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Public Contract Law Journal

Public Contract Law Journal Vol. 49, No. 4

How Additions to the Nunn-McCurdy Act Can Transform It from a Mere Reporting Requirement to an Effective Cost Control Mechanism

Benjamin Phillips


  • Provides an overview of the Nunn-McCurdy Act and its history and major changes
  • Discusses breaches of the Nunn-McCurdy Act by Department of Defense programs
  • Suggests amending the Nunn-McCurdy Act to add language to subject programs with three breaches of the Act to congressional review
  • Suggests providing Congress with the option to assess a penalty on appropriations to the Department of Defense for the following year based on the number of programs that experience multiple breaches
How Additions to the Nunn-McCurdy Act Can Transform It from a Mere Reporting Requirement to an Effective Cost Control Mechanism
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The Nunn-McCurdy Act, first introduced in 1982 and then made permanent law in the National Defense Authorization Act for Fiscal Year 1983, was established to provide visibility into the cost overruns associated with defense acquisition programs. The Nunn-McCurdy Act has different requirements for defense acquisition programs that breach certain cost growth thresholds, with the most significant breach requiring termination of the program unless certified by the Secretary of Defense. Given this, the Act essentially requires the Department of Defense to report programs that breach certain cost thresholds to Congress but does nothing to actually prevent the cost overruns from happening again. This Note suggests amending the Nunn-McCurdy Act to add language that makes a program that has experienced three breaches subject to Congressional review, eliminating the possibility for the Secretary of Defense to simply certify the program again. Additionally, this Note suggests providing Congress with the option to assess a penalty on the Department of Defense’s appropriations for the following fiscal year relative to the number of programs that experience multiple breaches. Finally, this Note suggests providing various termination methods that seek to receive some return on investment before a program is terminated completely.

I. Introduction

When it comes to military spending, no nation on the planet comes close to matching the expenditures of the United States. In 2015, world military spending totaled over $1.6 trillion, of which the U.S. accounted for thirty-seven percent. In fiscal year 2018, the United States spent more on national defense than China, Russia, Saudi Arabia, India, France, the United Kingdom, and Germany combined, $649 billion to their combined $609 billion. “Military spending is the second-largest item in the [U.S.] federal budget after Social Security.” According to the Congressional Budget Office, about one-sixth of federal spending goes to national defense.

Given the significant sums of money the United States puts into the military, Congress enacted a number of statutes that aim to monitor and limit the amount of defense spending. One of these statutory mechanisms is 10 U.S.C. § 2433, also known as the Nunn-McCurdy Act (the Act). In its current form, the Nunn-McCurdy Act requires a defense program that experiences a breach of its critical cost growth threshold to be terminated unless certified by the Secretary of Defense. The Act originated from a serious concern within Congress “about the continued escalation in the unit costs of some of our major defense systems” at “great cost to the taxpayer.” While this provision seems like the perfect mechanism to control cost overruns and waste in defense program spending, the Nunn-McCurdy Act could do more to reduce the occurrence of such breaches.

The Nunn-McCurdy Act should be amended to incorporate language that limits how many times the Secretary of Defense can certify a program that has experienced multiple breaches before that program becomes subject to congressional review. When coupled with some sort of penalty that affects the Department of Defense (DoD or Department)’s appropriations for the following fiscal year, the Department likely would enhance its control of program cost growth. Additionally, the Act should require that termination be preceded by statistical analysis that compares methods of termination and the cost/ value associated with each method. In other words, a program should not be terminated immediately after the Secretary of Defense or Congress decides not to certify it but should instead be terminated following a determination of what method provides the most value for the Department’s expenditures.

This Note begins by providing an overview of the Nunn-McCurdy Act and explores the Act’s history from its inception in 1981 through major changes Congress made to the Act in the National Defense Authorization Act of 2006 and Weapons System Acquisition Reform Act of 2009. Next, the Note explores trends in the occurrences of Nunn-McCurdy breaches by looking at what events correlate with an increase in breaches and what type of acquisitions most often experience a breach. This section highlights the VH-71 program as an example of how poor acquisition practices often result in a Nunn-McCurdy breach. Finally, this Note concludes by suggesting language that should be added to the Nunn-McCurdy Act to transform it from a mere reporting requirement to an effective cost control mechanism.

II. The Beginnings of the Nunn-McCurdy Act & its Evolution through Amendments

From concept to deployment, a defense acquiansition goes through a threestep process: (1) “identifying requirements;” (2) “allocating resources and budgeting;” and (3) “developing and/ or buying the item.” The third step “uses ‘milestones’ to oversee and manage acquisition programs,” with each milestone requiring that a “program must meet specific statutory and regulatory the acquisition process.” The phase from Milestone A to Milestone B can be characterized as technology maturation and risk reduction; the phase from Milestone B to Milestone C as engineering and manufacturing development; and the post–Milestone C phase as production and deployment.

