DOD Cost Overruns

This testimony discusses tools available to minimize Department of Defense (DOD) cost overruns and our recent work on the Nunn-McCurdy process. For nearly 30 years, the statutory provision known as Nunn-McCurdy has been a tool for Congress to use to hold DOD accountable for cost growth on major defense programs. The purpose of the statute was to provide Congress greater visibility into major defense programs' cost growth and to encourage DOD to manage and control cost growth. A Nunn-McCurdy breach occurs when a program's unit cost exceeds certain thresholds. When that happens, DOD must notify Congress of the breach. There are two types of Nunn-McCurdy breaches: significant breaches and critical breaches. A breach of the significant cost growth threshold occurs when the program acquisition unit cost or the procurement unit cost increases by at least 15 percent over the current baseline estimate or at least 30 percent over the original baseline estimate. A breach of the critical cost growth threshold occurs when the program acquisition unit cost or the procurement unit cost increases by at least 25 percent over the current baseline estimate or at least 50 percent over the original baseline estimate. The Nunn-McCurdy process has been amended a number of times over the years. For example, in the Weapon Systems Acquisition Reform Act of 2009, Congress enacted a new provision requiring the Secretary of Defense to terminate a program that experiences a breach of the critical cost growth threshold, unless the Secretary of Defense submits a written certification to Congress. This statement focuses on (1) trends in Nunn-McCurdy breaches, (2) factors that may be responsible for these trends, (3) changes DOD is making or proposing to make to the Nunn-McCurdy process, and (4) other tools DOD can use to minimize cost overruns. This testimony includes information from our March 2011 report on Nunn-McCurdy breaches, which is being released today. The report contains information on the scope of our analysis and the methodology used. In addition, we drew on our published body of work on weapon system acquisitions and best practices to identify tools that can be used to minimize cost overruns.

Since 1997, there have been 74 Nunn-McCurdy breaches involving 47 major defense acquisition programs. There were a larger number of breaches in 2001, 2005, 2006, and 2009, which coincides with new statutory requirements or changes presidential administration. As a result of Congress requiring DOD to measure cost growth against the original baseline estimate, the number of breaches reported increased in 2005 and 2006. The number of breaches was also high in 2001 and 2009-- the first years of new presidential administrations. During both transitions, no annual comprehensive Selected Acquisition Reports (SAR) were submitted, which, along with other factors, may have affected when breaches were reported. Nunn-McCurdy breaches are often the result of multiple, interrelated factors. Our analysis of DOD data and SARs showed that the primary reasons cited for the unit cost growth that led to Nunn-McCurdy breaches were engineering and design issues, schedule issues, and quantity changes. For example, we reported in 2003 that the Space Based Infrared System High program began with immature technologies and was based on faulty and overly optimistic assumptions about software reuse and productivity levels, the benefits of commercial practices, management stability, and the level of understanding of requirements. The program has breached four times. A large number of programs that breached also cited revised estimates, due in part to changing assumptions; requirements changes; and economic changes, such as labor and overhead rates, as factors that contributed to the breaches. DOD has instituted a process to provide earlier warning of potential Nunn-McCurdy breaches and plans to propose changes to the Nunn-McCurdy process to reduce several statutory requirements for breaches caused by quantity changes. Specifically, the Joint Staff has implemented a process to provide an earlier evaluation of the factors that are contributing to cost growth so that programs can take mitigating actions before experiencing a significant Nunn McCurdy breach. This new process has merit, as our analysis shows that nearly 40 percent of Nunn-McCurdy breaches occurred after a production decision had been made--when a program has fewer options for restructuring. DOD plans to propose a legislative amendment to reduce several statutory requirements added in 2009 for Nunn-McCurdy breaches when it determines that a breach was caused primarily by quantity changes that were unrelated to poor performance. According to DOD, not all breaches are indicators of poor performance because quantity reductions or capabilities added to a program after it begins can affect unit cost. The Nunn-McCurdy process can be a useful mechanism for holding programs accountable for cost growth and restructuring them in the wake of cost growth; however, its effect is limited because, in general, programs have already experienced significant problems by the time it is triggered. It is not realistic to expect cost growth to be entirely preventable, but it can be significantly reduced. To put programs in a position to minimize the risk of cost growth, DOD must use the tools available to it to establish programs in which there is a match between requirements and resources--including funding-- from the start and execute those programs using knowledge-based acquisition practices. In our previous work, we have identified proven management practices--many of which have been incorporated into DOD policy, but have yet to be fully implemented in practice--that can serve as tools to prevent DOD cost overruns. Greater adherence to practices at key phases of the acquisition process can help reduce weapon system costs, contain pressures for increased funding, and better address critical warfighter needs.