analysis on all phases of the program  life cycle, among other things. Subsequently, in December 2019, we  found that while the Coast Guard updated the cost estimate in June  2019 to inform the budget process, the estimate did not reflect cost  changes resulting from the contract award two months prior. Coast  Guard officials acknowledged these cost risks and plan to address  them as part of the next update to the program’s cost estimate. Coast  Guard officials told us that they plan to update the cost estimate by  the end of February 2020.

Schedule. The Coast Guard’s initial planned delivery dates of 2023,  2025, and 2026 for the three ships were not informed by a realistic  assessment of shipbuilding activities. Rather, these dates were  primarily driven by the potential gap in icebreaking capabilities once  the Coast Guard’s only operating heavy polar icebreaker—the Polar  Star—reaches the end of its service life. In addition, our analysis of  selected lead ships for other Coast Guard and Navy shipbuilding  programs found the icebreaker program’s estimated construction time  of 3 years to be optimistic. An unrealistic schedule puts the Coast  Guard at risk of not delivering the icebreakers when promised. As a  result, the potential gap in icebreaking capabilities could widen. We  recommended that the program develop a realistic schedule, including  delivery dates, and determine schedule risks during the construction  phase of the program. In response, the Coast Guard is now tracking  additional schedule risks for the program and is in the process of  updating its program schedule. Further, in December 2019, we found  that the contract delivery date for the lead ship, May 2024, is 2  months after the delivery date in the program’s schedule baseline.  Coast Guard officials said they plan to address this risk when they  update the program’s schedule by the end of March 2020.

In summary, the Arctic region has increased in strategic importance in  recent years, and with the increase comes more responsibility for the  Coast Guard. The Coast Guard has emphasized that as the Arctic  continues to open and strategic competition drives more actors to look to  the Arctic for economic and geopolitical advantages, the demand for  Coast Guard leadership and presence will continue to grow. As the Coast  Guard embarks on the acquisition of its new polar icebreakers, it faces a  number of key acquisition risks. The Coast Guard has begun to take  steps to address these risks and must remain committed to executing a  sound business case for the program to mitigate capability gaps in the  Arctic. To this end, we will continue to monitor the Coast Guard’s  progress in addressing our recommendations.

Chairman Correa, Ranking Member Lesko, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any questions about this statement, please  contact Marie A. Mak, (202) 512-4841 or makm@gao.gov. In addition,  contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Individuals who  made key contributions to this testimony include Rick Cederholm,  Assistant Director; Claire Li, Analyst-in-Charge; Peter Anderson; Jay  Berman; Tracey Cross; Laurier Fish; Miranda Riemer, and Roxanna Sun.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Coast Guard icebreakers can ensure year-round access to the Arctic—critical to protecting U.S. economic and national security interests in the region.

We testified on the Coast Guard’s Arctic strategy and capabilities, including icebreaking. The Coast Guard’s only operating heavy polar icebreaker is near the end of its service life. The plan is to replace it with 3 Polar Security Cutters. We’ve made a number of recommendations on this cutter acquisition.

For example, the new cutters’ planned delivery dates were based on the old icebreaker’s service life—not on the time it takes to build ships. We recommended developing a more realistic schedule.


Defense Logistics Agency: Small Businesses Participate in Reverse Engineering of Spare Parts

The Department of Defense spends tens of billions of dollars annually to sustain military assets including aircraft, ships, and missiles. In support of this effort, DLA strives to maintain a competitive supplier base through reverse engineering—the process of examining an item, such as a spare part, with the intent of replicating its design. Contractors consider intellectual property, such as their technical data and patented material, essential to their success. DLA also takes steps to safeguard contractors' intellectual property during reverse engineering.

The Senate Armed Services Committee report accompanying a bill for the fiscal year 2018 National Defense Authorization Act included a provision for GAO to review DLA's reverse engineering efforts, including the protection of small businesses' intellectual property. This report describes (1) DLA's reverse engineering programs and the extent to which small businesses participated in these programs from fiscal years 2015 through 2018; and (2) how DLA safeguards certain intellectual property within its reverse engineering efforts.

GAO analyzed data from three DLA commands—Aviation, Land and Maritime, and Troop Support, those that conduct reverse engineering—from fiscal years 2015 through 2018. GAO reviewed a nongeneralizable sample of 19 reverse engineering projects involving 13 parts, selected to include a variety of characteristics, such as the size of the contractors involved. GAO reviewed DLA's guidance and interviewed DLA officials and representatives from small businesses about safeguarding intellectual property as part of reverse engineering.