First approved by Congress in 1981, the Nunn-McCurdy Act was originally a mechanism to track the unit cost growth of major defense acquisition programs (MDAPs) by requiring reports to Congress when unit costs grow beyond certain percentage thresholds over a prescribed baseline. Designed as a tool for Congress to hold the DoD accountable for a pattern of cost overruns in MDAPS, the Act sought to provide Congress “greater visibility into [MDAPs’] cost growth and to encourage [the DoD] to manage and control cost growth.” This section discusses what procurement problems Congress felt required the original Nunn-McCurdy Act and subsequent changes Congress made to the Act to give it more force.

A. The Nunn-McCurdy Act Was Originally a Way for Congress to Have Greater Visibility into Major Defense Acquisition Programs and to Encourage the Department of Defense to Better Manage Cost Growth.

At the beginning of the Reagan administration, a number of high-profile DoD programs experienced substantial cost overruns. In response to “public concern over escalating cost growth,” Senator Sam Nunn and Representative David McCurdy led the charge for what would become the Nunn-McCurdy Act. According to Representative McCurdy, years of witnessing “some startling increases in the cost of procuring many of our needed weapons systems” motivated the “creation of a new management approach which results in the taxpayer receiving the ‘biggest bang for his or her bucks.’”

In 1981, the House Armed Services Committee Special Panel on Defense Procurement Procedures held a series of hearings on the cost growth associated with MDAPs. According to then-chairman Representative McCurdy, the goal of the panel was to “identify and recommend a method which will allow the Congress to more effectively review and evaluate cost categories for [MDAPs].” Representative McCurdy believed this was a two-step process: first, “develop an unambiguous and concise method of presenting procurement cost data for weapon systems to help pinpoint major categories of cost escalation,” and second, apply “oversight review procedures to improve the overall efficiency of the procurement process while cutting out those unsupportable and unnecessary costs.”

That same year, Senator Nunn proposed an amendment to the Department of Defense Authorization Act of 1982 that would require the DoD to notify Congress when the cost of MDAPs exceeded certain thresholds. The specific purpose of the amendment was to regulate the ever-increasing costs of MDAPs. Senator Nunn felt it was important to ensure that the DoD’s spending was part of a “a coherent national strategy.” Noting that the “unit costs of [MDAPs were] increasing at rates far beyond the rate of inflation, adding billions to the budget just to buy the same quantities of weapons,” Senator Nunn believed the amendment would hold the DoD publicly accountable for these spending increases Although the amendment initially faced opposition from the chairman of the Senate Armed Services Committee (the Committee), Senator John Tower, it ultimately passed by a unanimous vote.

Overall, the Senate Armed Services Committee remained concerned “about the continued escalation in the unit costs of some of [the MDAPs],” and determined that both Congress and the DoD needed to “identify at an early stage [MDAPs] experiencing cost growth problems.” The Committee feared that if such cost growth problems persisted, public support for continued strengthening and modernization of U.S, military forces with new weapon systems would quickly erode. In response, the Committee recommended making the cost tracking mechanism permanent law. Following minor adjustments to the system based on the experience with the initial round of reports and the DoD recommendations, the cost reporting mechanism became permanent law in 1983.

B. Amendments in 2006 and 2009 Enhanced the Reporting Required by the Nunn-McCurdy Act and Implemented a Termination Requirement for Programs That Experience a Critical Cost Breach.

A major amendment to the Act came in 2005, as Congress feared that the DoD was ignoring regulations in order to rapidly advance MDAPs toward the System Development and Demonstration phase, which involved increased funding. Specifically, the Committee found that such behavior had become systematic within the DoD. Thus, in the National Defense Authorization Act of 2006, Congress made four major changes to the Nunn-McCurdy Act, including the addition of a “requirement to measure cost growth against an original baseline.”

The 2005 amendment to the Nunn-McCurdy Act proposed by the Senate had four goals. First, the amendment sought to add the term “original Baseline Estimate” to the statute and to restrict modifications to the original estimate. Second, the Senate’s proposed amendment looked to add the terms “significant cost growth” and “critical cost growth” Third, the proposed amendment defined significant cost growth and critical cost growth in relation to a program’s current baseline estimate and original baseline estimate. Finally, the proposal wanted to make additional analysis and explanation a requirement for MDAPs that experience a critical Nunn-McCurdy breach. These changes stemmed from a belief that the Secretary of Defense and the secretaries of the military departments were circumventing the Nunn-Mc-Curdy Act’s reporting requirements by re–baselining programs. Thus, the amendment allowed re–baselining only when a program experienced a cost growth that exceeded the original baseline estimate of either the program acquisition unit cost (PAUC) or the procurement unit cost (PUC) by twenty-five percent.

