Trends in Nunn-McCurdy Cost Breaches for Major Defense Acquisition Programs
Gao ID: GAO-11-295R March 9, 2011For nearly 30 years, the statutory provision, known as Nunn-McCurdy, has been an oversight tool for Congress to hold the Department of Defense (DOD) accountable for cost growth on major defense programs. 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 a number of statutory provisions that help implement cost growth reporting under Nunn-McCurdy. For the purposes of this report, we refer to these statutory provisions as the Nunn-McCurdy process. In September 2010, Congress requested that we examine trends in Nunn-McCurdy breaches and factors that may be responsible for these trends. In this report, we also discuss changes DOD is making or proposing to make to the Nunn-McCurdy process. To identify trends in Nunn-McCurdy breaches, we collected and analyzed existing data on breaches from DOD's Defense Acquisition Management Information Retrieval system, which contains data on breaches since 1997. DOD officials also provided us with a list of programs that breached the cost growth thresholds since 1997, which we analyzed to remove duplicate entries. In addition, we reviewed analyses by the Office of the Director of Cost Assessment and Program Evaluation to verify our data.
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 changes in statute or presidential administration. The statutory changes added a program's original baseline estimate as a new benchmark against which to measure cost growth. During the last two changes in presidential administration, DOD did not submit annual comprehensive Selected Acquisition Reports (SAR), which, along with other factors, may have affected when breaches were reported. The Air Force had a higher proportion of total breaches compared to its proportion of total programs, whereas the Navy had a smaller proportion of breaches compared to its proportion of programs. Aircraft, satellite, and helicopter programs have experienced the largest number of breaches. Thirty-four different prime contractors were listed in the SARs for the programs that breached. Of the 47 programs that breached, 18 programs breached more than one time. Nunn-McCurdy breaches are often the result of multiple, interrelated factors. Our analysis of DOD data and SARs showed that the primary reasons for the unit cost growth that led to Nunn-McCurdy breaches were engineering and design issues, schedule issues, and quantity changes. Cost increases resulting from engineering and design issues may indicate that those programs started without adequate knowledge about their requirements and the resources needed to fulfill them. Many programs also cited revised cost estimates as a factor behind breaches, suggesting estimates were based on inaccurate assumptions. Our previous work shows that without the ability to generate reliable cost estimates, programs are at risk of experiencing cost overruns, missed deadlines, and performance shortfalls. DOD has instituted a process to provide earlier warning of potential breaches and plans to propose changes to try to limit the effect of breaches caused by quantity changes. Specifically, the Joint Staff has implemented a Nunn-McCurdy trip wire process to evaluate the factors that are contributing to cost growth so that programs can take mitigating actions. Our analysis shows nearly 40 percent of Nunn-McCurdy breaches occurred after a production decision had been made--when a program has fewer options for restructuring. DOD also plans to propose a legislative amendment to reduce several statutory requirements added in 2009 for Nunn-McCurdy breaches when it determines the breach was caused primarily by quantity changes that were unrelated to poor performance. Tracking changes in research and development costs, which are not sensitive to quantity changes, would be one way DOD could evaluate program performance in this context.
GAO-11-295R, Trends in Nunn-McCurdy Cost Breaches for Major Defense Acquisition Programs
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GAO-11-295R:
United States Government Accountability Office:
Washington, DC 20548:
March 9, 2011:
The Honorable Thomas Carper:
Chairman:
Committee on Homeland Security and Governmental Affairs:
Subcommittee on Federal Financial Management, Government Information,
Federal Services, and International Security:
United States Senate:
Subject: Trends in Nunn-McCurdy Cost Breaches for Major Defense
Acquisition Programs:
Dear Mr. Chairman:
For nearly 30 years, the statutory provision, known as Nunn-McCurdy,
[Footnote 1] has been an oversight tool for Congress to hold the
Department of Defense (DOD) accountable for cost growth on major
defense programs. 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 a number of statutory provisions
that help implement cost growth reporting under Nunn-McCurdy. For the
purposes of this report, we refer to these statutory provisions as the
Nunn-McCurdy process. In September 2010, you requested that we examine
trends in Nunn-McCurdy breaches and factors that may be responsible
for these trends. In this report, we also discuss changes DOD is
making or proposing to make to the Nunn-McCurdy process.
To identify trends in Nunn-McCurdy breaches, we collected and analyzed
existing data on breaches from DOD's Defense Acquisition Management
Information Retrieval system, which contains data on breaches since
1997. DOD officials also provided us with a list of programs that
breached the cost growth thresholds since 1997, which we analyzed to
remove duplicate entries.[Footnote 2] In addition, we reviewed
analyses by the Office of the Director of Cost Assessment and Program
Evaluation to verify our data. We utilized information from SARs
[Footnote 3] for individual weapon systems to explore trends by
various program characteristics including military service, type of
weapon system, and contractor. To identify factors responsible for
trends in Nunn-McCurdy breaches, we reviewed DOD's root cause analyses
and analyzed data from SARs, compared breach trends to statutory
changes, and summarized our past findings on programs that have
experienced breaches. To identify factors responsible for trends and
identify changes DOD is making or proposing to make to the Nunn-
McCurdy process, we interviewed relevant officials from the offices of
the Undersecretary of Defense for Acquisition, Technology, and
Logistics; Performance Assessments and Root Cause Analyses; Cost
Assessment and Program Evaluation; the Comptroller; and the Joint
Staff. We also reviewed DOD policy memoranda and proposed legislation
to learn about the current policy and proposed legislative changes.