The Defense Logistics Agency (DLA) is responsible for providing logistics support to the warfighter, including spare parts for military assets. From fiscal years 2015 through 2018, DLA initiated over 1,600 reverse engineering projects for spare parts at three of its commands—Aviation, Land and Maritime, and Troop Support. DLA uses reverse engineering to identify potential new sources for spare parts that are available from only one source and to achieve savings. DLA funded about 1,000 of the reverse engineering projects, while contractors funded the remaining 600 projects. Nearly two-thirds of all reverse engineering projects involved parts in five categories, with examples of the three largest categories illustrated in the figure.

GAO found that the majority of contractors conducting reverse engineering for DLA were small businesses. Specifically, DLA identified 124 contractors that conducted reverse engineering projects from fiscal year 2015 through 2018, 103 of which GAO determined were small businesses. According to small business representatives and DLA officials, reverse engineering is beneficial for small businesses and can help provide opportunities for additional business with DLA.

GAO found that the three DLA commands had processes to safeguard certain intellectual property in their reverse engineering efforts. Specifically:

Officials from all three commands stated they do not release drawings with limited data rights to contractors interested in reverse engineering parts.

Aviation and Land and Maritime officials stated that they check for patent markings on parts to ensure patented parts are not reverse engineered. Troop Support officials stated they do not check for patent marks because the parts they supply are often too old to have valid patents.

The small businesses GAO met with did not identify concerns with how DLA handles intellectual property. Further, DLA officials stated that they had not received any complaints from small businesses about their intellectual property being used inappropriately.

Sustaining the Department of Defense’s (DOD) military assets, such as  aircraft, ships, and missiles, is crucial to support the warfighter. DOD  spends tens of billions of dollars annually to ensure these assets are  available for military operations, with the Defense Logistics Agency (DLA)  supporting the sustainment efforts. DLA is DOD’s combat logistics  support agency and is responsible for purchasing, storing, and distributing  most consumable, expendable, and reparable parts, including spare  parts, for DOD. Military assets are often operational for decades and a  single contractor sometimes supplies the parts needed to sustain them.  This situation potentially leaves DLA vulnerable to higher costs and  disruption in supply if that supplier can no longer provide the part.

If DLA cannot obtain needed items due to price or obsolescence, it can  attempt to reverse engineer the part. This is one way DLA strives to  maintain its supplier base and obtain savings. Reverse engineering is the  process of examining an item, such as an antenna or an electrical cable,  with the intent of replicating the item’s design. Reverse engineering  efforts can be funded by DLA or by contractors that want to become new  suppliers. During this process, DLA takes steps to safeguard against  unauthorized patent infringement and protect the existing suppliers’  intellectual property—such as certain technical data and other proprietary  information for their spare parts. Contractors consider intellectual property  essential to the success of their businesses.

The Senate Armed Services Committee report accompanying a bill for the  fiscal year 2018 National Defense Authorization Act included a provision  for us to review DLA’s reverse engineering efforts, including DLA’s  processes for protecting small businesses’ intellectual property, such as  patented materials, if those businesses’ parts are reverse engineered by  other businesses. This report describes (1) DLA’s reverse engineering  programs and the extent to which small businesses participated in these  programs from fiscal years 2015 through 2018; and (2) how DLA  safeguards certain intellectual property within its reverse engineering  efforts.

To describe the results of DLA’s reverse engineering programs and small  business participation in fiscal years 2015 through 2018, we analyzed  DLA data describing the number of projects initiated in each fiscal year by  three major subordinate commands—Aviation, Land and Maritime, and  Troop Support. DLA identified these three major subordinate commands  as having formal reverse engineering programs. DLA’s data included  projects funded by contractors and projects funded by DLA. To categorize  the types of parts involved in reverse engineering, we compared the first  two digits in the national stock number for each part to its corresponding  Federal Supply Groups description, which DLA uses to identify parts. We  also analyzed DLA’s reverse engineering data to identify the number of  contractors involved in reverse engineering as well as the amount of  savings reported by DLA.

In addition, we compared data provided by DLA for contractors involved  in reverse engineering—both those that supplied parts prior to reverse  engineering and those that conducted reverse engineering—to small  business information in the System for Award Management and the  Federal Procurement Data System – Next Generation. We assessed  data reliability by (1) reviewing existing data and information about the  systems used to produce the data, (2) comparing the data provided to  documentation for a selection of reverse engineering projects, and (3)  interviewing agency officials knowledgeable about the data. Although we  found some inconsistencies in the data, we determined that the data were  sufficiently reliable to discuss the number and types of reverse  engineering projects in DLA.

