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Navy Aviation: AV-8B Harrier Remanufacture Strategy Is Not the Most Cost-Effective Option (Letter Report, 02/27/96, GAO/NSIAD-96-49).

GAO reviewed the Marine Corps' AV-8B Harrier Remanufacture program,
focusing on whether it would be more cost-effective to rebuild older
aircraft or procure new aircraft with increased capabilities.

GAO found that the: (1) Navy estimates that it would cost between $23
million and $29.5 million to rebuild each AV-8B aircraft using
refurbished parts; (2) Marines could procure new AV-8B radar attack
aircraft for about $23.6 million each; (3) Navy does not have the
ability to rebuild AV-8B aircraft as quickly as new aircraft can be
produced; (4) Navy could revise its procurement strategy to procure new
radar aircraft, since the remanufacture program is conducted under
single-year contracts; (5) Navy is having difficulty disassembling older
aircraft and acquiring replacement components in a timely and
cost-effective manner; and (6) surplus radar equipment intended for use
in rebuilding the aircraft may not be available as soon as anticipated,
which could cause delays in the remanufacture program.

--------------------------- Indexing Terms -----------------------------

     TITLE:  Navy Aviation: AV-8B Harrier Remanufacture Strategy Is Not 
             the Most Cost-Effective Option
      DATE:  02/27/96
   SUBJECT:  Cost effectiveness analysis
             Navy procurement
             Military aircraft
             Defense capabilities
             Aircraft components
             Spare parts
             Radar equipment
             Equipment repairs
             Manufacturing contracts
             Air warfare
             Desert Storm
             Navy Age Exploration Program
             Defense Business Operations Fund
             F-18 Aircraft
             APG-65 Radar
             APG-73 Radar
             Harrier Aircraft
             Hornet Aircraft
             Marine Corps AV-8B Harrier Remanufacture Program
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================================================================ COVER

Report to the Secretary of Defense

February 1996



Navy Aviation


=============================================================== ABBREV

  DOD - Department of Defense
  NADEP - Naval Aviation Depot
  REMAN - Remanufacture ProgramB-270424

=============================================================== LETTER


February 27, 1996

The Honorable William J.  Perry
The Secretary of Defense

Dear Mr.  Secretary: 

As part of our work on Navy tactical aviation programs, we reviewed
the Marine Corps $2.2 billion AV-8B Harrier Remanufacture Program
(REMAN).  Under the program, 72 of the older AV-8B aircraft with day
attack capabilities will be rebuilt so that they have the night
attack and radar capabilities that the most recently procured AV-8B
radar attack aircraft have. 

Our objective was to assess whether rebuilding the day attack
aircraft instead of buying more of the radar attack aircraft is the
more cost-effective option. 

------------------------------------------------------------ Letter :1

Introduced in 1993, the AV-8B aircraft with night attack and radar
capabilities enhances pilots' abilities to locate and destroy targets
under conditions of marginal weather, limited visibility (smoke,
dust, or haze), and darkness.  The two previously produced models had
significant limitations.  The day attack model, the first version of
the aircraft procured by the U.S.  Marines in 1982, has limited
capability during the hours of darkness because the pilots cannot
refer to the terrain and horizon to assist in maneuver, navigation,
and attack.  The night attack version, introduced into the fleet in
1989, has increased capabilities over the day attack version but
still has limitations.  Its Angle Rate Bombing System, used by the
day and night attack models for weapons aiming and delivery, is not
effective at night or during adverse weather conditions.  In
addition, the night attack version's forward looking infrared system,
which assists in navigation during hours of darkness, is degraded by
air moisture. 

All the prior upgrades to the AV-8B--from day to night attack models
and then to models with the improved radar configuration--have been
made by producing new models.  Aircraft have not been rebuilt or
modified.  The Marines plan to deviate from this practice with REMAN. 

