Preliminary Observations on DOD Estimates of Contract Termination Liability

What GAO Found

In its review of guidance and practices related to contract termination liability estimates, the Department of Defense (DOD) found that weapons programs generally received estimates of contract termination liability from contractors;, although there is no comprehensive guidance on how or when programs should require or consider these estimates. DOD plans to include additional language to help ensure that program managers are aware of the need to consider termination liability before contract award and during the life of a contract in its next update of its acquisition management guidance.

Based on ongoing work, GAO has observed that programs are generally receiving estimates of termination liability from the contractors through Contract Funds Status Reports (CFSR), provided to the government on a quarterly basis. However, DOD's ability to predict actual termination costs with these estimates appears limited.

Why GAO Did This Study

This report responds to the National Defense Authorization Act for Fiscal Year 2013. Section 812 of that Act mandates that GAO report to the congressional defense committees on the extent to which DOD is considering potential termination liability as a factor in entering into and terminating contracts. The Act also mandated that DOD review relevant acquisition guidance and take appropriate actions to ensure that program managers for major defense acquisition programs are preparing estimates of potential contract termination liability. This is the first of two reports GAO plans to issue in this area. The second addresses program cancellations and will be issued in early 2014. To meet GAO's requirement under Section 812, this report (1) describes the results of DOD's assessment, and (2) presents preliminary observations on termination liability estimates from GAO's ongoing work. To conduct this work, GAO reviewed DOD's assessment, in which DOD reviewed relevant acquisition guidance and collected information on a sample of six programs. GAO also interviewed DOD officials responsible for conducting the assessment. In addition, GAO leveraged ongoing work looking at weapons systems and program cancellations to further assess DOD efforts to consider potential termination liability.