Background The ACV is being developed as a partial or full replacement for the AAV,  which is a tracked (non-wheeled) vehicle with capability to launch from  ships to reach the shore carrying up to 21 Marines at a speed of up to  approximately 6 knots. This speed effectively limits its range for traveling  from ship to shore to no farther than 7.4 nautical miles. In order to  upgrade the AAV to meet current threats and establish a path toward an  enhanced platform, DOD and the Marine Corps implemented an  incremental approach. The first step was to improve the AAVs’ protection  from threats such as improvised explosive devices by installing enhanced  armor and other equipment—referred to as survivability upgrades—efforts  which are currently underway. The second step was to establish a plan to  replace the AAV with a new vehicle, the ACV, which would develop and  enhance capabilities in three incremental steps: ACV 1.1 would be a wheeled vehicle that provides improved  protected land mobility but limited amphibious capability. In  operations, it is expected to be part of an amphibious assault through  the use of a surface connector craft to travel from ship to shore. This  increment would leverage prototypes, demonstration testing, and  other study results from the previously suspended Marine Personnel  Carrier program. ACV 1.2 would have improved amphibious capability, including the  ability to self-deploy and swim to shore. The development phase of  the second ACV increment (ACV 1.2) is scheduled to begin in  February 2019. ACV 2.0 would focus on exploring technologies to attain higher water  speed capability. The ACV 1.1 program was initiated in 2014 and development of ACV 1.1  vehicles started in November 2015. The remainder of this report is  focused on development and acquisition of the ACV 1.1, which we will  refer to as ACV. The Marine Corps acquisition of the ACV employs a two- phase strategy for selecting a contractor to produce the ACV fleet. In the  first phase, the program issued a solicitation for offerors to submit  proposals and provided for award of multiple contracts for each contractor  to design and develop 16 prototypes for performance assessment. In the  second phase, referred to as the down-select process, after testing the  prototypes, the Marine Corps intends to select a single contractor to  continue into the start of production. The Marine Corps received five initial  proposals and ultimately awarded contracts to BAE and SAIC to develop  the ACV prototypes. The Marine Corps considered the ACV to be a  substantially non-developmental item because both contractors’ designs  were based on vehicles that were already in production and deployed by  other militaries. Figure 1 depicts the BAE and SAIC prototype vehicles. After testing the  prototypes, the Marine Corps plans to select a single contractor to  continue into the production phase. The first prototypes were delivered in January 2017 and have since been  undergoing developmental, operational, and live fire testing. Developmental testing assesses whether the system meets all technical  requirements and is used to: verify the status of technical progress,  determine that design risks are minimized, substantiate achievement of  contract technical performance, and certify readiness for initial operational  testing. ACV developmental testing includes testing for sustainability,  system survivability, and water and land mobility. Operational testing (assessment) is the field test, under realistic  conditions, for the purpose of determining effectiveness and suitability of  the weapons for use in combat by typical military users. Live fire testing is used to demonstrate vehicle capability against a  range of ballistic and non-ballistic threats expected to be encountered in  the modern battlefield, such as improvised explosive devices among  others. In January 2018 the Marine Corps started an operational assessment,  which was scheduled to be completed in March 2018. The assessments  consist of field tests, under realistic conditions, to inform the decision to  enter production. Ongoing test results, including the operational  assessment, will be used to inform the ACV June 2018 production  decision. Figure 2 is a timeline of the ACV program’s progress and plans to full  capability. The ACV program plans to produce at least 208 vehicles after  exercising contract options for 2 years of low-rate production of 30  vehicles each year starting in 2018 and then exercise options for 2 years  of full-rate production for the remaining 148 or more vehicles starting in  2020. In addition to testing the prototype vehicles, the program is holding a  production readiness review that started in November 2017 and  according to program officials, they will keep the review open until April  2018. During this review, the program will determine whether the designs  are ready for production and whether the contractors have accomplished  adequate production planning to enter production. Officials from DCMA,  which conducts contract performance oversight, have provided support in  assessing production readiness. After receiving the proposals for the  production down-select, the program will hold a system verification review  in April 2018 to verify that the performance of the ACV prototypes meets  capability requirements and performance