KC-46 Tanker Modernization: Aircraft Delivery Has Begun, but Deficiencies Could Affect Operations and Will Take Time to Correct

Aerial refueling—the transfer of fuel from airborne tankers to combat and airlift forces—is critical to the U.S. military's ability to effectively operate globally. The Air Force initiated the KC-46 program in 2011 to replace about a third of its aging KC-135 aerial refueling fleet. Boeing was awarded a fixed-price incentive contract to develop the first four aircraft, which are being used for testing. Boeing was also required to deliver the first 18 fully capable aircraft by August 2017. The program plans to eventually field 179 aircraft.

This report assesses the program's progress toward meeting cost, schedule, and performance goals. The report also assesses how the program's contracting and sustainment planning approach could inform other acquisition programs.

GAO analyzed cost, schedule, performance, test, manufacturing, contracting, and sustainment planning documents; and interviewed officials from the KC-46 program office, other defense offices, such as the Defense Contract Management Agency, the Federal Aviation Administration, and Boeing.

Costs for the KC-46 program remain lower than expected, as shown below.

The Air Force accepted the first KC-46 in January 2019, but Boeing remains nearly 3 years behind schedule. As shown below, Boeing now plans to deliver the first 18 aircraft with all three aerial refueling subsystems by June 2020.

Program officials expect the KC-46 to meet key performance goals over the next few years as it accumulates 50,000 fleet hours. However, the Air Force is accepting aircraft that do not fully meet contract specifications and have critical deficiencies, including ones that affect (1) the operators' ability to guide the fuel delivery boom into position, and (2) the boom itself. The deficiencies could affect operations and cause damage to stealth aircraft being refueled, making them visible to radar. Program officials estimate it will take 3 to 4 years to develop fixes for the deficiencies and a few more years to retrofit up to 106 aircraft. The Air Force and Boeing will incur costs to fix the deficiencies, with the Air Force's portion estimated to be more than $300 million. The Air Force is withholding 20 percent payment on each aircraft until Boeing fixes the deficiencies and non-compliances. Meanwhile, the Air Force has limited some refueling operations.

GAO identified a number of insights that could benefit other programs, including the use of a fixed-price-type development contract and a correction of deficiencies clause in the contract that protected the government from some cost increases. The Department of Defense agreed to provide lessons learned about the KC-46 program for future acquisition programs based on a recommendation GAO made in March 2012, but does not plan to do so until development is complete in 2021. GAO believes other programs could benefit from insights identified in this report if they were disseminated sooner.

GAO recommends that the Department of Defense disseminate insights in this report about the KC-46's contracting and sustainment planning experiences for consideration by acquisition programs, particularly those that plan to use a fixed-price-type development contract or a commercial derivative aircraft. The Department of Defense concurred with the recommendation.

The KC-46 aerial refueling tanker modernization program, currently  valued at about $43 billion, is one of the Air Force’s highest acquisition  priorities and will provide aerial refueling to Air Force, Navy, Marine  Corps, and allied aircraft. The Air Force contracted with Boeing in 2011 to  develop, test, and provide initial delivery of 18 KC-46 tankers by August  2017. The program recently completed its eighth year of a 9-year  development program to modify the design of an aircraft originally  designed for commercial use into an aerial refueling tanker. Aerial  refueling—the transfer of fuel from airborne tankers to combat and airlift  forces—is critical to the U.S. military’s ability to effectively operate  globally. The program eventually plans to field 179 KC-46 aircraft. These  aircraft are intended to replace roughly one-third of the Air Force’s aging  aerial refueling tanker fleet, comprised mostly of KC-135 Stratotankers.  As we have previously reported, Boeing has experienced problems wiring  the aircraft and other issues that have caused program delays.

You requested that we monitor the KC-46 program because of problems  Boeing is experiencing in developing the aircraft. This report assesses the  program’s progress toward (1) meeting cost estimates and schedule  goals; (2) achieving performance goals; and (3) completing testing. We  also assessed how the program’s contracting and sustainment planning  approach could inform other acquisition programs that are considering a  fixed-price-type development contract or using commercial derivative  aircraft. This is our eighth report on the KC-46 program. See the related  GAO Products page for a list of our previous KC-46 reports.

As part of our overall review, we reviewed key cost, schedule,  performance, test, manufacturing, and sustainment documents to  determine the status of the KC-46 program in 2018 compared to the initial  plans. We interviewed officials from the Air Force’s KC-46 program office,  the Air Mobility Command, other defense offices, the Federal Aviation  Administration, and Boeing to obtain more details and discuss our  observations on the progress made in 2018. We also attended monthly  meetings between the program office and Boeing, and visited two Boeing  production facilities in Everett, Washington.

To assess progress toward achieving cost estimates, we compared  current cost estimates to those established at the start of development  and to estimates contained in our April 2018 report. To assess progress  toward achieving schedule goals, we compared current schedule  estimates to those established at the start of development and to  estimates from our April 2018 report. For cost and schedule data, we  reviewed program documents such as defense acquisition executive  summary reports, selected acquisition reports, integrated master  schedules, and program briefings.

To assess progress toward achieving performance goals, we compared  key performance parameters for the KC-46 to their current status  contained in program documents. We tracked the program’s top critical  deficiencies as reported in program briefing slides, and compared the  deficiencies to what was required in the KC-46 development contract. To  assess Boeing’s progress toward completing testing, we compared  planned and actual developmental flight test data and identified remaining  program test activities, such as receiver aircraft certification testing and  operational testing. We assessed the reliability of the cost, schedule, and  test data by corroborating it using multiple sources including official  reports or publications where possible, and by interviewing agency  officials knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of reporting on the current status of  the KC-46 program.

To report on how the program’s contracting and sustainment approach  could inform other acquisition programs considering a fixed-price-type  development contract or commercial derivative aircraft, we analyzed the  original KC-46 contract, contract modifications, and key sustainment  documents. We compared the KC-46 program’s contracting approach to  the Federal Acquisition Regulation, Department of Defense guidance, and  best practices we identified for capturing design and manufacturing  knowledge on weapon acquisition programs. We reviewed a study that  identified the benefits of maintaining Federal Aviation Administration  certification for the KC-46 for sustainment purposes, and discussed key  assumptions that have changed since the study was completed with  program officials. We interviewed officials from the Air Force tanker  directorate; KC-46 program office; Office of the Deputy Assistant  Secretary of Defense for Systems Engineering; Under Secretary of  Defense for Acquisition and Sustainment Defense Pricing and  Contracting Office; Office of the Secretary of Defense Director,  Operational Test and Evaluation; Deputy Assistant Secretary of Defense  for Developmental Test and Evaluation; Defense Contract Management  Agency; and the Federal Aviation Administration. We also interviewed  representatives from Boeing.

We conducted this performance audit from July 2018 to June 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.