In addition, we selected a nongeneralizable sample of 19 reverse  engineering projects, involving 13 parts, chosen to obtain variety across  the following characteristics: DLA command, project completion status,  contractor- and DLA-funded projects, and types of entities conducting  reverse engineering efforts. For example, we sought to include projects  where the approved suppliers (prior to reverse engineering) or the  contractors conducting reverse engineering were small businesses. We  also included projects that reported savings as a result of reverse  engineering. For these selected 19 projects, we reviewed documentation  including requests for approval from military service engineers,  agreements between DLA and contractors, acquisition history  information, and documentation of prices paid to support savings  calculations. We identified 15 small businesses that were involved in  these 19 projects either as a small business whose parts had been  reverse engineered or as a small business that conducted reverse  engineering. We spoke with or received written responses from 10 of  these 15 small businesses. We also conducted follow-up with DLA  command officials to obtain additional information.

To describe how DLA safeguards intellectual property within its reverse  engineering efforts, we reviewed relevant DOD procedures. We also  reviewed documentation for the nongeneralizeable selection of 19  reverse engineering projects to understand how officials implemented the  procedures. For these selected projects, we interviewed or received  written information from 10 of the 15 small businesses regarding how  DLA’s reverse engineering affects small businesses and any concerns  about how their intellectual property is protected during the reverse  engineering process. We also interviewed DLA competition advocates  and small business officials about issues raised to them by small  businesses with whom they interact. Further, we interviewed  representatives from industry associations whose members include small  business manufacturers that conduct work with DOD, specifically the  Aerospace Industries Association, the National Defense Industrial  Association, and the National Association of Manufacturers, as well as  the Council of Defense and Space Industry Associations.

We conducted this performance audit from July 2018 to July 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

DLA’s primary purpose is to meet the logistics requirements of the armed  forces for food, clothing, fuel, spare parts, and other items. DLA’s major  responsibilities are to buy and distribute about 5 million distinct  consumable, expendable, and reparable items. In order to fulfill the  logistics requirement of the armed forces, DLA provides more than $35  billion in goods and services annually. As part of its responsibility to  provide spare parts, DLA officials stated that three of DLA’s major  subordinate commands conduct reverse engineering—Aviation, Land and  Maritime, and Troop Support. These commands are directly responsible  for meeting the following military services’ needs. Specifically:

Aviation provides aviation weapons systems spare parts, flight safety  equipment, maps, environmental products, and industrial plant  equipment.

Land and Maritime provides for ground-based and maritime  weapons systems spare parts, small arms parts, and fluid handling  systems.

Troop Support handles food, textiles, construction material, industrial  hardware, and medical supplies and equipment, including  pharmaceuticals.

Reverse engineering is the process of replicating a design by physically  examining and measuring an existing item to develop the technical data  necessary to reproduce the item functionally and dimensionally. In other  words, it is the process of extracting information about an item from the  item itself. According to DLA’s procedure, the intent of reverse  engineering is either to develop an approved technical data package—the  details needed to duplicate the item such as drawings or specifications,  among other things—or approve a new supplier. The technical data  package could be used for future competitive procurements when the  item is needed for sustainment purposes.

DLA uses reverse engineering for several reasons, such as identifying  potential new sources for obsolete parts or those supplied by only one  source, increasing competition, and achieving savings. Parts are  identified for reverse engineering generally because the government does  not have necessary legal rights to the drawings or lacks data needed to  facilitate competitive procurements. However, reverse engineering is  generally considered the least attractive alternative for replenishing parts  because it is expensive and time-consuming. Therefore, according to  DLA guidance, before starting reverse engineering DLA personnel should  try to buy data from the original equipment manufacturer, previous  manufacturing sources, or other data rights holder. DLA personnel also  need to consider the costs of acquiring the data rights before initiating  reverse engineering. DLA guidance for its reverse engineering processes  is the same regardless of the size of the businesses involved.