specifications. This report represents the last in the series of reports we are to issue in  response to the fiscal year 2014 National Defense Authorization Act,  which contains a provision that we review and report annually on the ACV  program until 2018. Previously,  In October 2015 we found that the Marine Corps made efforts to  adopt best practices and minimize acquisition risk, including: adopting  an incremental approach to update capabilities, using proven  technologies, increasing competition, and awarding fixed-price  incentive contracts for much of the development work. In April 2017, we found that DOD’s life cycle cost estimate for ACV  1.1 of about $6.2 billion, fully or substantially met the criteria for the  four characteristics of a high-quality reliable cost estimate. However,  we also found that changes the Marine Corps made to the acquisition  schedule — partly in response to a stop work order following a bid  protest that was denied by GAO in March 2016 — raised acquisition  risk by increasing the overlap between development activities, such  as testing of the vehicles, with production. This is a risk we had  identified in a previous report. As a result, we recommended that the  Marine Corps delay the production decision until 2019. DOD did not  concur with that recommendation. ACV Program Is on  Track to Meet  Development Cost  Goals with No  Additional Schedule  Delays Costs for the development phase of ACV are on track to meet cost goals  established at the start of development, based on a recent Navy estimate,  the ACV program office, and reporting from the contractors. In September  2017, the ACV program’s Defense Acquisition Executive Summary  Report for ACV provided a Navy cost estimate for development of $750.7  million, less than the $810.5 million baseline established at the start of  development in November 2015. Program officials also indicated that the  ACV program was on track to meet cost goals. They noted that the  contractors have not contacted the government to negotiate an increase  in billing prices, as of December 2017. Since both of the contractors have  delivered all 16 of their required prototypes and the manufacturing of the  prototypes is the largest anticipated portion of ACV development contract  costs, most of the costs associated with the manufacturing of the  prototypes have likely been realized. The Marine Corps made efforts to reduce cost risk to the government by  adopting a fixed-price incentive (firm target) contract type for the  construction of the prototype vehicles. As we previously reported in  October 2015, the Marine Corps planned to award hybrid contracts to  each of the ACV development contractors, which would apply different  pricing structures for different activities. The Marine Corps awarded the  contracts in November 2015 as planned. Most critically, a fixed-price  incentive contract type is being used for items in the contract associated  with the manufacturing of the development prototypes, which was  anticipated to be the largest portion of ACV development contract costs.  Under this contract type, the government’s risk is generally limited to the  contract’s price ceiling. Incentive contracts are appropriate when a firm- fixed-price contract is not appropriate and the required supplies can be  acquired at lower costs by relating the amount of profit or fee to the  contractor’s performance. According to Federal Acquisition Regulation, since it is usually to the  government’s advantage for the contractor to assume substantial cost  responsibility and appropriate share of the cost risk, fixed-price incentive  contracts are preferred over cost-reimbursement incentive contracts when  contract costs and performance requirements are reasonably certain.  The fixed-price incentive (firm target) contract type provides for adjusting  profit and establishing the final contract price by application of a formula  based on the relationship of total final negotiated cost to total target cost.  The final price is subject to a price ceiling, negotiated at the outset. If  the final negotiated cost exceeds the price ceiling, the contractor absorbs  the difference. As we also previously reported, however, the Marine  Corps received a waiver to forgo the establishment of a certified Earned  Value Management System for the ACV program, which reduces the  regularly-available cost, schedule, and performance data available for the  program to review. The ACV program office and DOD also indicated that they anticipate  production costs will be within goals established at the start of  development, though key production costs have not yet been determined.  