We conducted this performance audit from November 2010 to March 2011
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Results in Brief:
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 changes
in statute or presidential administration. The statutory changes added
a program's original baseline estimate as a new benchmark against
which to measure cost growth. During the last two changes in
presidential administration, DOD did not submit annual comprehensive
SARs, which, along with other factors, may have affected when breaches
were reported. The Air Force had a higher proportion of total breaches
compared to its proportion of total programs, whereas the Navy had a
smaller proportion of breaches compared to its proportion of programs.
Aircraft, satellite, and helicopter programs have experienced the
largest number of breaches. Thirty-four different prime contractors
were listed in the SARs for the programs that breached. Of the 47
programs that breached, 18 programs breached more than one time.
Nunn-McCurdy breaches are often the result of multiple, interrelated
factors. Our analysis of DOD data and SARs showed that the primary
reasons for the unit cost growth that led to Nunn-McCurdy breaches
were engineering and design issues, schedule issues, and quantity
changes. Cost increases resulting from engineering and design issues
may indicate that those programs started without adequate knowledge
about their requirements and the resources needed to fulfill them.
Many programs also cited revised cost estimates as a factor behind
breaches, suggesting estimates were based on inaccurate assumptions.
Our previous work shows that without the ability to generate reliable
cost estimates, programs are at risk of experiencing cost overruns,
missed deadlines, and performance shortfalls.
DOD has instituted a process to provide earlier warning of potential
breaches and plans to propose changes to try to limit the effect of
breaches caused by quantity changes. Specifically, the Joint Staff has
implemented a Nunn-McCurdy trip wire process to evaluate the factors
that are contributing to cost growth so that programs can take
mitigating actions. Our analysis shows nearly 40 percent of Nunn-
McCurdy breaches occurred after a production decision had been made--
when a program has fewer options for restructuring. DOD also plans to
propose a legislative amendment to reduce several statutory
requirements added in 2009 for Nunn-McCurdy breaches when it
determines the breach was caused primarily by quantity changes that
were unrelated to poor performance. Tracking changes in research and
development costs, which are not sensitive to quantity changes, would
be one way DOD could evaluate program performance in this context.
Background:
Enacted in 1982, the Nunn-McCurdy statutory provision requires DOD to
notify Congress whenever a major defense acquisition program's unit
cost experiences cost growth that exceeds certain thresholds. This is
commonly referred to as a Nunn-McCurdy breach. 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. There are two types of Nunn-McCurdy breaches: significant
breaches and critical breaches.[Footnote 4] 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.[Footnote 5] 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 statute has been amended a number of times over the
years. One of the most significant changes to the statute occurred in
the National Defense Authorization Act for Fiscal Year 2006, when
Congress added the original baseline estimate as a benchmark against
which to measure cost growth. The original baseline estimate is
defined as the baseline description prepared before the program enters
development, or at program initiation, whichever is later, without
adjustment or revision.[Footnote 6] By adding the original baseline
estimate as a benchmark against which to measure cost growth, and by
restricting the circumstances in which an original baseline estimate
may be revised,[Footnote 7] DOD can no longer avoid Nunn-McCurdy
breaches by simply revising a program's baseline estimate. While DOD
acquisition policy still allows current baseline estimates to be
revised, the policy was modified in 2008 to limit the circumstances
under which this may be done.[Footnote 8]
Another significant change occurred in the Weapon Systems Acquisition
Reform Act of 2009, in which 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 submits a written certification to Congress.[Footnote 9]
Now, Congress must be notified in writing of breaches and the
information must be included in the appropriate quarterly or annual
SAR. For significant breaches, no further action is required. For
critical breaches, DOD is required to take a number of additional
steps, including conducting a root cause analysis and reassessing
estimated program costs. Programs with critical breaches must be
terminated unless the Secretary of Defense certifies that:
* continuation of the program is essential to national security,
* there are no alternatives to the program providing acceptable
capability to meet the joint military requirement at less cost,
* the program's new estimates for program acquisition unit cost or
procurement unit cost are reasonable,
* the program is higher priority than other programs whose funding
must be reduced to accommodate the growth in cost of the program, and:
* the program's management structure is adequate to manage and control
program acquisition unit cost or procurement unit cost.
If the program is not terminated, the Secretary of Defense must (1)
restructure the program to address the root causes of the cost growth;
(2) rescind the most recent milestone or key decision point approval
and withdraw any associated certification; (3) require a new milestone
or key decision point approval before taking certain contracting
actions to ensure that the program can be restructured without
unnecessarily wasting resources; (4) report on all funding changes
made as a result of the growth in cost of the program, including
reductions made in funding for other programs to accommodate the cost
growth; and (5) conduct regular reviews of the program.
Trends in Nunn-McCurdy Breaches:
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 changes
in statute or presidential administration. The statutory changes added
a new benchmark against which to measure cost growth. During the last
two changes in presidential administration, DOD did not submit annual
comprehensive SARs, which, along with other factors, may have affected
when breaches were reported. The Air Force had a higher proportion of
total breaches compared to its proportion of total programs. Aircraft,
satellite, and helicopter programs constituted the largest number of
the breaches. Thirty-four different prime contractors were listed in
the SARs for the programs that breached. Of the 47 programs that
breached, 18 programs breached more than one time.