In February 2011, Boeing won the competition to develop the Air Force’s  next generation aerial refueling tanker aircraft, the KC-46. The KC-46 is to  be equipped with subsystems that allow for two types of refueling—(1) a  refueling boom that is integrated with a computer-assisted control system,  and (2) a permanent hose and drogue refueling system. This dual  refueling capability is an enhancement over prior tanker aircraft because  it enables the KC-46 to use boom refueling for Air Force aircraft and  drogue refueling for Navy or allied aircraft on a single flight. The majority  of legacy tankers, such as the KC-135s, were configured for only one of  these types of refueling and had to land and be reconfigured to use the  other refueling system.

During boom refueling, an operator on the KC-46 tanker aircraft extends  the boom—a rigid, telescoping tube—and inserts it into a receptacle on  the aircraft being refueled. The KC-46 also has a remote vision system,  which consists of a display, cameras, and computer processors, in lieu of  a window that legacy tankers use. The system allows operators to  observe the position of the boom and the receiving aircraft, and to  reposition the fuel delivery system to facilitate refueling. In contrast,  during drogue refueling, an operator uses the hose and drogue system— comprised of a long, flexible refueling hose and a parachute-like metal  basket that provides stability—to provide fuel to receiver aircraft. Drogue  refueling is available via the centerline drogue system in the middle of the  tanker aircraft or via wing aerial refueling pods located on each wing.  While refueling with the drogue or wing aerial refueling pods, the operator  uses the remote vision system to identify when to extend or reel in the  hoses. The wing aerial refueling pods can be used for simultaneous  refueling of two Navy or allied aircraft—an enhanced capability that only  20 of the 414 KC-135 tankers currently have the capability to do. Figure 1  shows the boom and drogue refueling subsystems on the KC-46.

The KC-46 tanker is a commercial derivative aircraft that is based on  Boeing’s commercial 767 aircraft. To convert a 767 to a KC-46 tanker,  Boeing modified the aircraft design in two phases. In the first phase,  Boeing changed the design of the 767 to include a cargo door, new fuel  tanks, and an advanced flight deck display borrowed from the 787  aircraft. This baseline non-military aircraft is called the 767-2C and is  being built on Boeing’s existing 767 production line. In the second phase,  Boeing added military systems to the 767-2C and brought it to a KC-46  configuration in a separate Boeing modification facility. The completed  KC-46 aircraft are then taken to a test and delivery center for Air Force  acceptance.

By using a commercial derivative aircraft, the Air Force intended to avoid  the long process and costs associated with designing, testing, and  evaluating a new aircraft. It also wanted to reap the benefits of decades of  reliability upgrades Boeing made to the aircraft for commercial customers,  an established commercial infrastructure for spare parts, and  maintenance and training data needed for sustainment that have been  validated and verified by the commercial industry, among other things.

According to an Air Force Policy Directive in place at the time of contract  award, programs that are based on commercial derivative aircraft are  required to achieve Federal Aviation Administration certification to the  maximum extent practical. The Air Force went further and required the  contractor to exhaust all possible solutions to obtain Federal Aviation  Administration certification on both commercial and military-unique  parts—including the boom, centerline drogue system, and wing aerial  refueling pods—before seeking military certification.

The Federal Aviation Administration previously certified the airworthiness  of Boeing’s 767 commercial passenger airplane (referred to as a type  certification), and in December 2017, awarded the amended type  certificate for the 767-2C aircraft to Boeing. The amended type certificate  allowed Boeing to use the 767-2C aircraft as the baseline non-military  aircraft for the KC-46. Then, in September 2018, the Federal Aviation  Administration certified the design of the KC-46 with a supplemental type  certificate. The supplemental type certificate signifies the Federal Aviation  Administration’s approval of the KC-46’s airworthiness, including mission  systems such as its aerial refueling components. According to program  officials, the Air Force granted a limited duration airworthiness certification  for the KC-46 in November 2018 to support the initial fielding, which they  said is common for new aircraft. The Air Force is continuing testing to  obtain a military type certification from the Air Force Engineering  Directorate, expected in several years. See figure 2 for a depiction of the  conversion of the 767 aircraft into the KC-46 tanker with the boom  deployed and the Federal Aviation Administration’s airworthiness  certificate needed at each stage.

During development, Boeing is expected to prove the aircraft’s design  and demonstrate that the aircraft performs as expected. This type of  testing is referred to as developmental testing. This testing was originally  planned to occur within a 15-month window starting in early 2015 and  ending in 2016.

Initial operational test and evaluation—expected to occur after  developmental testing and referred to in our report as operational  testing—is conducted on production aircraft, or production representative  articles. During this testing, the Air Force determines whether systems  are operationally effective and suitable to support a full-rate production  decision. The Air Force obtained a military flight release in November  2018, which allows it to start operational testing. To support operational  testing, the Air Force is undertaking testing to certify the KC-46 to refuel  various receiver aircraft, such as the F-15 fighter and B-52 bomber. After  the first four KC-46 aircraft are delivered and two receiver aircraft are  certified for refueling, the Air Force will begin operational testing.

The Air Force awarded Boeing a fixed-price incentive (firm target)  contract to develop the KC-46, which includes the design, manufacture,  and delivery of four test aircraft. Barring any changes, the contract  specifies a ceiling price of $4.9 billion for Boeing to develop the first four  aircraft. Once that price was reached, Boeing would assume  responsibility for all additional costs for developing those aircraft. The Air  Force used a fixed-price incentive development contract because KC-46  development was considered to be a relatively low-risk effort to integrate  mostly mature military technologies onto an aircraft designed for  commercial use. The contract limits the government’s financial liability  and provides the contractor incentives to reduce costs to earn more profit.  The contract specifies a 60/40 incentive ratio for sharing savings in the  event of underruns, or sharing costs in the event of overruns in relation to  the target cost. The government’s share is 60 percent, while Boeing’s is  40 percent. Cost sharing ends when the contract price reaches the $4.9  billion ceiling. Thereafter, Boeing is responsible for all additional costs  associated with the overruns. The contract also specifies that Boeing  must correct any deficiencies and bring development and production  aircraft to the final configuration at no additional cost to the government.

In addition, the contract includes options for Boeing to manufacture 175  aircraft with firm-fixed-price contract options for the first two production  lots, and options with not-to-exceed fixed prices for production lots 3  through 13. For purposes of this report, a production lot refers to a set  number of aircraft that must be built and delivered in a given time frame  and procured with a specific year of budget funding. The original contract  required Boeing to deliver 18 operational aircraft, nine sets of wing aerial  refueling pods, and two spare engines by August 2017.

The Under Secretary of Defense for Acquisition, Technology and  Logistics approved the KC-46 program to enter low-rate initial production  in August 2016. Originally, the Air Force planned for the first two  production lots to be low-rate production lots. The 19 aircraft associated  with these two lots, or 11 percent of the 175 production aircraft, were to  be built concurrent with developmental flight testing. The Office of the  Under Secretary of Defense for Acquisition, Technology and Logistics  approved additional low-rate production lots—lots three through five—in  2016 and 2017 to avoid interrupting the planned production of additional  aircraft. As we have reported over the past several years, Boeing had  problems developing the aircraft, which resulted in schedule delays and a  decision by Boeing and the program office to separate the delivery of the  first 18 aircraft from the delivery of the first nine sets of wing aerial  refueling pods.