The program’s development contracts with the two competing contractors  contain fixed-price incentive options for 4 years of production. The pricing  of the production vehicles will not occur, however, until DOD makes a  production decision in June 2018 and negotiates the final terms and  exercises the production option with one of the contractors. The Marine Corps has made no major changes to the ACV acquisition  schedule since we previously reported on the program in April 2017. In  that report we found that the production decision was moved from  February to June 2018 after a stop work order was issued to the  contractors in response to a bid protest from a vendor that was not  selected for one of the ACV development contracts. A senior program  official emphasized the importance of keeping the ACV acquisition on  schedule because the capability it provides is complementary to a  broader set of capability updates across multiple platforms that the  Marine Corps is in the process of procuring. ACV May Enter  Production with  Manufacturing  Maturity That Does  Not Meet Best  Practices The ACV program office is in the process of conducting tests and  assessments to determine if the program is on track to meet the criteria to  enter production, but program officials told us the Navy—which has the  authority to approve major acquisition milestone decisions for the  program—may choose to start low-rate production without meeting  established best practices for manufacturing maturity. At the start of  development, DOD established criteria for entering production in areas  such as capability performance and the status of the contractors’  manufacturing readiness to manufacture the ACV vehicles. Leading up to  the production decision, the program is engaged in a number of activities  such as the operational assessment and production readiness review to  inform the decision to start production. The production readiness review  has a critical role in informing the decision to enter production because it  represents an opportunity for the program to determine the maturity of the  contractor’s manufacturing process and assess potential risks related to  cost, schedule, or performance. Our previous reviews about  manufacturing best practices found that identifying manufacturing risks  early in the acquisition cycle and assessing those risks prior to key  decision points, such as the decision to enter production, reduces the  likelihood of cost growth and potential delays. The ACV program has used the DOD Manufacturing Readiness Level  (MRL) Deskbook to identify levels of manufacturing capability and  establish targets for minimal levels of manufacturing readiness at specific  acquisition milestones. The ratings are applied to various risk areas  such as design, materials, process capability and control, and quality  management. Table 1 shows the basic MRL definitions provided by the  Joint Defense Technology Panel. The MRL Deskbook recommends that a program is expected to  demonstrate a MRL of 8 by the time of the low-rate production decision.  However, GAO’s previously identified best practices for managing  manufacturing risks recommend programs reach a higher level—MRL- 9— for the risk area of process capability and control before entering low- rate production. At MRL-9, a program is expected to have its applicable  manufacturing processes in statistical control. The MRL Deskbook recommends that a program achieve an MRL-9 at the start of full-rate  production. The Marine Corps has eliminated manufacturing capability as a criterion  for consideration in the down-select production decision. In the solicitation  issued to the two competing contractors for the production decision in  December 2017, the Marine Corps identified two criteria that would be  considered to determine the winner of the down-select competition for the  production decision. They are, in descending order of importance: (1)  technical performance of the prototype vehicles and (2) the contractors’  submitted cost proposals. Previously, the ACV acquisition strategy and  development contracts identified five criteria for the selection process,  with manufacturing capability as the second most important factor (behind  technical performance). The development contracts stipulated that the  government reserved the right to adjust the factors and their order of  importance prior to the release of the solicitation for the production down- select decision. Program officials said that narrowing the down-select  factors to performance test results and cost was in line with the original  intent of the program to use the best value tradeoff process described in  the Federal Acquisition Regulation and that the revised criteria were  appropriate for a non-developmental item such as the ACV. While the program removed manufacturing capabilities from its criteria for  selecting the contractor for production, ACV program officials are still  assessing manufacturing readiness to support their production decision.  Program officials stated that they could enter production at a lower level  of manufacturing readiness than DOD guidance or GAO identified best  practices suggest. The program started a production readiness review in  November 2017 to determine the contractors’ respective manufacturing  maturity. According to program officials, they will keep the review open  until April 2018, at which point the program will make a determination  about the contractors’ manufacturing readiness levels. The program office  confirmed that the ACV criterion for entering production is to achieve an  MRL-8 but noted that it is possible that the program could choose to enter  into production without an overall MRL-8. Program officials stated that if  there are any specific risk areas that are assessed below that threshold,  the program office will define the risk and make a recommendation to the  Navy for entry into production based on whether or not they consider the  risk acceptable. To help inform its determination, program officials said