Nunn-McCurdy Breaches Increased after Changes in Statute or
Presidential Administration:
The number of Nunn-McCurdy breaches varied from 1997 to 2009, with
increases in some years coinciding with changes in statute or
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, as shown in table 1.
In 2005 SARs, 13 of the 17 breaches were measured against a program's
original baseline estimate, the benchmark for measuring cost growth
that was added by the amendment to Nunn-McCurdy.[Footnote 10] DOD
released its December 2005 SARs on April 7, 2006, and the changes to
Nunn-McCurdy were reflected in these SARs. As shown in table 1, the
number of breaches was also high in 2001 and 2009--the first years of
new presidential administrations. During both transitions, no annual
comprehensive SARs were submitted, which, along with other factors,
may have affected when breaches were reported.[Footnote 11] For
example, according to DOD, during the transition from one
administration to another in 2001, the cost of several programs
breached Nunn-McCurdy thresholds because of a change in management
philosophy, which included fully funding these programs to higher
independent cost estimates. A presidential transition also affected
cost reporting for 2008. According to DOD, cost data for the December
2008 SARs could not be updated for all programs because the fiscal
year 2011-2015 Future Years Defense Program was not complete, due to
the transition from one presidential administration to another.
Table 1: Nunn-McCurdy Breaches by Calendar Year, 1997-2009:
Year: 2009;
Number of breaches: 8;
Original baseline: 4;
Current baseline: 4;
Both current and original baseline: 4.
Year: 2008;
Number of breaches: 4;
Original baseline: 1;
Current baseline: 3;
Both current and original baseline: 2.
Year: 2007;
Number of breaches: 5;
Original baseline: 1;
Current baseline: 4;
Both current and original baseline: 1.
Year: 2006;
Number of breaches: 10;
Original baseline: 9;
Current baseline: 1;
Both current and original baseline: 7.
Year: 2005;
Number of breaches: 17;
Original baseline: 13;
Current baseline: 4;
Both current and original baseline: 2.
Year: 2004;
Number of breaches: 7.
Year: 2003;
Number of breaches: 2.
Year: 2002;
Number of breaches: 3.
Year: 2001;
Number of breaches: 11.
Year: 2000;
Number of breaches: 0.
Year: 1999;
Number of breaches: 3.
Year: 1998;
Number of breaches: 3.
Year: 1997;
Number of breaches: 1.
Source: GAO analysis of DOD data.
[End of table]
Since 1997, there have been 74 Nunn-McCurdy breaches involving 47
major defense acquisition programs. Thirty-nine were critical breaches
and 35 breaches were significant breaches. The larger number of
critical breaches in 2001, 2006, and 2009 were also likely due to the
statutory changes, instances where DOD did not submit a SAR, and other
factors, such as funding programs to higher independent cost estimates.
Figure 1: Critical and Significant Breaches by Calendar Year, 1997-
2009:
[Refer to PDF for image: stacked vertical bar graph]
Submission date: 1997;
Significant: 1;
Critical: 0.
Submission date: 1998;
Significant: 3;
Critical: 0.
Submission date: 1999;
Significant: 1;
Critical: 2.
Submission date: 2000;
Significant: 0;
Critical: 0.
Submission date: 2001;
Significant: 2;
Critical: 9.
Submission date: 2002;
Significant: 1;
Critical: 2.
Submission date: 2003;
Significant: 0;
Critical: 2.
Submission date: 2004;
Significant: 4;
Critical: 3.
Submission date: 2005;
Significant: 14;
Critical: 3.
Submission date: 2006;
Significant: 2;
Critical: 8.
Submission date: 2007;
Significant: 4;
Critical: 1.
Submission date: 2008;
Significant: 1;
Critical: 3.
Submission date: 2009;
Significant: 2;
Critical: 6.
Source: GAO analysis of DOD data.
No breaches were reported in 1997 and 2000.
Note: This figure uses the terms significant and critical to
categorize reported program cost growth. We note, however, that prior
to 2006, the statute did not use those terms to describe the cost
growth thresholds.
[End of figure]
Air Force Programs Constitute a Higher Proportion of Nunn-McCurdy
Breaches:
The Air Force had a higher proportion of total breaches compared to
its proportion of total programs, whereas the Navy had a smaller
proportion of breaches compared to its proportion of programs.
Specifically, out of 134 total major defense acquisition programs from
1997 to 2009, 36 (or 27 percent) are Air Force, 37 (or 28 percent) are
Army, 12 (or 9 percent) are DOD, and 49 (or 37 percent) are Navy
programs. Of the 74 breaches during the same time, 27 (or 36 percent)
are Air Force, 19 (or 26 percent) are Army, 11 (or 15 percent) are
DOD, and 17 (or 23 percent) are Navy programs.
Figure 2: Proportion of Nunn-McCurdy Breaches and Major Defense
Acquisition Programs by DOD Component, 1997-2009:
[Refer to PDF for image: vertical bar graph]
Component: Air Force;
Major defense acquisition programs: 27%;
Breaches: 36%.
Component: Army;
Major defense acquisition programs: 28%;
Breaches: 26%.
Component: DOD;
Major defense acquisition programs: 9%;
Breaches: 15%.
Component: Navy;
Major defense acquisition programs: 37%;
Breaches: 23%.