As of March 2019, the Air Force has exercised options for the first four  low-rate production lots, for 52 aircraft totaling about $7.8 billion. As a  result, the number of aircraft being produced concurrent with  developmental flight testing has increased to 52 aircraft, or 30 percent of  the total number Air Force expects to purchase. Traditionally, the  Department of Defense tracks concurrency to determine financial risk to  the federal government; however, in this case, due to the terms of the  development contract, the government’s liability was limited to sharing in  cost overruns only up to the contract’s ceiling price. Figure 3 shows the  number of aircraft the Air Force plans to procure in each lot.

Current Cost Estimate Is Less than Original Estimate, but Program Remains Years behind Schedule and Will Need to Address Deficiencies

The KC-46 program’s cost estimates have remained lower than initially  estimated, consistent with our past reports. The KC-46 program’s total  acquisition cost estimate is currently about $43 billion, or about $9 billion  lower than the original 2011 estimate. The Air Force was able to decrease  its cost estimate in large part because funds set aside for potential design  changes were not needed. After a 3-year delay from the original plan, the  Air Force began conditionally accepting the first seven KC-46 aircraft in  early 2019.

Total Government Cost Estimate Has Declined Since the Initial Estimate

The KC-46 program’s total acquisition cost estimate remains lower than  the initial estimate, consistent with our April 2018 report. As of January  2019, the Air Force estimates that the total program acquisition cost for  the KC-46, which includes development, procurement, and military  construction costs, will be about $43 billion. This is about $9 billion, or 17  percent, less than the original estimate of $51.7 billion made in 2011.  Correspondingly, the average acquisition cost of each aircraft has also  decreased by 17 percent because aircraft quantities have remained the  same. Table 1 provides a comparison of the initial and current quantity  and cost estimates. The estimates include, among other things, the  expected costs of the development and procurement contracts awarded  to Boeing, government test and evaluation costs, program office  expenses for advisory and assistance services from support contractors,  as well as contingency funding that might be needed to address the  potential risk of requirements changes or other unexpected issues.

Overall, the Air Force decreased its development and procurement cost  estimates by about $1.3 billion and $6 billion, respectively. As we have  previously reported, the main reason for the decrease is it has not needed  the large amount of contingency money the Air Force included in the  initial estimates for possible requirements changes. Military construction  cost estimates also decreased by about $1.4 billion as the Air Force  decided, for example, to reuse existing facilities at its operating bases  rather than build new ones.

In contrast, as of February 2019, Boeing representatives estimate that  costs to complete development have increased to about $6.2 billion, or  about $1.3 billion over the contract ceiling price of $4.9 billion, due to  development problems. Specifically, Boeing experienced problems  related to wiring the aircraft, design issues with the fuel system  components, a fuel contamination event that corroded the fuel tanks of  one of the development aircraft, and test delays. According to the fixed- price incentive contract, the government is generally not responsible for  these additional costs to the extent they exceeded the ceiling price of the  development contract.

Air Force Began Accepting Aircraft in January 2019 with Several Critical Deficiencies That Will Need to Be Addressed

The Air Force conditionally accepted the first seven KC-46 production  aircraft between January and March 2019, about 3 years later than  originally planned, with three critical deficiencies related to the refueling  subsystems. Although the federal government generally has no obligation  to accept work that does not meet contract requirements, program  officials told us that the Air Force negotiated minimum specifications  under which it would begin conditionally accepting aircraft. Officials told  us that among other benefits, conditionally accepting these aircraft  provides the Air Force additional military capability and the aircraft can be  used to start operational testing. These aircraft are among the 18 aircraft  required by the original contract.

As of April 2019, Boeing was producing the remaining 45 additional  aircraft associated with the first four low-rate initial production lots. Some  of the aircraft just started production on Boeing’s 767 production line.  Others are further along and being modified to become KC-46 aircraft in a  separate facility, or are being tested and taken to the delivery center for  Air Force acceptance. Still others are in storage, either waiting to be  transferred to the KC-46 modification center to be retrofitted with the  latest wiring configuration or transferred to the delivery center to prepare  for Air Force acceptance. Figure 4 shows where these 45 aircraft are in  Boeing’s production and delivery process, along with the seven aircraft  already delivered.

Boeing is not expected to meet its most significant delivery requirement  so far until mid-2020, 34 months after originally planned and almost 20  months later than we found in April 2018. Specifically, program officials  anticipate that the Air Force will accept the first 18 aircraft by August  2019, and nine sets of wing aerial refueling pods by June 2020—which  together with two spare engines constitute the contractual delivery  requirement contained in the development contract. According to program  officials, Boeing continued to have difficulty providing design  documentation needed to start Federal Aviation Administration testing for  the wing aerial refueling pods over the past year, which caused the  additional delays beyond what we reported last year. Figure 5 shows the  original and current delivery schedules for completing the development  contract requirement.

In February 2019, the Air Force stopped accepting KC-46 aircraft from  Boeing because it had identified foreign object debris, including tools, in  aircraft it had already accepted, as well as in the aircraft that were in the  final stages of acceptance. Boeing issued a corrective action plan  outlining steps the company needed to take to improve its foreign object  debris identification and prevention activities before the Air Force would  accept additional aircraft. Some of the steps included conducting daily  inspections of each aircraft for foreign object debris, having Boeing  production personnel submit lost tool reports to their superiors, and  developing strategies for containing the debris issue, such as only taking  the exact amount of small parts needed for an individual job in the aircraft  build. The Air Force began accepting aircraft again after Boeing took  steps to address the problem.

However, in March 2019, Boeing found additional foreign object debris as  it was conducting its newly implemented daily inspections and the Air  Force suspended deliveries again. Boeing implemented additional  corrective actions to the Air Force’s satisfaction and, as of April 2019, the  Air Force has authorized the resumption of KC-46 deliveries. Program  officials stated that Boeing is responsible for the costs to inspect and  remove foreign object debris from aircraft that have already been  accepted and that are in various stages of the Boeing manufacturing  process.

Because of the delivery delays to date and other factors in the existing  tanker fleet, an Air Mobility Command official said leadership is currently  planning to fly and maintain some legacy KC-135 tankers longer than  planned until the KC-46 is available to conduct missions. According to the  official, the Air Force plans to reallocate $57 million in fiscal year 2020  funds from the KC-46 program to the KC-135 program to support this  decision. The funding would cover the cost to fly and sustain some KC- 135 aircraft above what the Command had planned, including the  associated personnel costs. Air Mobility Command officials said that  decisions about retaining some legacy KC-135 aircraft will be reviewed  annually thereafter. If these aircraft are retained, funding would be  reallocated from the KC-46 program to support the decision.

Program Expects All Performance Goals Will Be Met, but Correcting Critical Deficiencies Will Take Several Years at a Cost to Boeing and the Government and Could Affect Operations

The program continues to expect that the KC-46 aircraft will ultimately  meet its high-level system performance goals, such as those related to  aerial refueling and operational availability. However, the Air Force and  Boeing expect that the critical deficiencies that could affect the aircraft’s  aerial refueling operations will take several years to address at a cost to  both the government and Boeing.