Under REMAN, the Marines plan to award single-year contracts to
remanufacture 72 of the day attack model aircraft and convert them to
aircraft with night attack and radar capabilities over a 10-year
period.  The day attack aircraft are to be transported to the Naval
Aviation Depot (NADEP) in Cherry Point, North Carolina.  There, the
aircraft are to be tested for flight worthiness and then
disassembled.  About $6 million worth of parts from each aircraft are
to be returned to the supply system and about $11.3 million of
designated components and assemblies from each aircraft are to be
either used in their current condition, refurbished, or modified for
reuse in the REMAN program.  The components and assemblies are to be
sent to the contractor, McDonnell Douglas Aerospace Company in St. 
Louis, Missouri.  The contractor is to integrate these used
components and assemblies, along with a new fuselage, a new engine,
and an APG-65 radar system, to produce the final REMAN aircraft.  The
first REMAN aircraft is scheduled for delivery in February 1996. 

------------------------------------------------------------ Letter :2

Our review showed that it would be more cost-effective to procure new
AV-8B radar attack aircraft than to rebuild the day attack aircraft. 
The Navy estimates that it will cost between $23 million and $29.5
million to remanufacture each AV-8B aircraft.  The AV-8B program
office did not have a current cost estimate for producing additional
radar model aircraft.  Therefore, we used cost data from the radar
model aircraft procured in 1991 as our base.  We calculated that for
about $23.6 million per aircraft, the Marines could procure new radar
model AV-8Bs rather than remanufactured aircraft made up largely of
used and refurbished components.  Because the REMAN program is
conducted under an annual contract, the Navy could revise its
procurement strategy and begin immediate negotiations to buy new
radar models rather than continue to contract annually to
remanufacture the aircraft. 

The accuracy of the Marine Corps cost estimates and the overall
success of the REMAN program are contingent on the Navy's ability to
provide the required reusable components to the contractor in a
manner that will not cause production delays and the resulting cost
increases.  However, it is questionable whether NADEP in Cherry
Point, North Carolina, can meet production schedules and cost
targets.  The first aircraft has taken almost twice as many staff
hours to disassemble as planned.  Although the depot expects to
reduce the disassembly time as it gains experience with the process,
the required time will still exceed the amount originally planned. 
Delays have also resulted from the inability of McDonnell Douglas and
NADEP vendors to provide components in a timely fashion.  Also, the
APG-65 radar assets that are to be used in the AV-8B aircraft are not
going to be available as originally planned. 

------------------------------------------------------------ Letter :3

Considering the costs associated with inducting an aircraft into the
REMAN program, disassembling, refurbishing, and modifying components
and assemblies; the value of components and assemblies furnished to
the contractor; and economies available through multiyear
procurement, our review indicated that the REMAN program is not the
most cost-effective procurement approach.  It would be feasible for
the Navy to revise its acquisition strategy because the contractor's
production line and facilities are still in place and ready for
continued production of radar model AV-8B aircraft. 

During our review, we compared past procurement cost figures
(adjusted for inflation) with current REMAN program cost estimates. 
We also assessed the impact of multiyear procurement on new
production cost estimates due to recommendations by the Department of
Defense (DOD) Inspector General and recent congressional interest. 

Twenty-one radar aircraft were procured in 1991 at an average unit
flyaway cost of $22.4 million.\1 Six more were procured in 1992 to
replace aircraft lost during Desert Storm at an average unit flyaway
cost of $31.9 million--a 42-percent increase that the program office
explained was due to the small quantity procured.  Table 1 shows the
procurement history of the AV-8B program. 

                                     Table 1
                      AV-8B Harrier Procurement Cost History
                              (fiscal years 1982-92)

                              (Millions of dollars)

                FY82  FY83  FY84  FY85  FY86    \a  FY88  FY89  FY90  FY91  FY92
--------------  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----
Units\b           12    21    27    32    46    42    24    24    24    21     6
Flyaway cost    $544  $536  $507  $499  $696  $625  $388  $468  $422  $471  $192
Unit cost       $45.  $25.  $18.  $15.  $15.  $14.  $16.  $19.  $17.  $22.  $31.
                   3     5     8     6     1     9     2     5     6     4     9
\a Fiscal year 1987 includes three night attack aircraft. 

\b Includes trainer aircraft. 

The AV-8B program office does not have a current cost estimate for
producing additional radar aircraft.  Therefore, to facilitate a
comparison of REMAN and probable new production costs, we used the
fiscal year 1991 flyaway cost as a baseline because of its more
efficient production rate
(21 aircraft). 