Source: GAO analysis of DOD data.
[End of figure]
Programs that breach the Nunn-McCurdy cost growth thresholds range
from unmanned aircraft to munitions. Aircraft, satellites, and
helicopters constitute the largest number of the 74 breaches. We could
not determine whether the number of breaches by program type was
proportional because DOD's Defense Acquisition Management Information
Retrieval system did not have information on the program type for all
134 programs from 1997-2009. Missile Defense Agency programs do not
report Nunn-McCurdy breaches. We recommended in 2010 that the Missile
Defense Agency establish cost baselines and report variances in those
baselines to Congress.[Footnote 14]
Table 2: Nunn-McCurdy Breaches by Program Type, 1997-2009:
Program type: Aircraft;
Number of breaches: 19.
Program type: Aircraft (Bomber);
Number of breaches: 2.
Program type: Aircraft (Fighter);
Number of breaches: 5.
Program type: Aircraft (Other);
Number of breaches: 4.
Program type: Aircraft (Transport);
Number of breaches: 5.
Program type: Aircraft (Unmanned);
Number of breaches: 3.
Program type: Helicopters;
Number of breaches: 13.
Program type: Satellites;
Number of breaches: 11.
Program type: Chemical demilitarization programs;
Number of breaches: 7.
Program type: Munitions;
Number of breaches: 5.
Program type: Command, control, communications and intelligence;
Number of breaches: 5.
Program type: Missiles;
Number of breaches: 4.
Program type: Ships;
Number of breaches: 2.
Program type: Submarines;
Number of breaches: 3.
Program type: Ground combat;
Number of breaches: 2.
Program type: Other[A];
Number of breaches: 2.
Program type: Transport vehicles;
Number of breaches: 1.
Source: GAO analysis of DOD data.
[A] Includes Land Warrior and Evolved Expendable Launch Vehicle
programs.
[End of table]
Establishing Prime Contractor Trends in Nunn-McCurdy Breaches Is
Difficult Based on the Information in SARs:
We reviewed SARs for programs with Nunn-McCurdy breaches and found 34
contractors involved in those programs. (See enclosure I for a list of
Nunn-McCurdy breaches by program and contractors). It is difficult to
track prime contractors and establish trends in Nunn-McCurdy breaches
based on the information in SARs for several reasons. For example,
some programs have multiple prime contractors and some contractors
have experienced mergers and acquisitions over the life of programs.
Only One Program That Has Breached Multiple Times Has Not Been
Recertified to Continue:
Of the 47 programs that breached, as shown in table 3, 18 programs
breached more than one time. Only one of the programs with multiple
breaches--the Armed Reconnaissance Helicopter--was not recertified
after a breach of the critical cost growth threshold. The Navy Area
Theater Ballistic Missile Defense was also not recertified and was
terminated because of poor performance and projected future cost and
schedule problems. Other programs that have experienced a breach--
including Advanced Seal Delivery System, Army Tactical Missile System-
BAT, Comanche Reconnaissance Attack Helicopter, Land Warrior, and the
VH-71 Presidential Helicopter Replacement--have also been terminated,
but it is unclear whether the breach precipitated the termination.
Table 3: Programs with Repeat Breaches, 1997-2009:
Program: Space Based Infrared System High;
Number of breaches: 4.
Program: Advanced Extremely High Frequency Satellite;
Number of breaches: 3.
Program: Advanced Threat Infrared Countermeasure/Common Missile
Warning System;
Number of breaches: 3.
Program: C-130 Avionics Modernization Program;
Number of breaches: 3.
Program: Chemical Demilitarization-Chemical Materials Agency;
Number of breaches: 3.
Program: F-35 Lightning II (previously Joint Strike Fighter);
Number of breaches: 3.
Program: Global Hawk;
Number of breaches: 3.
Program: Guided Multiple Launch Rocket System;
Number of breaches: 3.
Program: Joint Air-to-Surface Standoff Missile;
Number of breaches: 2.
Program: Armed Reconnaissance Helicopter;
Number of breaches: 2.
Program: B-1B Conventional Mission Upgrade Program;
Number of breaches: 2.
Program: Chemical Demilitarization-Chemical Materials Agency Newport;
Number of breaches: 2.
Program: Expeditionary Fighting Vehicle;
2.
Program: H-1 Upgrades;
Number of breaches: 2.
Program: Advanced Anti-Tank Weapon System - Medium (Javelin);
Number of breaches: 2.
Program: Joint Primary Aircraft Training System;
Number of breaches: 2.
Program: National Polar-orbiting Operational Environmental Satellite
System;
Number of breaches: 2.
Program: Virginia Class Submarine (SSN 774);
Number of breaches: 2.
Source: GAO analysis of DOD data.
[End of table]
Factors Responsible for Nunn-McCurdy Breaches:
Nunn-McCurdy breaches are often the result of multiple, interrelated
factors. Our analysis showed that the primary factors responsible for
the unit cost growth that led to Nunn-McCurdy breaches were
engineering and design issues, schedule issues, and quantity changes.
A large number of programs that breached also cited revised estimates,
requirements changes, and economic changes as factors that contributed
to the breach. DOD began conducting root cause analysis for some
programs that experienced a Nunn-McCurdy breach in 2009, which
provides more detail on the factors responsible for breaches than was
previously available.