Program Expects KC-46 Aircraft Will Meet Key Performance Goals

Program officials reported that, similar to what we reported last year, they  expect the KC-46 will ultimately meet all of its 21 performance goals.  These goals include nine key performance parameters and five key  system attributes set by the Air Force, as well as seven technical  performance measures Boeing established to track its own progress  toward meeting contract specifications. Appendix I provides a description  of each of the performance goals.

According to Air Force test officials, the program plans to ascertain if the  aircraft meets its 14 key performance parameters and key system  attributes during the operational test period, which began in May 2019.  For example, the Air Force will test the tanker’s ability to effectively refuel  receiver aircraft with boom and drogue refueling on the same mission.  The Air Force will also collect data to assess the operational availability of  the aircraft. Operational availability is defined as the percentage of time  the aircraft is available to complete its mission, which includes refueling  aircraft or transporting cargo or people, when needed. The KC-46 needs  to be available at least 80 percent of the time. Air Mobility Command  officials will continue to monitor operational availability of the aircraft after  it has been fielded to inform maintenance and future upgrade decisions.

An important key system attribute is reliability and maintainability, which  has implications on aircraft availability and life cycle costs. In general,  aircraft that are reliable and easy to maintain are typically available more  often to perform missions and can experience lower life cycle costs. To  help assess this key system attribute, the Air Force set a reliability growth  goal that is based on the mean time between unscheduled maintenance  events due to equipment failure. This is defined as the total flight hours  divided by the total number of incidents requiring unscheduled  maintenance. The goal is 2.83 flight hours between unscheduled  maintenance events due to equipment failure by the time the aircraft  reaches 50,000 flight hours. As of February 2019, the program had  completed 3,928 flight hours, achieving 2.51 hours at that time. Program  officials believe that the reliability will improve as additional flight hours  are completed and as unreliable parts are identified and replaced.

According to Boeing representatives, the company met or is projected to  meet the seven technical performance measures it tracked during KC-46  development. For example, the aircraft is now below the target weight of  204,000 pounds. In addition, program officials said that the aircraft is  within the range of gallons of fuel used per flight hour that is specified in  the contract. Boeing also projects that the aircraft will meet other  measures, such as Air Force maintainers being able to fix mechanical  problems on the aircraft within 12 hours 71 percent of the time once the  aircraft has accumulated 50,000 fleet hours of service.

Program Estimates It Will Take Several Years to Fix Critical Aerial Refueling Deficiencies at a Cost to Boeing and the Air Force

Boeing and the Air Force are working to resolve three critical deficiencies  related to the performance of the aerial refueling systems that the Air  Force discovered during developmental testing. These deficiencies are  related to contract specifications, which are at a greater level of specificity  than the performance goals. The Air Force determined that the  deficiencies in these systems could result in damage to some of the  aircraft that are being refueled by the KC-46 and identified them as  Category 1 urgent deficiencies that need to be addressed. The Air Force  expects that it will take 3 to 4 years for Boeing to develop design solutions  for these issues and a few more years to retrofit existing aircraft. A  description of the deficiencies and how they are being addressed are  discussed below.

Remote Vision System Did Not Provide Visual Clarity in All Lighting  Conditions: During developmental flight testing, there were instances  when the aerial refueling operator was not able to make contact with  the receiver aircraft for refueling as intended. This was because the  remote vision system camera and processor had difficulty making  timely adjustments to some environmental conditions. According to  Boeing and program officials, these conditions include certain sun  angles, where the glare from the sun can cause the receiver aircraft to  washout or blackout on the display screen, making it difficult for the  aerial refueling operator to sufficiently see the receptacle of the  receiver aircraft to start refueling. The remote vision system also does  not provide sufficient depth perception to safely refuel in all lighting  conditions.

Boeing has already made changes to the remote vision system  software to improve visibility for refueling operators. According to  program officials, the changes included adjusting the contrast on the  display screen and increasing the speed at which operators can  switch between different screen viewing options. However, these  changes did not address the Air Force’s concerns regarding whether  the system could support refueling in all conditions as called for under  the contract, which requires sufficient visual clarity in all lighting  conditions.

Boeing has agreed to redesign the remote vision system to meet the  requirement. According to program officials, Boeing has not yet  developed a solution, but has reported the redesign will include  additional software and hardware changes. Program officials estimate  that it may take Boeing 3 to 4 years to develop a solution for the  remote vision system and have it certified by the Federal Aviation  Administration so that aircraft parts will continue to be certified to the  greatest extent possible. It will then take a few more years after that to  retrofit all aircraft that are operating without the new system at that  time. Boeing did not provide a cost estimate for this solution, but will  fix and retrofit all aircraft at no cost to the government. In the  meantime, program officials said the Air Force has placed limitations  on some boom refueling operations.

Lack of Remote Vision System Clarity Also Caused Undetected  Contacts with Receiver Aircraft: As we reported in April 2018, during  developmental flight testing, there were instances where the boom  nozzle contacted a receiver aircraft outside the refueling receptacle.  According to program officials, in many of these instances, the aerial  refueling operators were unaware that those contacts had occurred.  Boom nozzle contact outside the receptacle can damage antennae or  other nearby structures. It is especially problematic for low-observable  receiver aircraft, such as the F-22 fighter, because boom contact can  also damage their special coatings and render them visible to radar.

Boeing and program officials now anticipate that any hardware or  software changes Boeing makes to the remote vision system, as  discussed above, will also address the issue of undetected contacts  with receiver aircraft. Efforts to address this issue are expected to be  made at no cost to the government.

Boom Stiffness Hampered KC-46 Refueling of Lighter Receiver  Aircraft: During developmental flight testing, pilots of lighter receiver  aircraft, such as the A-10 and F-16, reported the need to use more  power to move the boom forward while in contact with the boom to  maintain refueling position. According to program officials, the KC-46  boom currently requires more force to compress it sufficiently to  maintain refueling position than the boom on the KC-135 or the KC- 10. In addition, program officials said that the additional force exerted  by the lighter aircraft can also create an issue when the boom is  disconnected. This is because the additional required power can  cause the receiver aircraft to lunge forward into the boom and strike it,  possibly damaging the receiver aircraft and the boom. The severity of  the damage depends on the location of the refueling receptacle, which  differs based on the aircraft type. In the case of the A-10, the  receptacle is located on the nose of the aircraft and the boom stiffness  creates a greater risk to the pilot because a boom strike could  damage the windshield. For the F-16, the receptacle is located behind  the cockpit and a boom strike could damage the vertical surfaces of  its tail. The Air Force is currently allowing F-16s to be refueled by the  KC-46 in operational test and training environments, but not the A-10  until the boom stiffness has been fixed.

Modifications to address the boom stiffness will add cost for the  government. Program officials said the development contract did not  specify the amount of force needed to compress the boom. As part of  the KC-46 low-rate initial production decision, the Air Force concurred  with Boeing’s proposed specifications, which are built into the current  boom. Therefore, program officials said the Air Force will be  responsible for costs associated with designing a solution for the  boom stiffness and retrofitting aircraft. They said the deficiency will  require a hardware change. Program officials believe that it will likely  take 3 to 4 years to develop a solution and get it certified by the  Federal Aviation Administration. It will then take additional time to  retrofit about 106 aircraft in lots 1 to 8. The total estimated cost for  designing and retrofitting aircraft is more than $300 million.