The goal of the 2005 amendments was to “tighten requirements for flagging programs that are experiencing problematic cost growth and ensure more rigorous review and analysis of these programs.” The Committee believed that the changes would lead DoD to establish realistic cost estimates for MDAPs, and to “more aggressively manage MDAPs to avoid undesirable cost growth on these programs.” Ultimately, Congress enacted these changes to the Nunn-McCurdy Act to “ensure that the Department procures technologically viable and economically responsible systems designed to meet the military’s needs in the twenty-first century while carefully balancing current and desired capability, available economic resources, and current and future needs for military presence.”

A further change to the Nunn-McCurdy Act came a few years later in the Weapon Systems Acquisition Reform Act of 2009, when Congress added the requirement that critical cost breaches result in program termination unless the Secretary of Defense certifies the program in writing to Congress. This change was the result of a consensus that believed a successful defense program should start “with sound systems engineering, cost-estimating, and developmental testing early in the program cycle.” Evidently, getting things right from the start was seen as the best way for the DoD to dispense of costly technology and integration risk from programs before production decisions needed to be made. When introducing the Act and explaining the rationale behind the need to reform the defense acquisition system, Senator John McCain stated,

We have learned this lesson the hard way — at great cost to the taxpayer. Typically, major weapons have been procured with insufficient systems engineering knowledge about critical technologies. But, with those weapons programs having, by a certain point, acquired often overwhelming political momentum, Nunn-McCurdy, basically only a reporting requirement, has done very little to bring costs associated with those originally underappreciated risks under control. We now know that when a program is predictable, that is, when decision milestones are being met; estimated costs are actual costs; and performance to contract specifications and key performance parameters are achieved, the acquisition process can be relied on as providing the joint warfighter with optimal capability at the most reasonable cost to the taxpayer.

Senator McCain noted the bill focused on starting programs right, and he believed the bill accomplished this by “emphasizing systems engineering; more effective upfront planning and management of technology risk; and growing the acquisition workforce to meet program objectives.” Senator McCain also highlighted a new requirement that post Milestone-B programs with significant cost growth “either be terminated or enter the new defense acquisition system, which the DoD recently and fundamentally restructured to help it manage technology and integration risk.” With this addition, Senator McCain hoped to “transform Nunn-McCurdy from a mere reporting requirement into a tool that can help the DoD manage out-of-control cost growth.”

C. How the Nunn-McCurdy Act Operates Today

The Nunn-McCurdy Act largely accomplished its original goals; by putting the DoD’s constant cost overruns in the public eye, the Department was forced to better manage cost growth. Aside from the Nunn-McCurdy breach criteria, there are no standard criteria exists for assessing program stability. The two criteria provided in the statute are the significant cost growth threshold and the critical cost growth threshold. A significant breach (i.e. exceeding the significant cost growth threshold) occurs when the PAUC or the PUC increases at least fifteen percent over the current baseline estimate or at least thirty percent over the original baseline estimate. A critical breach (i.e. exceeding the critical cost growth threshold) occurs when the PAUC or PUC increases at least twenty-five percent over the current baseline estimate or at least fifty percent over the original baseline estimate. The PAUC and PUC serve different functions with respect to cost measurements.

In addition, the Nunn-McCurdy Act provides that “[t]he term ‘Baseline Estimate’, with respect to a unit cost report that is submitted under this section … means the cost estimate included in the baseline description for the program or subprogram under section 2435 of [Title 10].” Section 2435 of Title 10 defines the original baseline estimate as the baseline description established with respect to the program prepared “before the program or subprogram enters system development and demonstration, or at program or subprogram initiation, whichever occurs later, without adjustment or revision.” An adjustment or revision of the original baseline estimate occurs only if the program experiences a critical Nunn-McCurdy breach. A current baseline estimate is the estimate included in the most recently revised Acquisition Program Baseline. “If the original baseline estimate has never been revised, the original baseline estimate is also the current baseline estimate.”

A program that experiences a critical cost breach must be certified by the Secretary of Defense in order to continue. The Nunn-McCurdy Act provides five valid reasons for certification of a program following a critical breach: (1) the continuation of the program is essential to national security; (2) a lack of alternatives to the program providing acceptable capability means the requirements currently cannot be met at less cost; (3) the new estimates of the program have been deemed reasonable by the Director of Cost Assessment and Program Evaluation; (4) the program is higher priority than other programs whose funding is subject to reductions in order to accommodate the growth in cost of the program; and (5) the program’s management structure is adequate to manage and control program costs.