In order to start a reverse engineering project, DLA has established  criteria, such as documenting a business case and showing that the part  meets certain yearly purchase thresholds. Specifically, according to DLA  guidance, procurements of the part over the past 2 years generally should  exceed $10,000 in each year. Additionally, the engineering support  activity at a military department (Army, Air Force, or Navy) responsible for  the part generally approves a project before reverse engineering can  begin. Once reverse engineering is completed, the technical data  package must be approved by the appropriate engineering support  activity. Figure 1 shows the general process from identifying a part as a  potential candidate for reverse engineering to approving a technical data  package or a new source of supply, and indicates whether DLA or a  contractor is responsible at each step.

DLA has two reverse engineering programs—the Replenishment Parts  Purchase or Borrow program, funded by contractors, and the DLA  internally funded efforts.

Through the Replenishment Parts Purchase or Borrow program,  contractors reverse engineer a part at their own expense. DLA’s goals for  this program are to increase competition and achieve savings. After  successful reverse engineering and military approval of a technical data  package, the contractor becomes a new source of supply for the part.  Contractors may identify parts for reverse engineering—mostly small  hardware items and electrical components, such as antennas and  cables—from a candidate list on a DLA website or through their own  research. To conduct reverse engineering, contractors may purchase or  borrow parts under agreement with the government subject to certain  conditions, such as the part is not classified or considered a critical part— one that is crucial enough that a failure of that part would result in serious  injury or impact the success of a mission—among other things. The  government incurs minimum cost, if any, in this program.

The goal of DLA-funded reverse engineering is to develop a technical  data package that will be used in future competitive procurements.  Typically, DLA funds efforts for parts that are available from only one  source, are obsolete, or have limited data rights. These efforts occur in  several ways:

DLA engineers conduct the reverse engineering.

DLA funds the efforts through partnerships with other DOD entities.

DLA awards contracts to companies to create drawings of parts that  the government can then use in competitive procurements. The  government obtains full use of these drawings.

Intellectual Property: Data Rights and Patents

Intellectual property derives from the work of the mind or intellect and is  an application, right, or registration relating to property—such as an idea,  invention, or process. It includes patents and proprietary information:

Patents—grants an inventor the right to exclude others from making,  using, or selling an invention in the United States, typically for a period  of 20 years. The holder of a valid patent is the only authorized  supplier of the patented item unless another supplier has acquired a  license to manufacture and sell the item.

Proprietary information—includes technical data which represents  trade secrets usually developed at private expense, such as design,  material composition, or manufacturing processes. The owner of a  specific item does not make the information available to others without  obligations concerning its confidentiality. This confidentiality of  proprietary information does not protect it from discovery by reverse  engineering.

In order to share technical data, for example, to issue a solicitation for  competitive procurement of an item, DLA needs to have sufficient data  rights. Data rights are the government’s contractual license rights for  technical data—recorded physical and material characteristics, such as  item specifications, engineering drawings, or operating and maintenance  manuals. If the government is entitled to and acquires unlimited data  rights, it is allowed to use, reproduce, or disclose that technical data.

When the government acquires limited rights the government may only  use the data internally, such as for the operation of equipment, but may  not disclose technical data for the purpose of procuring an item from  another contractor. DLA procedures indicate the government should  consider the cost of acquiring the data rights before initiating reverse  engineering.

Reverse Engineered Spare Parts Resulted in Some Lowered Prices and Increased Supplier Opportunities for Small Businesses

Number of Reverse Engineered Spare Parts

DLA’s Aviation, Land and Maritime, and Troop Support major subordinate  commands initiated over 1,600 reverse engineering projects during fiscal  years 2015 through 2018, according to DLA data. Table 1 describes the  number of projects initiated in each fiscal year by DLA’s Aviation, Land  and Maritime, and Troop Support for both the contractor- and DLA-funded  efforts.

Nearly two-thirds of all reverse engineer projects involved parts in the  following five categories.  1.  Hardware and abrasives. For example, screws, nuts, washers, and  keys.  2.  Vehicular equipment components. For example, floor mats, vehicle  door hinges, and tailgates.  3.  Electrical and electronic equipment components. For example,  pressure switches, electrical assemblies, and antennae.  4.  Electric wire, and power and distribution equipment. For example,  batteries, wiring harnesses, and special purpose cable assemblies.  5.  Aerospace craft components and accessories. For example,  insulation blankets, filters, and door handles.

Figure 2 shows examples of items in these categories.