Using Navy indexes, we escalated the average unit cost of fiscal year
1991 procurement ($22.4 million) by 7.5 percent ($24.1 million) to
account for inflation.\2 Then, using DOD data on potential savings
from a multiyear procurement strategy for engines,\3 we determined
that the cost of new aircraft would be about $23.6 million per
aircraft, without having provided the contractor the additional $11.3
million worth of reused, government-furnished components and
assemblies.  We discussed this methodology with DOD officials and
they did not disagree.  According to program documents, under the
REMAN acquisition strategy, the Navy expects to pay between $23
million and $29.5 million for each aircraft, exclusive of the value
of reused government-furnished equipment. 

In June 1994, the DOD Inspector General reported that the Navy could
save over $150 million by pursuing a multiyear procurement strategy
for REMAN.  On the basis of that report, the Fiscal Year 1995 Senate
Appropriations Committee Report directed the Navy to address
multiyear procurement.  The Navy rejected the multiyear procurement
strategy and in a March 1995 letter to the House and Senate
Appropriations Committees stated

     "The remanufacture program commenced in fiscal year 1994 and has
     not completed a full manufacturing cycle.  Therefore, process
     performance is not yet fully validated and extrapolation of cost
     savings are estimates based on the prime contractor's
     manufacturing process used in past production of new AV-8B
     aircraft of the same configuration.  While total quantities
     appear firm and the requirement remains valid, a more
     appropriate time to consider a multi-year procurement
     acquisition strategy would be after the remanufacturing costs
     are substantiated, and we are comfortable that no system
     degradation has occurred as a result of remanufacture.  We will
     then be in a position to make a recommendation with regards to a
     multiyear procurement plan for fiscal year 1998."

If the program continues as planned, by 1998, procurement contracts
will have been initiated to remanufacture 50 percent of the 72
aircraft planned for the REMAN program.  Further, our review of the
Navy's procurement history for this aircraft (see table 1) showed
that the contractor has demonstrated the capability to produce new
AV-8B aircraft at a more efficient rate than the procurement schedule
for the REMAN program shown in table 2. 

                                     Table 2
                     AV-8B REMAN Procurement Schedule (fiscal
                                 years 1994-2003)

               FY94  FY95  FY96  FY97  FY98  FY99  FY00  FY01  FY02  FY03  Total
-------------  ----  ----  ----  ----  ----  ----  ----  ----  ----  ----  -----
Aircraft          4     4     4    12    12    12    12    12    --    --     72
Aircraft         --    --     3     5     4    12    12    12    12    12     72
Accelerated production to the fiscal year 1991 level would be a more
cost-effective approach than the low rate being requested by the
Navy, and would provide the Marine Corps with increased combat
capability at a more efficient production rate.  On the other hand,
NADEP does not have the ability to disassemble the aircraft or
refurbish and modify components and assemblies for reuse by the
contractor under the REMAN program at the rate needed to support a
production rate comparable to that available under new production. 

\1 Cost related to the production of a usable radar model AV-8B. 

\2 From fiscal year 1991 through fiscal year 1994, the inflation rate
was 7.5 percent. 

\3 The airframe portion of the fiscal year 1991 procurement was a
multiyear acquisition and, therefore, it is not included in our

------------------------------------------------------------ Letter :4

The NADEP at Cherry Point, North Carolina, has been tasked to
disassemble the day attack aircraft removed from the fleet, ensure
that the components and assemblies to be reused in the process of
producing the radar version are in ready-for-use condition, and
deliver these parts to the contractor.  Each of the reused components
and assemblies has a defined delivery schedule, which if not met will
delay production at the contractor's facility and increase program
costs.  The Navy's ability to deliver the components and assemblies
on schedule is questionable. 

According to NADEP officials, since the remanufacture program was not
prototyped, the depot is experiencing many unanticipated problems. 
Each aircraft has some unique differences that must be resolved in
terms of modification, replacement, or repair before a particular
component is sent to the contractor for integration in the REMAN
aircraft.  If the depot does not have a replacement part on hand or
the capability to modify or fabricate particular parts and
assemblies, it must contract out for the capability or purchase the
necessary new parts.  All of these options would lead to delays and
increased costs. 

