Weapons Acquisition

Requiring the use of warranties in weapon system acquisitions is impractical and provides the government with few benefits. GAO estimates that the military spends about $271 million each year on weapon system warranties, which return only about five cents for every dollar spent. Congress expected warranties to improve weapon system reliability by providing a mechanism to hold contractors liable for poor performance. In practice, however, warranties have proved an expensive way for the Defense Department (DOD) to resolve product failures with contractors. The government has traditionally self-insured because its large resources make protection against catastrophic loss unnecessary. Further, it is often the sole buyer for a product and cannot share the insurance costs with other buyers. Because a contractor cannot allocate the cost of insuring against the risk of failure among multiple buyers, DOD ends up bearing the entire estimated cost. Moreover, DOD program officials said that warranties do not motivate contractors to improve the quality of their products. GAO believes that the warranty law should be repealed and the decision to obtain a warranty should be left to the program manager.

GAO found that: (1) DOD receives about $1 in direct benefit for every $19 paid to a contractor for a warranty; (2) DOD program officials rarely seek to waive the warranty requirement because waivers require the approval of an Assistant Secretary of Defense and congressional defense authorization and appropriations committees; (3) despite DOD regulations that require a cost-benefit analysis to determine if the warranty is cost-effective, some cost-benefit analyses are inadequate; (4) the military services are not conducting post-award assessments to determine whether warranty costs are commensurate with the benefits received and to identify advantageous and disadvantageous warranty provisions for future contracts; (5) the government has traditionally self-insured because its large resources make protection against catastrophic loss unnecessary, and it is often the sole buyer for a product and cannot share the insurance costs with other buyers; (6) because a contractor cannot allocate the cost of insuring against the risk of failure among multiple buyers, DOD ends up bearing the entire estimated cost; (7) DOD officials said that warranties do not motivate contractors to improve the quality of their products; and (8) warranties only extend the period that DOD can determine that a product does not conform to contract specifications and requirements and require the contractor to make repairs.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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