Engineering and Design Issues Are the Most Cited Contributors to Nunn-
McCurdy Breaches:
Our analysis of DOD data and SARs showed that the primary factors
responsible for the unit cost growth that led to Nunn-McCurdy breaches
are engineering and design issues, schedule issues, and quantity
changes. Major defense acquisition programs that breached Nunn-McCurdy
cost growth thresholds often cited multiple, interrelated factors for
the breaches. For example, the Expeditionary Fighting Vehicle program
breached after the program was restructured to extend the system
design and development phase and enable time for the system to be
redesigned to meet reliability requirements. According to DOD SARs, a
large number of programs that breached also experienced the following:
* revised estimates due to changes in program assumptions;
* requirements changes, such as adding capabilities; and,
* economic changes, such as increased costs of airframe manufacturing,
labor, and materials or application of current inflation indices.
Figure 3: Factors Cited in SARs as being Responsible for Nunn-McCurdy
Breaches:
[Refer to PDF for image: vertical bar graph]
Factor responsible for breaches: Engineering/design issues;
Number of breaches citing this factor: 50.
Factor responsible for breaches: Schedule issues;
Number of breaches citing this factor: 44.
Factor responsible for breaches: Quantity changes;
Number of breaches citing this factor: 41.
Factor responsible for breaches: Revised estimates;
Number of breaches citing this factor: 38.
Factor responsible for breaches: Economic changes;
Number of breaches citing this factor: 35.
Factor responsible for breaches: Requirement changes;
Number of breaches citing this factor: 34.
Factor responsible for breaches: Support costs;
Number of breaches citing this factor: 23.
Factor responsible for breaches: Funding issues;
Number of breaches citing this factor: 21.
Factor responsible for breaches: Production issues;
Number of breaches citing this factor: 16.
Source: GAO analysis of DOD data.
[End of figure]
Cost increases resulting from engineering and design issues may
indicate that those programs started without adequate knowledge about
their requirements and the resources needed to fulfill them. For
example, we reported in 2003 that the Space Based Infrared System High
program was too immature to enter the system design and development
phase 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.[Footnote 15] The program has breached four times.
Many programs cited revised cost estimates as a factor behind
breaches, suggesting estimates were based on inaccurate assumptions.
Our previous work shows that without the ability to generate reliable
cost estimates, programs are at risk of experiencing cost overruns,
missed deadlines, and performance shortfalls. In 2008, we reported
that development costs for major acquisition programs are often
underestimated at program initiation--by 30 to 40 percent in some
cases--in large part because the estimates are based on limited
knowledge and optimistic assumptions about system requirements and
critical technologies.[Footnote 16] For example, initial development
cost estimates for the Army's Warfighter Information Network-Tactical
communications system were understated by at least $1.3 billion, or
nearly 160 percent as of July 2008, in part because the estimates
assumed that commercial off-the-shelf radio technology would be
available. This assumption proved to be wrong, and the program
breached in 2006. Similarly, DOD officials told us that the estimates
for the Armed Reconnaissance Helicopter were based on an assumption
that the program would be able to quickly ramp up production using a
helicopter frame built commercially by Bell Helicopter. However, when
the business base for the commercial helicopter did not materialize,
this key assumption changed, and the program was ultimately canceled.
In a 2009 presentation on Nunn-McCurdy breaches, DOD's Office of
Acquisition Resources and Analysis cited several factors as being
responsible for breaches.
Table 4: Factors for Nunn-McCurdy Breaches Cited by DOD:
Reason cited: Reductions in quantity;
Example(s) cited: Guided Multiple Launch Rocket System.
Reason cited: Change in requirements since baseline;
Example(s) cited: Global Hawk.
Reason cited: Development or production stretch-out;
Example(s) cited: F-22 Advanced Tactical Fighter, National Polar-
orbiting Operational Environmental Satellite System.
Reason cited: Technical or performance/reliability issues;
Example(s) cited: Armed Reconnaissance Helicopter, Expeditionary
Fighting Vehicle.
Reason cited: Inadequate baseline cost estimate;
Example(s) cited: Chemical Demilitarization, Space Based Infrared
System High.
Source: DOD.
[End of table]
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. For example, the Excalibur program's
unit costs increased by nearly 200 percent in 2010 as a result of
reducing quantities from 30,000 to 6,264. However, the overall cost of
the program decreased by 36 percent to $1.6 billion. While in the case
of Excalibur the Army reduced quantities based on capability needs, we
have previously reported that quantities are often reduced in response
to cost overruns on programs.[Footnote 17] Of the 41 programs in our
analysis that reported quantity changes as a contributor to unit cost
increases, 26 experienced quantity decreases.
As a result of the Weapon System Acquisition Reform Act of 2009, DOD
began conducting root cause analysis for programs that experienced a
Nunn-McCurdy breach of the critical cost growth threshold. This
analysis provides more detail on the factors responsible for breaches
than was previously available in SARs. SARs contain general categories
that help classify the reasons for cost growth and were the primary
mechanism for understanding the factors responsible for breaches. For
example, DOD's December 2009 SAR summary stated that the DDG-1000
program breached due to a quantity decrease from 10 to 3 ships and not
as a result of poor performance. However, the root cause analysis also
reported that the program also faced technical and fiscal challenges,
such as incorporating 10 new transformational technologies, 4 of which
were immature at program start. In addition, the Apache Block III
program cited procurement quantity increases as the primary cause of
its 2009 breach. The Army added 56 newly built aircraft to an existing
program that was remanufacturing and upgrading existing aircraft. The
program cites the higher unit cost of the new aircraft as the dominant
cause of the breach; however, the root cause analysis report pointed
out that cost estimates from the Office of the Director of Cost
Assessment and Program Evaluation indicated that the program would
have experienced a critical breach without the addition of the 56 new
build aircraft.