The Air Force has taken steps to keep Boeing incentivized to address the  deficiencies in a timely manner. In particular, at the time the Air Force  accepted each aircraft, the government had already made progress  payments to Boeing comprising 80 percent of the estimated price for each  aircraft. Air Force officials stated that the program is currently withholding  the remaining 20 percent payment on each aircraft until Boeing meets all  contract specifications and corrects critical deficiencies.

Additional Test and Analysis Required to Validate That KC-46 Aircraft Fully Meet Key Contract and Mission Requirements

Over the next year, Boeing is to conduct developmental testing on the  wing aerial refueling pods and correct deficiencies, and the Air Force is to  finish analyzing test data to validate that performance and contract  specifications have been met. In addition, the Air Force is to complete  operational testing (planned for completion in December 2019) to  determine if the KC-46 and its subsystems are fully capable of performing  its mission in a realistic operational environment. Since our last report in  April 2018, Boeing completed developmental testing and obtained  airworthiness certification from the Federal Aviation Administration for the  KC-46 aircraft and two of its three aerial refueling systems—the boom  and the centerline drogue system. This has allowed the Air Force to start  accepting aircraft. Figure 6 shows the status of the KC-46 test activities.

Developmental Testing: As of March 2019, Boeing had completed about  92 percent of the overall KC-46 developmental test program. The roughly  8 percent remaining, which consists of 2,303 of the 29,181 total  developmental test points, relates to the wing aerial refueling pods.  According to program officials, Boeing, in coordination with its supplier for  this subsystem, submitted test plans to the Federal Aviation  Administration in December 2018 for approval to begin flight testing the  wing aerial refueling pods. These officials also told us that developmental  testing on the pods began in early June 2019. Boeing projects that the Air  Force will verify that the pods meet contract specifications and they will  be airworthy by May 2020.

The Air Force is also currently reviewing developmental test data to  validate that performance and contract specifications have been met and  identify aircraft deficiencies. As of March 2019, the Air Force has  identified the three critical deficiencies that we discussed earlier in this  report. It also identified 160 Category 2 urgent deficiencies that Air Force  policy notes can be addressed through workarounds, which can include  manual updates or procedural restrictions. For example, the flight control  system does not have an indicator that would alert the KC-46 operators  that they are overriding the automatic system that keeps the boom  aligned with the receiver aircraft. If the boom is not aligned with the  receiver aircraft, it can cause damage to the boom and the receiver  aircraft. Program officials said that, as a result, the Air Force has currently  placed limitations on some boom refueling operations. The number of  Category 2 urgent deficiencies went up by about 26 percent between mid- February and the end of March 2019. Program officials attributed this  growth to the progress the Air Force is making in analyzing test data and  validating whether the aircraft meet contract specifications. The Air Force  may identify additional deficiencies as it completes these developmental  testing activities and during operational testing.

Operational Testing: According to program officials, the Air Force  Operational Test and Evaluation Center plans to conduct KC-46  operational testing from mid-May to December 2019. Operational testing  is centered on five overarching test objectives.

Three test objectives are focused on the ability of the KC-46 to  perform operations for refueling, airlift, and aeromedical evacuation,  including how quickly the KC-46 can offload fuel to a receiver aircraft.

The fourth objective is focused on the ability of the KC-46 to meet its  mission tasking, which includes measures such as the KC-46’s  availability and ability to complete a mission.

The fifth objective addresses whether the KC-46 is logistically  supportable through measures including aircrew and maintainer  training, and how well the demand can be met with available parts.

According to Air Force test officials, operational testing consists of about  500 test conditions, each of which may include multiple test points. The  Air Force plans to use four KC-46 aircraft for operational testing.

During operational testing for aerial refueling, the Air Force will test  whether the KC-46 can deliver fuel through the boom or centerline drogue  system to 18 different types of receiver aircraft in operational conditions,  including refueling another KC-46. The Air Force needs to certify receiver  aircraft for refueling before these aircraft can be used for operational  testing with the KC-46. Boeing and the Air Force are in various stages of  testing and certifying 18 receiver aircraft. In its 2018 annual report, the  Department of Defense’s Office of the Director, Operational Test and  Evaluation reported that the duration of the KC-46 operational test period  will depend on how long it takes the Air Force to certify all 18 receiver  aircraft. As of March 2019, two aircraft have been tested and certified by  the Air Force as a receiver to the KC-46. Five have completed testing, but  have not yet been certified, and testing for two others has begun. Figure 7  shows the status of testing and certifications for the KC-46 receiver  aircraft currently planned for operational testing. The Air Force plans to  obtain additional certifications for aircraft that are not being used for  operational testing.

The Air Force schedule for completing receiver testing continues to shift.  According to Department of Defense developmental and operational test  officials and program officials, it is taking longer than expected to  complete receiver aircraft certification testing in advance of operational  testing due in part to receiver aircraft availability. According to these  officials, Air Force major commands have been reluctant to allow their  receiver aircraft to be tested with the KC-46 over concerns that the lack of  visual clarity in the remote vision system and the boom’s stiffness could  cause the boom to strike and damage the receiver aircraft. Program  officials told us that, as a result, negotiations between the KC-46 program  and Air Force major command officials concerning the use of receiver  aircraft are taking longer than expected. These difficulties have resulted in  delays to certification tests, in some cases for several weeks. The lack of  availability of specific aircraft when they are scheduled to be tested may  require the Air Force to reschedule other receiver aircraft. These  schedule changes can require some resequencing of test planning and  approval activities.

In addition, because the wing aerial refueling pods have not been certified  and delivered, the Air Force will need to conduct operational testing on  refueling operations for them later. To conduct this test, major commands  with receiver aircraft that require drogue refueling would need to provide  receiver aircraft again. According to program test officials, the start of  operational testing for the wing aerial refueling pods will depend on  whether the Air Force Operational Test and Evaluation Center uses pods  that have not been certified for airworthiness by the Federal Aviation  Administration or waits until Boeing delivers a certified subsystem.  Problems requiring changes could be identified during KC-46 operational  testing, developmental and operational testing for the wing aerial refueling  pods, or receiver aircraft certification testing. The development contract  makes Boeing responsible to correct any deficiencies discovered during  these test periods that do not meet contract specifications.

KC-46 Program Offers Insights for Future Acquisition Programs on the Benefits and Challenges of a Fixed-Price-Type Development Contract and a New Sustainment Approach

Based on our own observations, as well as our discussions with  Department of Defense officials who have been involved with the KC-46  program for many years, we identified aspects of its acquisition approach  that could provide insights to future programs. Specifically, the insights  could apply to programs considering a fixed-price development contract  and determining what sustainment approach to use for commercial  derivative aircraft. For example, the KC-46 development contract  provided some financial protection to the government from increases in  development and some life cycle costs. However, other aspects of the  contract did not require Boeing to demonstrate high levels of aircraft  performance prior to being awarded production contracts or receiving  payment for its work. Current and former program officials also provided  insights about key aspects of program management that they believe are  essential for executing fixed-price development contracts based on their  experiences. In addition, the Air Force’s new approach for sustaining the  KC-46, relying heavily on the Federal Aviation Administration to certify  even military-unique aircraft systems, could be useful in considering  future acquisition approaches.