---------------------------------------------------------- Letter :4.1

The depot has experience in disassembling the AV-8B aircraft from its
Age Exploration Program, which evaluates the structural integrity of
the aircraft.  However, the Age Exploration Program does not require
the detailed level of dismantling that is required for the REMAN
program.  Additionally, unlike in the Age Exploration Program, under
the REMAN program the depot is required to make over 30 new
modifications to components that it has no previous experience

In planning support to the REMAN program, the depot budgeted 2,879
staff hours per aircraft for the disassembly functions.  However, the
process has taken up to 5,100 staff hours for the first aircraft
inducted into the program, and the next three aircraft are expected
to consume about the same level of effort.  Officials at the depot
told us that the increase in the time required for the disassembly
process was due to the fact that there had not been an opportunity to
prototype the process, including the handling of various
modifications.  This increase in staff hours causes increases in
costs and delays in schedule for the program. 

The fiscal year 1994 depot labor rate was $47.05 per hour.  With the
increase in required staff hours, the cost per aircraft inducted into
the program will increase by about $104,000.  Officials at the depot
anticipate that the other three aircraft inducted into the REMAN
program during fiscal year 1994 will also take about the same level
of effort.  As the depot technicians and mechanics gain more
experience with the disassembly, refurbish, and modification
operations, they expect the process to level off at about 4,000 staff
hours per aircraft. 

Due to an increase in the Defense Business Operating Fund rates, the
depot labor rate for fiscal year 1995 was much higher ($91.59 per
hour) than fiscal year 1994 rates.  Officials at the depot are
optimistic that the rate for fiscal year 1996 will drop to about $66
per hour.  If the labor rates drop to $66 per hour and stay constant
for the remainder of the REMAN program and the depot achieves the
estimated level of 4,000 staff hours per aircraft for disassembly,
rework, and modification before shipping the kits to McDonnell
Douglas, the results would still be an added cost to the program of
about $74,000 per aircraft. 

---------------------------------------------------------- Letter :4.2

To begin the disassembly process, four aircraft were inducted into
the REMAN program between June and November 1994.  The disassembled,
modified, and reused-as-is components were scheduled for delivery to
the contractor between July 1995 and May 1996, to meet a production
delivery schedule of February through November 1996.  As of August
1995, a complete set of components for one of the four aircraft
inducted in fiscal year 1994 had been delivered to the contractor. 
Component sets for the other three aircraft, while not yet behind in
their delivery schedules, were experiencing delays in their
modification and preparation at the depot.  Depot officials told us
that these delays have occurred because of the inability to obtain
parts and materials necessary to modify the day attack aircraft
components in a timely fashion. 

Components from each disassembled aircraft are divided into 22 kits. 
Several of the components in each kit require some work or
modification to be made ready for use before they are included in the
respective kits.  Each of the NADEP maintenance shops responsible for
the modification to these components and assemblies have schedules to
maintain, so as not to cause schedule delays in delivering the kits
to the contractor.  Delays in the receipt of materials required to
make components ready for use put the depot at risk for not being
able to deliver the components and assemblies to the contractor on
schedule.  During our visit to the depot in August 1995, we were told
by various shop foremen that modification schedules were not being
maintained because parts and modification kits they require to make
the necessary modifications were not being delivered to the depot on

The lack of parts and materials needed to make the necessary
modifications to upgrade day attack aircraft components to the REMAN
program specifications negatively affects the depot's ability to
deliver the remanufacture kits to the contractor as scheduled.  Some
of these delays result from the contractor and NADEP vendors' failure
to deliver as scheduled.  While we were at the depot in August 1995,
we noted a 50-day delay in the receipt of wing modification kits from
McDonnell Douglas.  According to depot officials, to minimize delays
in providing the remanufacture kits to the contractor, arrangements
have been made to borrow components and parts from the Aviation
Supply Office in Philadelphia.  Altimeters ordered from the vendor
for the first four REMAN aircraft are a case in point.  NADEP and the
Aviation Supply Office agreed that when the parts are received from
the vendor, the depot will forward them to the Aviation Supply Office
as replacements for those borrowed.  Costs associated with this
innovative depot work-around to avoid schedule delays are increases
charged to the REMAN program as an over-and-above cost.\4 A new
production strategy would mitigate this cost because the contractor
would be furnishing new parts and assemblies as opposed to reused
components from the disassembled day attack models being furnished by
the government. 