Changes to DOD Practices and Proposed Changes to Nunn-McCurdy Process:
DOD has instituted a process to provide earlier warning of potential
breaches and plans to propose changes to try to limit the effect of
breaches caused by quantity changes. Specifically, the Joint Staff has
implemented a Nunn-McCurdy trip wire process to evaluate the factors
that are contributing to cost growth so that programs can take
mitigating actions. Our analysis shows nearly 40 percent of Nunn-
McCurdy breaches occurred after a production decision had been made--
when a program has fewer options for restructuring. DOD also plans to
propose a legislative amendment to reduce several statutory
requirements added in 2009 for Nunn-McCurdy breaches when it
determines the breach was caused primarily by quantity changes that
were unrelated to poor performance. Tracking changes in research and
development costs, which are not sensitive to quantity changes, would
be one way DOD could evaluate program performance in this context.
DOD Is Taking Steps Intended to Provide Earlier Warning of Potential
Breaches and Plans to Propose Other Changes to the Nunn-McCurdy
Process:
DOD has instituted a process to provide earlier warning of potential
breaches. Specifically, the Joint Staff has implemented a Nunn-McCurdy
trip wire process, whereby some programs are reviewed when their
current cost estimate exceeds either 10 percent of the current
baseline or 25 percent of the original baseline. The process is
intended to evaluate the factors that are contributing to cost growth
so that programs can take mitigating actions. Officials stated that
while it is too early to determine if the process successfully
prevents critical breaches, they believe it has the potential to do
so. Our analysis supports the need to identify breaches earlier
because we found nearly 40 percent of Nunn-McCurdy breaches occurred
after a production decision had been made--when a program has fewer
options for restructuring.
Additionally, the Undersecretary of Defense for Acquisition,
Technology, and Logistics is currently drafting a proposed legislative
amendment to reduce several statutory requirements for Nunn-McCurdy
breaches of the critical cost growth threshold added in 2009, if DOD
determines the breach was caused primarily by quantity changes that
were unrelated to increases in unit cost. According to DOD officials,
Excalibur is an example of a program that would qualify for this
relief. The Excalibur program experienced a Nunn-McCurdy breach of the
critical cost growth threshold after the Army reduced quantities from
30,000 to 6,264. The quantity reductions were the result of Army
assessments of munitions usage and needs, rather than in response to
program-specific cost concerns. According to DOD officials, the
proposed legislation would not apply to programs like the DDG-1000, in
which quantities were decreased from 10 to 3 ships, in part in
response to concerns about its affordability. One method of measuring
cost growth that would not be sensitive to quantity changes is to
analyze changes in research and development costs. This might also
help to identify problem programs earlier in the acquisition process.
We examined research and development cost increases for major defense
acquisition programs in 2009 and found if the Nunn-McCurdy cost growth
thresholds were applied to only research and development costs, nine
programs that have not experienced a Nunn McCurdy breach would have
experienced a breach of the critical threshold and four programs would
have experienced a breach of the significant threshold.:
Table 5: Programs That Would Experience a Breach if Nunn-McCurdy Cost
Growth Thresholds Were Applied to Research and Development Costs:
Program: CH-53K - Heavy Lift Replacement;
Type of breach: Significant.
Program: Cooperative Engagement Capability;
Type of breach: Critical.
Program: CVN-68 Class/Carrier Replacement Program (CVN 77);
Type of breach: Critical.
Program: Joint Mine Resistant Ambush Protected;
Type of breach: Critical.
Program: Joint Standoff Weapon;
Type of breach: Critical.
Program: Joint Tactical Radio System Handheld, Manpack, and Small Form
Fit;
Type of breach: Critical.
Program: Joint Tactical Radio System Network Enterprise Domain;
Type of breach: Critical.
Program: LHA Replacement Amphibious Assault Ship;
Type of breach: Significant.
Program: Multifunctional Information Distribution System - Joint
Tactical Radio System;
Type of breach: Critical.
Program: Patriot Advanced Capability - 3;
Type of breach: Critical.
Program: Patriot/Medium Extended Air Defense System Combined Aggregate
Program Missile;
Type of breach: Significant.
Program: Stryker Family of Vehicles;
Type of breach: Significant.
Program: Warfighter Information Network-Tactical, Increment I;
Type of breach: Critical.
Source: GAO analysis of DOD data.
[End of table]
Agency Comments and Our Evaluation:
DOD provided technical comments, which we incorporated as appropriate.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 20 days from the date of this letter. At that time, we will send
copies of this letter to DOD and other interested congressional
committees. In addition, these documents will be available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you have any questions, please contact me at (202) 512-4841 or
sullivanm@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
letter. GAO staff members who made key contributions to this report
are listed in enclosure II.