We previously recommended in March 2012 that the Under Secretary of  Defense for Acquisition, Technology and Logistics closely monitor the  cost, schedule, and performance outcomes of the KC-46 program to  identify positive or negative lessons learned for future acquisition  programs. We noted that, as one of only a few major acquisition  programs to award a fixed-price incentive (firm target) development  contract in recent years, evaluating performance and identifying lessons  learned would be illustrative, important for informing decision makers, and  help guide and improve future defense acquisition programs.

The Department of Defense agreed with the recommendation and  compiled lessons learned during the source selection phase of the  program. However, the department has not yet identified and reported on  lessons learned during program implementation to evaluate cost,  schedule, and performance outcomes as we recommended. Program  officials said they are collecting lessons learned, but will not report them  until after the development contract is complete in 2021. However, by  waiting until 2021, other acquisition programs considering using a similar  approach will not be able to take advantage of KC-46 lessons learned,  including the ones we identify below that could reduce government risk  and save taxpayer money.

Fixed-Price Incentive Contract and Several Key Clauses Benefitted the Air Force by Limiting the Government’s Financial Risk

The Air Force used a fixed-price incentive (firm target) contract type to  limit the government’s financial risk for KC-46 development. The KC-46  development contract was designed to provide a profit incentive for  Boeing to control or even reduce overall costs.

The use of a fixed-price contract did not result in a reduction in  development costs below target costs, but did help control the  government’s costs. Specifically, the Air Force was able to avoid $1.3  billion in costs exceeding the contract ceiling that Boeing has incurred  while developing the aircraft, according to program officials, as of  February 2019.

Boeing initially declared cost overruns related to wiring while  manufacturing the first development aircraft in the spring of 2014. At that  time, it discovered wire separation issues, which were caused by an  inaccurate wiring design. It took Boeing about 6 months to correct the  wiring design and resume wiring work on the developmental aircraft.  Boeing declared other cost overruns later in development as it faced  challenges in obtaining Federal Aviation Administration certification for  the aircraft, which caused significant testing delays. Together, the wiring  problems, certification and testing delays, and other setbacks have  resulted in a projected 3-year schedule delay. To the extent these costs  exceeded the contract ceiling price, Boeing has borne the costs to  address these issues, which included retaining more personnel such as  design engineers and testers than it originally planned.

The KC-46 contract also contains three specific clauses that further  benefited the government by limiting its financial risk:

Correction of deficiencies clause: This clause requires Boeing to pay  for aircraft retrofits when the government determines that the  company is not meeting contract specifications. According to the  development contract, Boeing is responsible for correcting  deficiencies discovered during engineering and manufacturing  development, and in production and deployment. Based on the  initial schedule, operational testing would have ended in 2017. Up to  19 low-rate initial production aircraft would have been covered by this  clause and deficiencies would have been almost exclusively identified  through testing activities.

Because of delays in the development phase, more aircraft will now  be covered by the correction of deficiencies clause. According to the  integrated master schedule, Boeing will still be completing  development activities in 2020. As a result, the correction of  deficiencies clause is expected to now cover the 52 low-rate  production aircraft already ordered as well as any other aircraft  ordered while development activities are ongoing. Boeing will now be  responsible for correcting deficiencies identified during testing as well  as in day-to-day operations on all of these aircraft.

Fuel usage rate clause: This clause requires Boeing to meet a  specified fuel usage rate for each individual aircraft, which will help  the Air Force control some of the KC-46’s life cycle costs. According  to the contract clause, if an individual aircraft does not meet the fuel  usage rate, Boeing would have to propose a corrective action at no  cost to the Air Force. The Air Force could also make an equitable  price adjustment based on a formula that projects the additional costs  the Air Force would incur over the expected 40-year life of the aircraft.

Long-term pricing: The KC-46 contract includes long-term pricing  terms for 175 production aircraft. In agreeing to these terms, Boeing  had to estimate its costs through 2027. The pricing in the contract  protects the government from cost increases including inflation and  higher supplier costs that were not already embedded in the prices.  The contract includes a variety of purchasing options so that the Air  Force is not locked into acquiring a set amount of aircraft each year. It  identifies the most cost effective approach for procuring the 175  production aircraft, which is typically between 12 and 15 aircraft for  each production lot. It also identifies the additional costs the Air Force  would incur if it procured fewer or more aircraft in each production lot  that would deviate from the most cost effective approach. Program  officials stated that including the long-term pricing in the contract has  helped it secure adequate funding from Congress to procure the most  cost effective number of aircraft in each of the four low-rate production  lots it has awarded so far.

Several Provisions of the Fixed-Price Incentive Contract Magnified Program Challenges

Several aspects of the fixed-price incentive development contract,  however, did not reduce risk to the government and further complicated  existing program challenges. First, production lot awards were not linked  to Boeing’s performance. Second, progress payments to Boeing were  based on costs the contractor incurred rather than on its demonstrated  performance. Third, the contract did not identify the timing of when  production aircraft would be delivered to the Air Force for acceptance.

Production lot awards are not tied to demonstrated performance: The  development contract linked the award of production lots to schedule  milestones rather than to contractor performance. The contract  specified that the first and second low-rate production lots had to be  awarded within 30 days and 14 months of the low-rate initial  production decision, respectively. According to the initial plan, Boeing  would have completed 13 months of developmental testing and 66  percent of the flight test program with the KC-46 by the low-rate initial  production decision.

As we have previously reported, however, the program experienced  delays. At the time of the low-rate initial production decision, the  program had only completed about one-third of the planned flight test  program. The Air Force decided to award both low-rate production lots  within a week of the decision despite the lower amount of testing  knowledge. Program officials stated that they awarded the contract  because Boeing met the low-rate decision criteria, including  demonstrating successful refueling operations. Further, based on the  correction of deficiencies clause, they believed at that time that  Boeing would be responsible for paying to correct all deficiencies it  discovered during subsequent testing on aircraft it produced. Our prior  work on best practices, however, emphasizes that awarding  production lots before performance is demonstrated introduces risk of  cost increases, schedule delays, and performance problems.

Progress payments are not based on demonstrated performance: The  KC-46 contract included a financing approach that requires the Air  Force to make progress payments to Boeing up to 80 percent of its  incurred costs. These progress payments incentivized Boeing to make  progress on building the aircraft, and the program’s withholding of  some payment incentivizes the company to resolve deficiencies more  quickly. In general, Department of Defense guidance recognizes that  performance-based payments incentivize a contractor to optimize its  activities to meet the goals that are important to the government, such  as completing a certain amount of engineering or developmental  testing by specific milestones. It also notes that they are not  practical on all contracts, and contracting officers should consider  whether the benefits outweigh the time and effort to establish and  administer them. The guidance also notes that progress payments  based on costs incurred by a contractor may not reflect the  contractor’s progress towards meeting program goals or incentivize a  contractor to meet those goals. On the KC-46 for example, the  program office had made 80 percent of the allowed progress  payments for the four development aircraft by November 2015─9  months before the low-rate initial production decision, despite only  completing 15 percent of the flight test points at that time.