\4 Over-and-above is an allowance used within the REMAN program to
allow for corrosion and other repairs on components that are reused. 

---------------------------------------------------------- Letter :4.3

According to Navy officials, over $130 million will be saved by using
excess APG-65 radar assets from the F-18 aircraft in the AV-8B
aircraft.  In a March 11, 1994, Acquisition Decision Memorandum, the
Principal Deputy Under Secretary of Defense for Acquisition and
Technology concurred with the Navy's approach to accelerate the F-18
radar upgrade from APG-65 to APG-73 radars in order to provide the
resulting excess APG-65 radar assets for the REMAN program.  Three of
the six basic components that make up the APG-65 radar system are
common to the F-18's APG-73 radar and will remain in use in the F-18
aircraft.  The remaining three components (the radar
receiver/exciter, target data processor, and computer power supply)
will become excess assets available to the REMAN program. 

In a 1995 classified report, we noted that the APG-73 radar had
problems that needed to be resolved before entering the production
phase.  Responding to our report, DOD said that a procurement
decision would be made sometime in 1996, after an operational
evaluation of the system is completed.  If problems continue and the
APG-65 components are not available to the AV-8B REMAN program as
planned, it is possible the program could be delayed.  If the assets
are not available at all, the AV-8B program office would then have to
procure all new radar components.  Program officials told us the
assets would be provided by the F-18 program as planned either from
spares stock or from F-18 fleet assets.  They also mentioned the
possibility that an older, less capable version of the APG-65 radar
could be tested and used, if necessary. 

According to program officials, the 150-series APG-65 radar is the
version required by the AV-8B aircraft.  One of these officials also
told us that the schedule for removal of the 150-series APG-65 radar
assets from the F-18 aircraft is not in sync with the requirements of
the AV-8B remanufacture program for radar assets.  The AV-8B REMAN
program will need radar assets before their scheduled removal from
F-18 aircraft.  Not only is the removal of radar assets from F-18s a
schedule risk to the AV-8B program, the program officials stated that
there is also a shortage of 17 sets for the remanufacture program. 
To compensate for this shortfall, the Navy is modifying 17 of the
older 140-series APG-65 radar assets to 150-series configuration to
meet REMAN schedule requirements.  This work-around is being funded
with monies from the AV-8B remanufacture and other Navy programs. 

In our discussions with contractor personnel about the impact of
possible delays, we were told that if the radar components, which are
to be furnished by the government, are not made available to the
contractor on schedule, the aircraft could be provisionally delivered
without radar.  If this is the case, the aircraft would not be
mission capable until the radar sets were made available.  Under a
new production strategy, the contractor would be responsible for
providing new radar, mitigating this risk. 

------------------------------------------------------------ Letter :5

In light of the availability of a more cost-effective strategy to buy
new radar AV-8B aircraft, instead of modifying the day attack AV-8B,
we recommend that you direct the Secretary of the Navy to develop a
current cost estimate for producing new radar model aircraft and (1)
revise the acquisition strategy for acquiring upgraded AV-8B aircraft
for the Marine Corps so that after the existing annual contract
expires, the Marine Corps acquires new radar models rather than
remanufactured models and (2) take advantage of the savings available
through multiyear procurement. 

------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD agreed that a multiyear
procurement strategy is generally preferable and advantageous, but
only partially concurred with our recommendation that the Navy be
required to take advantage of savings available through multiyear
procurement.  DOD stated that it is policy to reevaluate program
acquisition strategies as changes in fiscal resources or operational
requirements justify.  We believe that since the radar model AV-8B
aircraft is a valid and stable Marine Corps requirement, now is the
appropriate time for the Navy to take advantage of savings that could
be realized through multiyear procurement. 

DOD disagreed with our recommendation to require the Secretary of the
Navy to revise the acquisition strategy for acquiring upgraded AV-8B
aircraft so that after the existing annual contract expires, the
Marine Corps acquires new radar model aircraft rather than
remanufactured aircraft.  DOD based its disagreement on current
fiscal constraints and cost analyses performed by the Naval Air
Systems Command and the Office of the Secretary of Defense's Cost
Analysis Improvement Group prior to the 1994 Milestone IV Defense
Acquisition Board Review.  According to DOD, these analyses, which
projected that it would cost $29.7 million per aircraft to produce a
new radar model AV-8B, confirmed that the REMAN program is the more
cost-effective way to upgrade the AV-8B fleet. 

