* GAO report notes program already $900 mln over cost target
* Program has significant overlap between development, production
* Air Force says risk of delay "moderate"
By Andrea Shalal-Esa
March 26 (Reuters) - One year into its development, the Air Force's new KC-46 refueling tanker being developed by Boeing Co faces "significant schedule risks" and technical challenges, and is already $900 million over budget, a congressional report found.
The Government Accountability Office, an investigative arm of Congress, said the Air Force had limited its liability for cost overruns on the $51.7 billion program by using a fixed-price contract, but schedule delays were still possible.
"Even with these safeguards, it is important to note that one year into development, Air Force and contractor development cost estimates exceed the development contract amount and significant schedule risks have been identified," GAO wrote in an annual report on the program required by Congress.
The program is already $900 million over the target price of $4.4 billion for the initial development contract, and $400 million over the contract's ceiling of $4.9 billion.
The contract calls for the government to cover 60 percent of overruns up to the ceiling. Boeing has to cover any overrun beyond that level, unless the government changes its requirements for the tanker and renegotiates its contract.
Boeing beat out Europe's EADS to win the contract in February 2011, capping a decade of failed Air Force attempts to start replacing its aging fleet of KC-135 refueling planes, which are now 49 years old on average.
GAO said the program had an accelerated schedule with significant overlap, or concurrency, among the development, testing and production of the new 767-based planes.
The issue of "concurrency" has troubled another big Pentagon weapons program, the F-35 Joint Strike Fighter built by Lockheed Martin Corp. The Pentagon has restructured that program three times in recent years to reduce the overlap between development and production.
GAO said the tanker program was not as challenging as an all-new weapon system since it used a modified commercial platform, but it still faced risk on three critical technologies that had not been tested in a realistic environment.
It noted that the Air Force and Boeing were both concerned about risks to the development and test schedule for the new planes due to a tight flight testing schedule, work on the commercial Boeing line to prepare the aircraft for military modifications, the need for two Federal Aviation Administration certifications, and software challenges.
GAO said Boeing's recent decision to shut down its Wichita, Kansas, facility where it had planned to militarize the planes added a further complication, despite the government's insistence that it will hold Boeing to its contractual obligation to deliver 18 aircraft by August 2017.
"If the provisions in the current contract remain intact, the government's cost liability will be safeguarded ... However these provisions cannot prevent delays in delivering aircraft should problems be discovered late in development or while production is under way," it said.
Only about 60 percent of the flight testing of the new planes is planned to be competed when the Air Force plans to start low-rate production of the new tankers in August 2015.
GAO identified three technologies that still needed to be demonstrated in a realistic environment, including a new three-dimensional display for the crew members who operate the plane's refueling boom and several software issues.
It also raised concerns about the plane's weight, which is already near its limit, and instability of the hose used on new refueling pods.
The Air Force acknowledged that there was some concurrency on the program, but said it was "nowhere near as much as most other major aircraft acquisition programs," adding that it viewed the risk of schedule delays as "moderate."
"The Air Force clearly recognizes schedule as the top risk on the KC-46 program ... however the Air Force believes the GAO assessment that the KC-46 program has 'significant concurrency' overstates the actual level and impact of schedule concurrency between development, testing and production activity," it said in a response to the GAO report.