KC-46 program officials said that once the low-rate production  contracts were awarded in August 2016, Boeing prioritized completing  the manufacturing of those aircraft because it had previously started  manufacturing them with its own funds. It also focused on completing  aspects of developmental testing related to the boom and centerline  drogue so that it could begin delivering aircraft to the Air Force. In  general, once the Air Force accepts an aircraft, Boeing is eligible to  receive additional payment for its work on that aircraft. Program  officials, however, would have preferred that Boeing placed more  emphasis on completing receiver aircraft certifications so that when  aircraft were accepted, the Air Force could begin operational testing,  which is led and paid for by the government.

Contract originally did not identify aircraft delivery time frames: The  original development contract did not identify a specific delivery period  for production aircraft. Instead, it specified that Boeing was supposed  to deliver the first 18 aircraft by August 2017. According to program  officials, not identifying a delivery period was an oversight. Program  officials stated that the Air Force needed more specific aircraft  delivery information to develop detailed plans for establishing  operating bases and performing depot maintenance, including training  pilots and maintainers. For example, if training is done too early, the  Air Force may have to provide refresher training to pilots and  maintainers. If it is done too late, then the Air Force may not be able  to use the aircraft as soon as it could or to the extent it had planned.  The Air Force was eventually able to get specific delivery dates for the  aircraft as part of negotiations it had with Boeing to modify the  development contract after Boeing did not meet the original August  2017 contract delivery date.

KC-46 Program Officials Identified Other Key Insights for Successful Implementation of Fixed- Price Incentive Development Contracts

According to current and former KC-46 program officials, stable  requirements and a skilled acquisition workforce are essential for  executing a fixed-price incentive contract.

Stable Requirements: The current KC-46 program manager said that  there were no major requirements changes on the program between  2011 and 2018. The only requirements change occurred in 2019 to  address the critical deficiency identified on the boom which, as we  discussed earlier, the Air Force is paying to fix. As we previously  found in 2012, controls were put in place to limit requirements  changes. These controls were in response to a 2011 memorandum  issued by the Office of Cost Assessment and Program Evaluation in  the Office of the Secretary of Defense. The memorandum maintained  that, on the whole, the Department of Defense had demonstrated  limited ability to maintain stable requirements and limit changes to  program baselines on previous complex weapon system programs,  and that minimizing such change would be essential to the success of  the KC-46. For the KC-46 program, any engineering or contract  changes affecting system requirements or that have the potential to  impact program cost, schedule, and performance baselines must be  approved by the Air Force Service Acquisition Executive in  consultation with the Secretary and the Chief of Staff of the Air Force.

Skilled Acquisition Workforce: Some current and former program  managers also noted that having personnel with strong negotiating  and cost estimating skills, as well as data rights expertise, is essential  for programs with fixed-price incentive development contracts. One  former program official explained that in general, contractors such as  Boeing on the KC-46 do not know exactly how they are going to build  a weapon system until they have completed detailed systems  engineering and design drawings, which occurs in the development  phase. We previously found in November 2016 that as top-level  capability requirements are defined and decomposed into lower-level  design requirements, they become more specific and the number of  requirements grows. This growth can be exponential, with tens of  thousands of detailed design requirements derived from a relatively  small number of capability requirements.

While the government generally does not specify how a contractor  designs a weapon system for fixed-price incentive contracts, officials  we spoke with said KC-46 program managers and engineers have  been involved in almost daily discussions with Boeing to make design  tradeoffs. As such, one former program executive officer said program  offices that are using fixed-price incentive development contracts  should ensure that program management staff, including contracting  officers and engineers, has strong negotiating skills to protect the  government’s interest during these daily negotiations where design  tradeoffs are made. Further, these program offices need financial  management staff with strong cost estimating skills to support the  negotiations when necessary. This official indicated that the KC-46  program office had people with these skills.

However, several former program officials stated that the KC-46  program office needed personnel with data rights expertise. They said  that they had to rely on a data rights expert from outside the KC-46  program to assist in drafting a section of the request for proposal that  would allow the Air Force to obtain data it would need to maintain KC- 46 aircraft. The officials indicated that the Air Force has few data  rights experts and that it would be beneficial to have contracting  officers and attorneys in the program offices with data rights expertise.  For example, program officials anticipate that there will be ongoing  discussions and negotiations with Boeing about the type of data it will  need for the Air Force to perform depot maintenance activities over  the life of the program.

Air Force Is Gaining a Better Understanding of the Benefits and Challenges of Implementing a New Sustainment Approach That Could be Considerations for Future Acquisition Programs

The Air Force plans to use a sustainment approach on the KC-46 that it  has not yet used on other aircraft, that presents added complexity, and  which Boeing is having difficulty supporting. Under the new approach, the  Federal Aviation Administration will certify nearly all parts of the aircraft,  including most of the military-unique parts such as the centerline drogue,  boom, and wing aerial refueling pods. By certifying through the Federal  Aviation Administration, the Air Force expects to take advantage of  commercial aircraft updates that occur regularly and to obtain new or  refurbished parts for the aircraft through a global parts pool that  commercial users of the 767 aircraft rely on to maintain their aircraft.  Further, the Air Force, instead of a contractor, will provide product support  for the aircraft. Previous commercial derivative aircraft programs,  including the KC-10, did not have the Federal Aviation Administration  certify military-unique functions such as aerial refueling, and the Air Force  has relied on the KC-10 contractor for product support over the lifetime of  that program. According to the KC-46 acquisition strategy, Boeing will  initially provide product support for the KC-46 for a period of up to 5  years. During that time, the Air Force will gradually take over the  responsibility and then maintain the aircraft for the lifetime of the program,  which is expected to be 40 years. The KC-46 program’s experience in  obtaining and maintaining Federal Aviation Administration certification,  including participation in the parts pool, can offer insights for future  acquisition programs to consider.

The Air Force also required Federal Aviation Administration certification to  a greater extent than the Air Force policy in place at the time the  development contract was awarded. Specifically, the contract states that  the contractor shall obtain Federal Aviation Administration certification for  all the aircraft’s mission equipment. In cases where this is not workable,  the contract says that the contractor must exhaust all possible solutions  prior to not obtaining full certification.

As we mentioned earlier in the report, Boeing is having difficulty getting  certification for the military-unique portions of the aircraft related to the  aerial refueling systems, which has contributed to significant program  delays. Boeing’s commercial business unit already obtained Federal  Aviation Administration certification for the commercial parts of the  aircraft. However, according to program officials, Boeing’s defense  business unit, which is responsible for obtaining certifications for the  military-unique parts, was not as well versed on the certification process.  We previously reported that, according to Boeing officials, the company  and the supplier had underestimated the extent of design drawing details  required by the Federal Aviation Administration to certify that the parts  conformed to the approved design. The supplier of the wing aerial  refueling pods spent several years negotiating agreements with several of  its key sub-tier suppliers to obtain the necessary documentation. To  reduce the risk of further delays, in 2015, Boeing co-located some of its  employees with the supplier to provide technical support to complete the  documentation for certification over the past several years.