The information the Naval Air Systems Command and the Cost Analysis
Improvement Group used in comparing the costs of the REMAN program
with continued or new production is based on out-of-date historical
cost data from the procurement of night attack model AV-8B aircraft
that were last procured in fiscal year 1990.  On the basis of those
data, which were the best available at the time the REMAN program was
considered, remanufacture of current assets might have been the best
solution to modernize the AV-8B fleet.  However, new data, based on
the procurement of new radar model AV-8Bs, are now available.  We
used those data to arrive at our $23.6-million estimate for producing
a new radar model AV-8B.  During a meeting with DOD officials to
discuss their comments on a draft of this report, DOD did not
disagree with our methodology.  Therefore, in our view, the data we
used provides a more accurate cost indicator than an estimate of the
night attack AV-8B aircraft modified for radar because our data come
from actual procurement of radar model AV-8B aircraft. 

DOD also stated in its comments that the REMAN program will provide
aircraft with the same operational capabilities that new production
provides.  This is an inaccurate characterization of the operational
capabilities that will be provided under the REMAN program.  In fact,
aircraft to be produced under the REMAN program will have less
operational capability because they will have less weapon-carrying
capacity than the radar model AV-8B aircraft procured in fiscal year
1991.  Specifically, because the REMAN aircraft will have reused
wings from the day attack model aircraft, these aircraft will have
only five external weapon stations, whereas the new production radar
models have seven external stations. 

DOD's comments are presented in their entirety in appendix I. 

------------------------------------------------------------ Letter :7

We obtained information on the project contract and management of the
AV-8B Harrier Program by reviewing program documentation and
interviewing officials at the following DOD locations: 

  U.S.  Navy Headquarters, Washington, D.C.;

  U.S.  Marine Headquarters, Arlington, Virginia;

  Office of the Chief of Naval Operations, Washington, D.C.;

  AV-8B Program Office, Crystal City, Virginia; and

  Naval Aviation Depot, Cherry Point, North Carolina. 

We also visited contractor facilities at McDonnell Douglas Aircraft
Division in St.  Louis, Missouri. 

We conducted our review between October 1994 and November 1995 in
accordance with generally accepted government auditing standards. 

This report contains recommendations to you.  The head of a federal
agency is required under 31 U.S.C.  720 to submit a written statement
on actions taken on our recommendations to the Senate Committee on
Government Affairs and the House Committee on Government Reform and
Oversight no later than 60 days after the date of the report and to
the Senate and House Committees on Appropriations with the agency's
first request for appropriations made more than 60 days after the
date of the report. 

---------------------------------------------------------- Letter :7.1

We are sending copies of this report to appropriate congressional
committees; the Secretary of the Navy; the Commandant of the Marine
Corps; and the Director, Office of Management and Budget.  We will
also make copies available to others on request. 

Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
were Steven F.  Kuhta, Assistant Director; Samuel N.  Cox,
Evaluator-in-Charge; and Brian Mullins, Evaluator. 

Sincerely yours,

Louis J.  Rodrigues
Director, Defense Acquisition Issues

(See figure in printed edition.)Appendix I
============================================================== Letter 

(See figure in printed edition.)

(See figure in printed edition.)

The following is GAO's comment on the Department of Defense's (DOD)
letter dated December 20, 1995. 

------------------------------------------------------------ Letter :8

1.  According to DOD's response to a draft of this report, the radar
model aircraft procured in 1991, that we used as our basis for
comparing Remanufacture Program (REMAN) and new production cost, was
the last year of a 3-year multiyear procurement buy.  We determined
that multiyear procurement for the 1991 buy was applicable only to
the airframe.  Therefore, we recalculated our estimate so as not to
apply a multiyear cost saving factor for the airframe.  This
recalculation increased our estimate for new aircraft procurement but
did not cause us to change our conclusions and recommendation in the
final report.  Our adjusted estimate is reflected in the body of the

*** End of document. ***