that they will  review the manufacturing readiness assessments produced by the  contractors, as well as reviews by the DCMA, which is responsible for  assisting with contract oversight. Because the two contractors were still in  competition at the time of the release of this report, we are unable to  publicly report additional, more detailed, information about production  readiness or performance tests. However, we have previously found that  programs with insufficient manufacturing knowledge at the production  decision face increased risk of production quality issues, cost growth, and  schedule delays. Entering the production phase of the ACV acquisition with manufacturing  readiness levels lower than those recommended by DOD guidance and  GAO-identified best practices would increase the likelihood of outcomes  associated with insufficiently mature manufacturing capabilities, such as  production quality issues and schedule delays. The Marine Corps has  already been authorized funding to start production and plans to exercise  options in 2018 to produce 30 vehicles for the first year of low-rate  production. However, the Marine Corps has two upcoming decisions  that would provide opportunities to refocus on manufacturing readiness  for the ACV—specifically the decision to enter into the second year of  low-rate production in 2019 for 30 vehicles, and the decision to enter the  first year of full-rate production in 2020 and acquire 56 of the remaining  148 vehicles. Acquiring additional vehicles before ensuring sufficient  manufacturing maturity could raise the risk that the contractor may not be  sufficiently prepared for continued production, which could result in delays  in delivery of acceptable vehicles or additional costs to the government. Conclusions The Marine Corps has long identified the need for the enhanced  capabilities envisioned through the ACV program and is nearing the  potential production of such a vehicle. Following the cancellation of the  EFV program after the expenditure of $3.7 billion, the ACV program  represents an opportunity to follow a better acquisition approach. It is too  early to determine whether the contractors will meet targets for production readiness by the time of the production decision, but the program office is  considering entering production without meeting the recommended  manufacturing maturity levels established by DOD or GAO-identified best  practices. We have already identified the ACV program as adopting an aggressive  acquisition schedule in which the amount of concurrent developmental  testing and production is more than typical acquisition programs. In fiscal  year 2018, Congress authorized funding for the program to start  production, but the decision to enter a second year of low-rate production  and the decision to start full-rate production represent opportunities for  the ACV program to verify the manufacturer has achieved a sufficient  level of readiness before commencing production of the bulk of vehicles.  If the Marine Corps does not take steps to ensure that the contractor’s  manufacturing readiness is sufficiently mature, as demonstrated through  MRLs, prior to committing to additional production beyond the first year of  low-rate production, there is an increased risk for production quality  issues, cost growth, and schedule delays. Recommendations for  Executive Action We are making two recommendations to DOD. The Secretary of the Navy should take steps to ensure that the Marine  Corps not enter the second year of low-rate production until after the  Marine Corps has determined that the contractor has achieved an MRL of  at least an 8 for all risk areas. (Recommendation 1) The Secretary of the Navy should take steps to ensure that the Marine  Corps not enter full-rate production until the Marine Corps has determined  that the contractor has achieved an MRL of at least 9 for all risk areas.  (Recommendation 2) Agency Comments  and Our Evaluation We provided a draft of this product to DOD for comment. In its comments,  reproduced in appendix I, DOD partially concurred with GAO’s  recommendations. DOD agreed that manufacturing readiness should be assessed prior  entering both the second year of low-rate production and the start of full- rate production, and plans to do so. DOD acknowledged that the MRL  Deskbook provides best practices for identifying risks, but noted that the  ACV program is not required to follow it. DOD noted that it may be  reasonable to proceed into manufacturing at lower MRLs, if steps to  mitigate identified risks are taken.  However, DOD disagreed that not  demonstrating a specified MRL for any individual risk area, in itself,  should delay the start of either production milestone. DOD expressed  concern that delaying subsequent years of production, if MRLs are not at  the levels recommended, could lead to counterproductive breaks in  production. We agree that adopting the MRL Deskbook is not required by DOD and  represents best practices to minimize production risk.  