Based on a study completed by Morgan Borszcz Consulting in 2014, the  Air Force expected to benefit from saving up to $420 million by  maintaining the Federal Aviation Administration certification for the KC-46  over the life of the program. Savings were primarily estimated in three  areas:  1.  $200 million could be saved by having Boeing maintain responsibility  for all design changes on the aircraft, including working with the  Federal Aviation Administration to certify design changes and  updating instruction manuals based on the changes.  2.  $70 million could be saved by having Boeing address any safety  issues identified by the Federal Aviation Administration in  Airworthiness Directives.  3.  Between $57 million and $150 million in costs could be avoided if the  Air Force maintains Federal Aviation Administration certifications and  does not recertify parts to military standards.

The study also stated that the Air Force could save money by  participating in the 767 aircraft parts pool, mentioned above, though it did  not specify the amount of savings. The parts pool limits the risk of  diminishing manufacturing sources over time and the costs the Air Force  typically incurs when qualifying new suppliers. Program officials told us  that they decided to use a worldwide 767 parts pool because more than  75 percent of KC-46 parts are expected to be available through that parts  pool, which reduces the need for the Air Force to procure these parts in  advance and place them in its distribution system. Programs that do not  have Federal Aviation Administration certified parts have to find and  qualify suppliers for needed parts on their own and they must find and  qualify new suppliers if one goes out of business over the operational  lifetime of the aircraft. In using the 767 parts pool, the Air Force  anticipated readily obtaining parts as needed for maintaining the KC-46  aircraft as well as repairing parts and putting them back into the pool.

Since the time the study was completed, however, program officials have  learned that the Air Force cannot put parts back into the parts pool  because commercial members of the pool do not want to use repaired or  reconditioned parts that were used on Air Force aircraft. As a result, the  Air Force will not achieve all of the savings it anticipated. Program  officials explained that commercial companies do not fly their aircraft  under the same conditions as the Air Force, and these companies believe  it is too risky for them to use parts that were once used on a KC-46.  Program officials said the Air Force can still purchase parts from the parts  pool though. The Air Force can also refurbish and use its own parts as  long as the parts and the processes it uses to refurbish the parts meet  Federal Aviation Administration certification standards and mechanics are  properly certified. However, it remains to be seen if the Air Force can  maintain the certifications because it has not yet had to do this on other  aircraft and requires adherence to Federal Aviation Administration  procedures.

The Air Force’s approach to building the KC-46 has been somewhat  unique—deriving a military aircraft from a commercial model using a  fixed-price incentive contract, among other things. After experiencing  delays of nearly 3 years, the Air Force started accepting aircraft that can  now be used for operational testing and support of worldwide missions.  While work remains to ensure that critical deficiencies are corrected, the  KC-46 program offers lessons that could be shared with other  Department of Defense acquisition programs that are considering using a  fixed-price-type development contract or a commercial derivative aircraft  regarding contracting for and sustaining weapon systems. In particular,  the contract provided substantial protections to the government against  cost increases that Boeing experienced while developing the aircraft, but  it also used a financing approach that did not tie Boeing’s performance to  completing important program goals. In addition, the Air Force’s effort to  leverage commercially available parts to reduce sustainment costs  created challenges. We previously recommended that the Department of  Defense develop and share KC-46 lessons learned for future acquisition  programs; however, it does not plan to do so until 2021. By sharing  identified lessons now with other program leaders considering fixed-price- type contracts or developing commercial derivative aircraft, programs  may be able to increase the effectiveness of any new similar development  programs.

We are making the following recommendation to the Department of  Defense:  The Secretary of Defense should ensure that the KC-46 program office  disseminates insights we identified in this report about the KC-46’s  contracting and sustainment planning experiences for consideration by  acquisition programs, in particular those considering a fixed-price-type  development contract or a commercial derivative aircraft.

We provided a draft of this product to the Department of Defense for  comment. In its comments, reproduced in appendix II, the department  concurred with our recommendation, but did not identify the specific  actions it would take to implement the recommendation. It also provided,  in technical comments, language clarifying that the Air Mobility Command  cost estimates for flying and maintaining KC-135s longer, as a result of  KC-46 delivery delays, did not also account for any savings that would be  achieved from not flying KC-46 aircraft. We provided additional detail in  the report to address this comment. We also incorporated other technical  comments as appropriate.

We are sending copies of this report to the Acting Secretary of Defense,  the Acting Secretary of the Air Force, and appropriate congressional  committees. The report is also available at no charge on the GAO 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 ludwigsonj@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 major contributions to  this report are listed in appendix III.

Appendix I: KC-46 Performance Capabilities

The program office has 21 performance goals that are critical to the KC- 46 aircraft’s military capability and track progress to meeting contract  specifications. These performance goals include nine key performance  parameters, five key system attributes, and seven technical performance  measures. Table 2 provides a description of each key performance  parameter and key system attribute.

Table 3 provides a description and status of each technical performance  measure.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Cheryl Andrew, Assistant  Director; Lorraine Ettaro; Kurt Gurka; Stephanie Gustafson; Katheryn  Hubbell; Jean Lee; Malika Rice; Jenny Shinn; and Steve Woods made  key contributions to this report.

GAO, KC-46 Tanker Modernization: Program Cost is Stable, but  Schedule May Be Further Delayed, GAO-18-353 (Washington, D.C.: Apr.  18, 2018).

GAO, KC-46 Tanker Modernization: Delivery of First Fully Capable  Aircraft Has Been Delayed Over One Year and Additional Delays are  Possible, GAO-17-370 (Washington, D.C.: Mar. 24, 2017).

GAO, KC-46 Tanker Aircraft: Challenging Testing and Delivery Schedules  Lie Ahead, GAO-16-346 (Washington, D.C.: Apr. 8, 2016).

GAO, KC-46 Tanker Aircraft: Key Aerial Refueling Capabilities Should Be  Demonstrated Prior to the Production Decision, GAO-15-308  (Washington, D.C.: Apr. 9, 2015).

GAO, KC-46 Tanker Aircraft: Program Generally on Track, but Upcoming  Schedule Remains Challenging, GAO-14-190 (Washington, D.C.: Apr. 10,  2014).

GAO, KC-46 Tanker Aircraft: Program Generally Stable but  Improvements in Managing Schedule Are Needed, GAO-13-258  (Washington, D.C.: Feb. 27, 2013).

GAO, KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but  Contain Schedule Risk, GAO-12-366 (Washington, D.C.: Mar. 26, 2012).

The Air Force contracted with Boeing to turn commercial aircraft into aerial refueling tankers. The contract is an infrequently-used type intended to protect the government from cost overruns and incentivize the contractor to keep costs down.

After a nearly 3-year delay, the Air Force accepted the first plane in January—with critical defects that don't meet contract standards. The Air Force is withholding the remaining 20% of the price until the defects are addressed.

Now that some of the planes are arriving, we recommended that the Department of Defense share lessons learned from this contracting approach with other DOD acquisition programs.