Sincerely yours,
Signed by:
Michael J. Sullivan:
Director Acquisition and Sourcing Management:
Enclosures - 2:
[End of section]
Enclosure I: Programs That Experienced a Nunn-McCurdy Breach and Their
Contractors, 1997-2009:
This enclosure provides a list of the contractors that were listed in
Selected Acquisition Reports for programs that experienced a Nunn-
McCurdy breach.
Table 6: Programs That Experienced a Nunn-McCurdy Breach and Their
Contractors, 1997-2009:
Program: Advanced Anti-Tank Weapon System - Medium (Javelin);
Contractors: Texas Instruments/Martin Joint Venture, Raytheon/
Lockheed Martin Joint Venture.
Program: Advanced Extremely High Frequency Satellite;
Contractors: Lockheed Martin.
Program: Advanced Seal Delivery System;
Contractors: Northrop Grumman.
Program: Advanced Threat Infrared Countermeasures/Common Missile
Warning System;
Contractors: Lockheed Sanders Inc, BAE Systems.
Program: Apache Block III;
Contractors: McDonnell Douglas Helicopter, Longbow Limited Liability
Company.
Program: Armed Reconnaissance Helicopter;
Contractors: Bell Helicopter Textron.
Program: Army Tactical Missile System/BAT;
Contractors: Lockheed Martin Missiles, Northrop Grumman Corporation,
Vought Systems.
Program: B-1B Conventional Mission Upgrade Program;
Contractors: McDonnell Douglas/The Boeing Company.
Program: C-130 Avionics Modernization Program;
Contractors: The Boeing Company.
Program: C-130J Hercules;
Contractors: Lockheed Martin.
Program: C-5 Reliability Enhancement and Reengining Program;
Contractors: Lockheed Martin.
Program: CH-47F Improved Cargo Helicopter;
Contractors: Boeing Helicopters.
Program: Chemical Demilitarization-Assembled Chemical Weapons
Alternatives;
Contractors: Bechtel National Inc., Bechtel Parsons BG.
Program: Chemical Demilitarization-Chemical Materials Agency;
Contractors: Bechtel National Inc., Westinghouse, Washington Demil
Co., EG&G Defense Materials, Parsons Infra & Tech Group.
Program: Chemical Demilitarization-Chemical Materials Agency Newport;
Contractors: Parsons Infra & Tech Group.
Program: Chemical Demilitarization Legacy;
Contractors: Raytheon Engineers & Construction, Raytheon Demil
Company, Bechtel National, INC, EG&G Defense Materials.
Program: Comanche Reconnaissance Attack Helicopter;
Boeing Sikorsky, LHTEC.
Program: DDG 1000 Destroyer;
Contractors: BAE Systems Armament Systems Division, Raytheon
Integrated Defense Systems, Bath Iron Works, Northrop Grumman
Shipbuilding.
Program: E-2D Advanced Hawkeye;
Contractors: Northrop Grumman Corporation.
Program: Evolved Expendable Launch Vehicle - Atlas V, Delta IV;
Contractors: Lockheed Martin Corporation, McDonnell Douglas
Corporation.
Program: Expeditionary Fighting Vehicle;
Contractors: General Dynamics.
Program: F/A-18E/F Super Hornet;
Contractors: McDonnell Douglas, General Electric.
Program: F-22 Advanced Tactical Fighter;
Contractors: Lockheed Martin Aero Corporation, United Technologies
Corporation.
Program: F-35 Lightning II (previously Joint Strike Fighter);
Contractors: Lockheed Martin, Pratt and Whitney, General
Electric/Rolls-Royce.
Program: Family of Medium Tactical Vehicles;
Contractors: Stewart & Stevenson Services.
Program: Force XXI Battle Command Brigade and Below;
Contractors: DRS Tactical Systems, Northrop Grumman Space and Missile
Systems.
Program: Global Hawk;
Contractors: Northrop Grumman Corporation.
Program: Guided Multiple Launch Rocket System;
Contractors: Lockheed Martin Missiles and Fire Control - Dallas.
Program: H-1 Upgrades;
Contractors: Bell Helicopter Textron.
Program: Joint Air-to-Surface Standoff Missile;
Contractors: Lockheed Martin.
Program: Joint Primary Aircraft Training System;
Contractors: Raytheon Aircraft, Raytheon Aerospace.
Program: Joint Tactical Radio System Ground Mobile Radios;
Contractors: The Boeing Company.
Program: Land Warrior;
Contractors: General Dynamics.
Program: Longbow Apache;
Contractors: Boeing Company, Longbow Limited Liability Co., Lockheed
Martin Federal.
Program: LPD 17 Class Amphibious Transport Dock Ship;
Contractors: Avondale Alliance, Bath Iron Works.
Program: MH-60R Multi-Mission Helicopter;
Contractors: Lockheed Martin, Sikorsky Aircraft Corporation.
Program: MH-60S Fleet Combat Support Helicopter;
Contractors: Sikorsky Aircraft Company, Lockheed Martin Corporation.
Program: National Polar-orbiting Operational Environmental Satellite
System;
Contractors: Northrop Grumman Space Technology.
Program: Navstar GPS;
Contractors: Boeing North American.
Program: Navy Area Theater Ballistic Missile Defense;
Contractors: Coleman Research Corporation, Lockheed Martin GES,
Standard Missile Company, Raytheon Systems Corporation.
Program: Presidential Helicopter Replacement (VH-71);
Contractors: Lockheed Martin Systems Integration.
Program: Remote Minehunting System;
Contractors: Lockheed Martin.
