Defense Acquisitions:

DOD's Practices and Processes for Multiyear Procurement Should Be Improved

GAO-08-298: Published: Feb 7, 2008. Publicly Released: Feb 7, 2008.

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DOD spends $10 billion annually on multiyear procurement (MYP) contracts for weapons systems. MYPs may save money through more efficient relationships with suppliers and producers, but may also suffer losses if cancelled and can limit future budget flexibility. Recently, Congress has been concerned about DOD's management of the process and savings realized by MYPs. GAO was asked to evaluate DOD's review process for MYP candidates; examine MYP program outcomes; identify the impact of changes to MYP savings threshold guidance, and determine how much DOD validates MYP performance. To do this, GAO reviewed statutes and other guidance, held discussions with relevant officials, examined DOD budget justifications and contracts, and conducted limited case studies.

DOD's process for justifying multiyear programs leaves questions about the appropriateness of some approved MYPs and the cost effectiveness of investments made for the risks assumed, as indicated by recent submissions for the F-22A and V-22. Although the law has clear requirements for stable, low risk programs with realistic cost and savings estimates, lack of guidance and a rigorous process is not achieving this. It is difficult to precisely determine the impact of multiyear contracting on procurement costs. GAO studies of three recent MYPs identified unit cost growth ranging from 10 to 30 percent compared to original estimates, due to changes in labor and material costs, requirements and funding, and other factors. In some cases, actual MYP costs were higher than estimates for annual contracts. Although annual contracts also have unit cost growth, it is arguably more problematic for MYP's because of the up-front investments and the government's exposure to risk over multiple years. MYP savings were on average higher before changes in law called for "substantial savings" rather than a specific quantitative standard. Other factors--lower quantities of modern systems procured, stricter cancellation liability allowances, and contraction in the defense industrial base--may have also impacted savings by lessening opportunities for more efficient purchases, a key attribute of MYPs. DOD does not track multiyear results against original expectations and makes little effort to validate if actual savings were achieved. GAO's case studies indicate that evaluating actual MYP results provides valuable information on the veracity of original estimates in the justification packages, the impacts on costs and risks from internal and external events, and lessons learned that can be used to improve future multiyear candidates and savings opportunities.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. An August 17, 2011 memo from the Director of Defense Procurement and Acquisition Policy (through the DOD IG) discusses a series of actions taken by the department since 2008 to centrally obtain, analyze, and document data on multiyear contracts from the military departments. This information helped OSD document historical multiyear contract information, outcomes, and after-action assessments. DOD also instituted a peer review process for all contracts with an estimated value of $1 billion or more. This would cover most multiyear contracts. The peer review process involves cross-departmental teams reviewing contracts and multiyear candidates at several stages of contracting to ensure compliance with policy and share lessons learned. One of the primary goals we had in mind when recommending a central database was to enable DOD to capture and share lessons learned that could improve overall quality of decision making. We agree with the Department that these actions substantially meet the intent of our recommendation.

    Recommendation: To improve the outcomes of the multiyear justification reviews of major DOD weapon systems, the Secretary of Defense should direct appropriate offices within the Under Secretary of Defense (USD) (Comptroller) and USD (Acquisition, Technology & Logistics) to implement a central database for maintaining historical records and for effectively monitoring and tracking major DOD weapon system multiyear procurements, to include documenting the specific decisions made by stakeholders and their rationales for decisions.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD partially concurred with this recommendation, stating that cost and savings are reviewed during the proposal stage and after contract negotiations, and that the CAIG can perform independent cost assessments on selected programs. DOD agreed to consider whether the benefits of requiring 3rd party validation of cost and savings data for MYP candidates warrants the associated delays and expense of such a validation. An August 17, 2011 memo from the Director of Defense Procurement and Acquisition Policy (through the DOD IG) discusses a series of actions taken by the department since 2008 and states that current hiring initiatives, improved continuing education, and a new pricing tool achieves the objective and intent of our recommendation. Specifically, the Defense Contract Management Agency has hired 300 pricing analysts to assist contracting officers during negotiations. This effort should result in a much expanded, well-trained workforce with the competence and tools to accurately estimate and compare multiyear procurement and annual contract costs. In addition, the Defense Acquisition University has developed new curriculum for acquisition personnel that provides more rigorous training and certification for analyzing contract costs and price analyses. Also, a new cash-flow analysis tool is available for all to use to better and more consistently quantify internal rate of return and net present value, two key measures for evaluating and justifying multiyear packages. We agree that these actions collectively satisfy the intent and desired outcome of our recommendation.