However, we also  believe that demonstrating the MRL levels recommended in the MRL  Deskbook for all risk areas mitigates increased risk associated with the  aggressive schedule pursued by the ACV program—about which we have  previously expressed concerns. We believe our recommendation to  achieve an overall MRL-8 by the second year of low-rate production is a  reasonable goal, considering it gives the ACV program an additional year  after the point at which the MRL Deskbook recommends reaching MRL- 8—the start of low-rate production. In addition, ensuring that all  manufacturing readiness risk areas are at MRL-9 for the start of full-rate  production, as recommended by best practices in the MRL Deskbook,  would help further alleviate risks associated with the program’s  aggressive schedule. We appreciate the DOD concerns about delaying  subsequent years of production if MRLs have not reached those identified  in the best practices in the MRL Deskbook, but note that not doing so  increases the likelihood of production quality issues that could lead to  cost growth and schedule delays in future years. Therefore, we made no  changes to the recommendations in response to the comments. We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Under Secretary of Defense  for Acquisition and Sustainment; the Secretary of the Navy; and the  Commandant of the Marine Corps. This report also is available at no  charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on 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. Key contributors to this report GAO staff who  made key contributions to this report are listed in appendix II. Appendix I: Comments from the Department  of Defense Appendix II: GAO Contact and Staff  Acknowledgments GAO Contact: Staff  Acknowledgments: In addition to the contact named above, Bruce H. Thomas (Assistant  Director), Matt Shaffer (Analyst in Charge), Pete Anderson, Alexandra  Jeszeck, Jennifer Leotta, Roxanna Sun, and Marie Ahearn made key  contributions to this report.
In June 2018, the United States Marine Corps plans to select a contractor and begin low-rate production for the ACV, a vehicle used to transport Marines from ship to shore under hostile conditions. The ACV will replace all or part of the current Assault Amphibious Vehicle fleet. The National Defense Authorization Act for Fiscal Year 2014 included a provision for GAO to annually review and report on the ACV program until 2018. This report, GAO's last under that provision, assesses the extent to which the Marine Corps is making progress toward (1) meeting cost and schedule goals for the ACV program and (2) demonstrating manufacturing readiness. GAO reviewed program cost estimates, updated schedules, and program assessments of test results and production readiness, as well as compared ACV acquisition efforts to DOD guidance and GAO-identified best practices. GAO also interviewed program and testing officials, and visited both ACV primary assembly locations. The first version of the Amphibious Combat Vehicle (ACV 1.1) is on track to meet development cost goals with no additional anticipated delays for major acquisition milestones. With regard to costs, the development phase of ACV 1.1 is on pace to not exceed cost goals that were established at the start of development, based on a recent Navy estimate, the ACV program office, and reporting from the contractors. For example, a September 2017 program progress review reported a Navy estimate of the cost of development at $750.7 million, less than the $810.5 million baseline established at the beginning of development. With regard to schedule, the ACV program has made no major changes to the acquisition schedule since GAO previously reported on the program in April 2017. ACV 1.1 program officials are in the process of preparing to down-select to a single contactor and enter low-rate production in June 2018, start a second round of low rate production the following year, and begin full-rate production in 2020. ACV 1.1 may be followed by the acquisition of other versions (ACV 1.2 and ACV 2.0) with advanced capabilities such as higher water speeds. The ACV program is preparing to start production of ACV 1.1, which includes determining that the contractors' manufacturing capabilities are sufficiently mature. However, program officials are considering entering production with a lower level of manufacturing maturity than called for in Department of Defense (DOD) guidance or GAO identified best practices. The ACV program measures manufacturing maturity with manufacturing readiness levels (MRL) for risk areas such as design, materials, process capability and control, and quality management. DOD guidance for weapons acquisition production recommends that programs achieve an MRL of 8 across all risk areas before entering low-rate production and that a program achieve an MRL of 9 at the start of full-rate production. GAO's previous reviews about manufacturing best practices found that achieving manufacturing maturity and identifying production risks early in the acquisition cycle and assessing those risks prior to key decision points, such as the decision to enter production, reduces the likelihood of quality issues, cost growth, and delays. The Marine Corps contract option for producing the first round of low-rate production for ACV 1.1 will be exercised after June 2018; the contract also contains additional options for production vehicles. Making the decisions to proceed with the second round of low-rate production and for the start of full-rate production before meeting called-for levels of manufacturing readiness criteria increases the risk that ACV 1.1 will witness delays and increased costs.