Some Reverse Engineering Projects Resulted in Lowered Prices

Some of DLA’s projects resulted in lower prices for the reverse  engineered parts in subsequent procurements. According to DLA data,  the agency saved at least $22 million from reverse engineering projects  initiated from fiscal years 2015 through 2018 as a result of lower prices  paid. For example, in one project we reviewed, a small business  successfully reverse engineered a retaining ring, which assists in  securing parts in an aircraft engine, purchased by Troop Support and  became a new approved source of supply. A subsequent purchase of this  part resulted in a unit price that was almost $70 lower per unit compared  to the most recent purchase before reverse engineering. We found that  Troop Support saved over $11,000 through this project.

We found that 141—or less than 10 percent—of all projects initiated from  fiscal years 2015 through 2018 were successfully completed. Table 2  describes the number of projects that were completed, in-process, and  canceled as of December 2018, according to DLA.

DLA officials told us that less than 10 percent of projects have been  completed for several reasons. DLA officials stated that the engineering  support activities at the military services sometimes take a long time to  respond to requests for approval, which adds time to reverse engineering  projects. For contractor-funded projects under the Replenishment Parts  Purchase or Borrow program, reasons include the following:

DLA officials explained that contractors sometimes decide not to  complete reverse engineering because the contractors determine the  effort would be more labor intensive than originally anticipated or their  priorities shift.

DLA officials also stated that DLA does not necessarily hear back  from a contractor after it purchases a part to begin the reverse  engineering process.

Representatives from contractors we spoke with told us that they  experience delays in obtaining responses from DLA and military  service engineers regarding approvals for their projects.

In addition, DLA officials explained that the completion rate for DLA- funded projects is low for the following reasons:

More urgent priorities arise after a project begins. Personnel who work  on reverse engineering typically have other duties in addition to these  efforts and if more urgent priorities emerge after a reverse  engineering project has started, the effort may need to be postponed  or abandoned to attend to the more pressing priority.

The need no longer exists for some parts that were identified as  reverse engineering candidates.

Most Businesses Conducting Reverse Engineering Were Small Businesses

We found that DLA’s reverse engineering programs created opportunities  for contractors—particularly small businesses—to become new suppliers.  According to DLA data, 124 contractors participated—or had the  opportunity to become new sources of supply for parts—in the contractor- funded reverse engineering program from fiscal years 2015 through 2018.  Of these, we determined that 103 were small businesses. In addition, while DLA performed reverse engineering work for most of the DLA- funded projects, DLA awarded contracts to 6 companies to conduct  reverse engineering, all of which were small businesses.

Roughly one-third of the 124 contractors worked on only one spare part  during the time frame we reviewed, while the others initiated reverse  engineering for multiple parts. For example, one small business  requested to reverse engineer more than 50 parts during fiscal years  2015 through 2018. A representative for this contractor told us they use a  business analytics system that queries publicly available information in  order to identify opportunities for reverse engineering.

While most companies conducting reverse engineering were small  businesses, almost half the contractors that supplied parts prior to  reverse engineering were not small businesses. Specifically, for fiscal  years 2015 through 2018, DLA identified 74 contractors whose parts had  been successfully reverse engineered, of which we determined that 34  were not small businesses and 26 were.

In general, representatives at the small businesses we spoke with stated  that the reverse engineering programs help small businesses. For  example, representatives of one contractor that requested to reverse  engineer a part told us that DLA’s reverse engineering program as a  whole benefits small businesses because most of the parts being reverse  engineered are originally from other than small businesses, and the  program is a path that allows small businesses to become approved  suppliers. In addition, representatives from one contractor that reverse  engineered multiple projects stated that working with DLA has allowed  their business to establish past performance ratings, which will help in  future government procurements.

Officials from DLA competition advocate and small business offices  stated that reverse engineering is generally beneficial for small  businesses. They stated that small businesses have not registered  complaints about DLA’s reverse engineering program. Rather, small  businesses seek opportunities for additional business with DLA, which  reverse engineering can help provide. In addition, industry associations  we spoke with stated that reverse engineering is a way to involve small  business. They stated that reverse engineering projects provide small  businesses opportunities to become qualified suppliers and compete for  future DLA contracts.

DLA Processes Generally Safeguard Intellectual Property in Reverse Engineering Efforts

We found that DLA has processes to protect intellectual property, such as  patented designs and proprietary information during reverse engineering.  Of the 10 small businesses we spoke with that were involved with our 19  selected projects, none of the representatives identified concerns with  DLA’s practices for protecting intellectual property. Although DLA’s  standard operating procedure applies to both DLA-funded efforts and  contractor-funded efforts, the provisions that safeguard against patent  infringement are specific to the contractor-funded program. According to  these provisions, patented materials should not be approved or shared for  reverse engineering.