Program: Space Based Infrared System High;
Contractors: Lockheed Martin Space Systems.
Program: V-22 Joint Services Advanced Vertical Lift Aircraft (Osprey);
Contractors: Allison Engine Co., Bell Boeing, Rolls Royce.
Program: Virginia Class Submarine (SSN 774);
Contractors: General Dynamics EB Corporation.
Program: Warfighter Information Network - Tactical;
Contractors: General Dynamics Government Systems.
Program: Wideband Global SATCOM;
Contractors: Boeing.
Source: GAO analysis of DOD data.
[End of table]
[End of section]
Enclosure II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Michael J. Sullivan, (202) 512-4841 or sullivanm@gao.gov.
Acknowledgments:
In addition to the contact named above, Ron Schwenn, Assistant
Director; Robert Bullock; Kristine Hassinger; Leigh Ann Nally; Ken
Patton; Morgan Delaney Ramaker; and Roxanna Sun made key contributions
to this report.
[End of section]
Footnotes:
[1] 10 U.S.C. § 2433. The statutory provision is known as Nunn-McCurdy
because it was first introduced by Senator Nunn and passed as a 1-year
provision as part of the Department of Defense Authorization Act,
1982. 127 Cong. Rec. 9760-63 (1981); Pub. L. No. 97-86, § 917. The
following year, Representative McCurdy introduced a permanent
provision based on Senator Nunn‘s provision, which was enacted as part
of the Department of Defense Authorization Act, 1983. 128 Cong. Rec.
18345-48 (1982); Pub. L. No. 97-252, § 1107.
[2] We considered an entry to be a duplicate if the program reported
the exact same breach over multiple Selected Acquisition Reports
(SAR). The most common duplicates were significant breaches, which
continue to be reported annually until a new acquisition program
baseline is approved.
[3] 10 U.S.C. § 2432.
[4] The Nunn-McCurdy statute did not use the terms ’significant“ or
’critical“ to describe the cost growth thresholds until 2006, when the
statute was amended by section 802 of the National Defense
Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163.
[5] Program acquisition unit cost is the total cost of development,
procurement, acquisition operations and maintenance, and military
construction divided by the number of units procured. Procurement unit
cost is the total procurement cost divided by the number of units to
be procured.
[6] 10 U.S.C. § 2435(d). The original baseline estimate serves as the
current baseline estimate until a revised acquisition program baseline
is prepared. Department of Defense Instruction 5000.02, Operation of
the Defense Acquisition System Enclosure 4, Table 6 (Dec. 8, 2008).
(Hereinafter cited as DODI 5000.02 (Dec. 8, 2008)).
[7] DOD can only revise the original baseline estimate if the program
breaches the critical cost growth threshold. 10 U.S.C. § 2435(d).
[8] The 2008 revision to DOD‘s acquisition policy limits the
circumstances in which the current baseline estimate may be revised
to: (1) milestone decisions and full rate production, (2) as a result
of a major program restructure that is fully funded and approved, or
(3) as a result of a program deviation if primarily the result of an
external cause beyond the control of the program manager. DODI
5000.02, Enclosure 4, Table 6 (Dec. 8, 2008).
[9] Weapon Systems Acquisition Reform Act of 2009, Pub. L. No. 111-23,
§ 206 (codified at 10 U.S.C. § 2433a(b)).
[10] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163, § 802.
[11] DOD is required to submit SARs to Congress at the end of each
fiscal year quarter on current major defense acquisition programs,
although certain exceptions apply. SARs for the first quarter of a
fiscal year are known as comprehensive annual SARs. Each comprehensive
annual SAR is required to be submitted within 60 days after the date
on which the President transmits the budget to Congress for the
following fiscal year. 10 U.S.C. § 2432(b)(1), (c)(4), (f). While DOD
is required to report breaches in quarterly SAR submissions, most
breaches are typically reported in comprehensive annual SARs.
[12] If a program and a subprogram or more than one subprogram
breached in the same SAR, we counted that as one breach.
[13] If a program reported a breach of both the significant and
critical cost growth thresholds in the same SAR, we counted only the
critical breach. If a program reported a breach of the significant
cost growth threshold and subsequently reported a breach of the
critical threshold before the program was rebaselined, we counted the
two breaches separately.
[14] GAO, Defense Acquisitions: Missile Defense Transition Provides
Opportunity to Strengthen Acquisition Approach, [hyperlink,
http://www.gao.gov/products/GAO-10-311] (Washington, D.C.: Feb. 25,
2010).
[15] GAO, Defense Acquisitions: Despite Restructuring, SBIRS High
Program Remains at Risk of Cost and Schedule Overruns, [hyperlink,
http://www.gao.gov/products/GAO-04-48] (Washington, D.C., Oct. 31,
2003).
[16] GAO, Defense Acquisitions: A Knowledge-Based Funding Approach
Could Improve Major Weapon System Program Outcomes, [hyperlink,
http://www.gao.gov/products/GAO-08-619] (Washington, D.C., July 2,
2008).
[17] [hyperlink, http://www.gao.gov/products/GAO-08-619].
[18] For this analysis, we considered an increase in research and
development cost of at least 30 percent over the original estimate to
be a breach of the significant cost growth threshold and an increase
of at least 50 percent over the original estimate to be a breach of
the critical cost growth threshold.
[End of section]
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