    Recommendation: To improve the outcomes of the multiyear justification reviews of major DOD weapon systems, the Secretary of Defense should direct appropriate offices within the Under Secretary of Defense (USD) (Comptroller) and USD (Acquisition, Technology & Logistics) to establish a process for third party validation of the costs and savings data submitted for such candidate programs.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. An August 17, 2011 memo from the Director of Defense Procurement and Acquisition Policy (through the DOD IG) discusses a series of actions taken by the department since 2008 and states that expanded guidance on multiyear procurement is expected to be issued. In August 2012, the Director of Defense Procurement and Acquisition Policy released a draft version of the guidance that addresses our recommendation. This guidance amplifies existing multiyear guidance and provides clarification regarding many of the issues associated with the use of multiyear procurement contracts.

    Recommendation: To improve the outcomes of the multiyear justification reviews of major Department of Defense (DOD) weapon systems, the Secretary of Defense should direct appropriate offices within the Under Secretary of Defense (USD) (Comptroller) and USD (Acquisition, Technology & Logistics) to improve and expand guidance provided to military services to better define multiyear decision criteria for major DOD weapon systems and to facilitate more consistent, objective, and knowledge-based evaluations of these multiyear candidates within DOD.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD partially concurred with this recommendation in commenting on our draft report, acknowledging that after action assessments may be of value for certain programs, but questioning the timing and ability to do so on all programs. However, in DOD's 60-day response letter to our final report, the Department changed its position to fully concur and stated that they would implement an after-action assessment process on multiyear contracts. An August 17, 2011 memo from the Director of Defense Procurement and Acquisition Policy and follow up memo on August 7, 2012 discuss a series of actions taken by the department since 2008 that satisfactorily meets the intent of our recommendation. Relevant actions included (1) collecting and analyzing multiyear contract data from the military departments; (2) establishing a lessons learned data base capturing best practices; and (3) implementing a peer review process. Peer review involves cross-departmental teams reviewing contracts at various stages of completion to ensure consistent application of policy and regulations and to share lessons learned and best practices across the Department. Furthermore, DOD policy now requires post-audits by the Defense Contract Management Agency of completed multiyear contracts and new proposal reviews by the Cost Assessment and Program Evaluation office. Collectively, these actions meet the intent of our recommendation. From several sources and perspectives, the Department is gathering and applying lessons learned on prior multiyear programs.

    Recommendation: To provide lessons learned for informing and improving future major DOD weapon system multiyear candidate programs and to ensure DOD is earning a sufficient return on its investments in multiyear contracts for major DOD weapon systems, the Secretary of Defense should direct that the responsible military service, in conjunction with appropriate elements within OSD, conduct after-action assessments at the conclusion of all multiyear contracts used to procure major DOD weapon systems to determine their effectiveness in achieving predicted benefits while managing associated risks. These assessments should identify major deviations, if any, between the unit costs predicted in the multiyear justification package and the unit costs actually incurred. The assessments should also substantiate--to the extent practicable--savings achieved and identify reasons and causes contributing to overall performance results and attempt to isolate those issues peculiar to the multiyear contract from those that would likely have also affected annual contracts if a multiyear strategy had not been employed. Internally, DOD should use the results of these assessments to provide lessons learned to both industry and the government that can help inform and lead to better and more supportable decisions on future multiyear candidate programs.

    Agency Affected: Department of Defense

 

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