Aviation and Land and Maritime officials stated that they physically review  parts for patent marks before reverse engineering can take place for  contractor-funded efforts under the Replenishment Parts Purchase or  Borrow program. However, Troop Support officials said they do not check  for patents under this program because they are supplying parts for  legacy systems—systems that are typically 20 years or older—which  means any potential patents would have expired. They also stated that  they conducted reverse engineering to a limited extent through the  Replenishment Parts Purchase or Borrow program. We found Troop  Support initiated 30 of the 617 Replenishment Parts Purchase or Borrow  efforts from fiscal years 2015 through 2018.

For DLA-funded efforts, Aviation and Land and Maritime officials stated  that they physically review parts for patents, and the project is stopped if  one is found. For example, officials from Land and Maritime canceled a  project for an eye guard because officials found drawings marked with a  patent number. The officials could not determine if the patent had expired  so they canceled the project. Aviation officials also stated that they rarely  encounter patent markings; they have seen four or five in the last 2 years.  Troop Support officials stated they do not check for patent markings and  they rely on the engineering support activities to check for patents. Figure  3 shows an example of a patent marking.

DLA’s guidance for reverse engineering also does not allow the release of  limited rights data for the contractor-funded projects under the  Replenishment Parts Purchase or Borrow program. DLA officials at all  three major subordinate commands told us that they do not release  drawings that have limited data rights to contractors conducting reverse  engineering under this program. DLA guidance does not cover whether  data can be used under DLA-funded efforts. Officials at Aviation, Land  and Maritime, and Troop Support all stated that proprietary or limited  release drawings or technical data related to the part cannot be used by  engineers who work on reverse engineering efforts. Aviation officials  noted that the tracking system records those who have seen propriety  drawings, and this information is used to ensure that these individuals do  not work on reverse engineering projects related to those drawings. Land  and Maritime officials stated that the tracking system used for reverse  engineering projects also identifies drawings marked as proprietary and  controls who has access to drawings.

In general, the small businesses we met with did not express any  concerns about how DLA handles intellectual property. We spoke with  four small businesses that supplied parts that had been reverse  engineered by other businesses. Representatives of these four small  businesses confirmed that they did not hold patents on the parts that  were reverse engineered. Further, the small businesses that conducted  reverse engineering stated that DLA adequately protected intellectual  property. In one case, a representative from a small business that  participates in the Replenishment Parts Purchase or Borrow program  stated that DLA has never released a part that had controlled data to  them and DLA takes protection of proprietary data seriously. Another  contractor who performs DLA funded reverse engineering efforts stated  drawings are not released and sometimes the function of the part is not  even shared with contractors.

DLA command officials stated they had not heard of any concerns from  small businesses about their intellectual property being used  inappropriately. In addition, officials from the DLA small business office  stated they had not heard concerns from any small businesses. Further,  one official from the small business office noted that the parts DLA  purchases are not new innovations and so do not necessarily have  protected intellectual property. Competition advocates stated they  received no complaints from small businesses. The industry associations  we met with asked their small business membership if there were any  specific concerns regarding DLA’s protection of intellectual property.  Officials from the Aerospace Industries Association, the National Defense  Industrial Association, and the National Association of Manufacturers  stated there were no complaints from the small businesses represented  by their groups about the businesses’ experiences working with DLA.

We provided a draft of this report to DOD for review. DOD had no  comments.

We are sending copies of this report to the Secretary of Defense; the  Director, Defense Logistics Agency; appropriate congressional  committees; and other interested parties. This report will also be available  at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at makm@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Key contributors to this report are  listed in appendix II.

Appendix I: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Penny Berrier, Assistant Director;  Brandon Booth, Alexandra Dew Silva, Stephanie Gustafson, Victoria  Klepacz, Jean McSween, Ralph Roffo, Roxanna Sun, Anne Louise  Taylor, and Alyssa Weir made key contributions to this report.

Spare parts for the military's aircraft, ships, and missiles can be difficult to come by as these assets age. To help, the Defense Logistics Agency uses reverse engineering—examining an item to duplicate its design—to more easily obtain spare parts, increase competition, and save money.

DLA makes its spare parts available to interested businesses for reverse engineering. Businesses that create technical specifications for the parts can qualify as suppliers.

We found that the majority of contractors conducting reverse engineering for DLA were small businesses. We also found that DLA works to safeguard intellectual property during this process.