For certified programs, the Nunn-McCurdy Act provides that the Secretary of Defense must: (1) restructure the program in a way that addresses the causes of the Nunn-McCurdy breach and ensures the program has adequate management; (2) rescind the previous milestone and any associated certification; (3) require new milestone approval before entering into a new contract, exercising an option under the current contract, or extending the scope of an existing contract under the program; (4) provide a report describing all funding changes made to accommodate the program’s cost growth; and (5) perform systematic reviews of the program. The goal of requiring any program certified by the Secretary of Defense to go back through major milestone review is to “help ensure that programs with significant cost problems are not allowed to continue without a sound business case.”

If not certified by the Secretary of Defense, the ensuing termination of the program that follows is a termination for convenience. The termination clauses found in Federal Acquisition Regulation (FAR) part 52 state that the government may terminate performance of work under this contract in whole or in part if the Contracting Officer determines that a termination is in the government’s interest. FAR 2.101 provides that termination for convenience “means the exercise of the [g]overnment’s right to completely or partially terminate performance of work under a contract when it is in the [g]overnment’s interest.” Given that the Nunn-McCurdy Act requires termination when a program experiences cost overruns and it becomes the government’s financial interest to stop the acquisition, terminations under the Nunn-McCurdy act are terminations for convenience.

III. Trends in Nunn-McCurdy Breaches

When examining the data on Nunn-McCurdy breaches made available by the Government Accountability Office (GAO) for the period from 1997 to 2015, certain trends emerge as to when the majority of breaches occur. Although policy changes play a key role in the occurrences of Nunn-McCurdy breaches, sometimes the cause of a breach is as simple as the use of poor acquisition practices. This section first explores significant trends in occurrences of Nunn-McCurdy breaches, then shifts to examining the VH-71 Presidential Helicopter Program to highlight how poor acquisition practices can result in a Nunn-McCurdy breach and failed acquisition program.

A. According to the Government Accountability Office, Nunn-McCurdy Breaches Most Often Occur When There Is a Change in the Statue’s Requirements or Presidential Administration.

According to the GAO, between 1997 and 2015 there were ninety-four Nunn-McCurdy breaches, with “a larger number of breaches in 2001, 2005, 2006, 2009, and 2009, which correlate with new statutory requirements or changes [in] presidential administration.” For example, eleven breaches occurred in 2001 following the transition from the Clinton administration to the Bush administration, and eight breaches occurred in 2009 following the transition from the Bush administration to the Obama administration. As for changes in statutory requirements, seventeen breaches occurred in 2005 and ten breaches occurred in 2006, the same time period when Congress added the terms original baseline estimate, significant cost growth, and critical cost growth to the statute. Of the seventy-four Nunn-McCurdy breaches that occurred between 1997 and 2009, thirty-four were critical breaches and forty were significant breaches; of the thirty-seven Nunn-McCurdy breaches that occurred between 2007 and 2015, twenty-four were critical breaches and thirteen were significant breaches.

Specific examples of breaches in this period include the following. In 2003, the DoD started seventy-seven defense acquisition programs, of which forty- one percent experienced a twenty-five percent increase in their PAUC. Similarly in 2007, the number of defense acquisition programs increased to ninety-five, of which forty-four percent experienced a twenty-five percent increase in PAUC growth. A year later in 2008, the DoD had ninety-six defense acquisition programs in its portfolio, of which forty-two percent experienced a twenty-five percent increase in PAUC growth.

Among these programs, “aircraft, satellite, and helicopter programs have experienced the largest number of breaches.” Between 1997 and 2009, nineteen aircraft programs, thirteen helicopter programs, and eleven satellite programs encountered Nunn-McCurdy breaches. Notable defense acquisition programs that experienced critical Nunn-McCurdy breaches include the VH-71 Presidential Helicopter Replacement Program, the Joint Strike Fighter, the V-22 Joint Services Advanced Vertical Lift Aircraft, and the Space Based Infrared Surveillance System. Of the programs that experienced breaches between 1997 and 2009, eighteen involved Lockheed Martin, twelve involved Boeing/McDonnell Douglas, and seven involved Northrop Grumman.

Generally, when a program experiences multiple Nunn-McCurdy breaches it will be certified to continue. For example, forty-seven programs experienced a breach between 1997 and 2009. Of that forty-seven, eighteen programs experienced more than one Nunn-McCurdy breach, and only one of those eighteen was not certified to continue. Of the eighteen programs that were certified following a Nunn-McCurdy breach, ten experienced two breaches, seven experienced three breaches, and one program experienced four breaches.

Nunn-McCurdy breaches are “often the result of multiple, interrelated factors,” and a significant number of breached programs were certified and later breached again. The most cited causes of growth include engineering and design issues, schedule issues, and quantity changes, followed closely by revised estimates, economic changes, and requirement changes. For example, between 1997 and 2009, engineering and design issues caused fifty Nunn-McCurdy breaches. The prevalence of cost increases from engineering and design issues “may indicate that those programs started without adequate knowledge about their requirements and the resources needed to fulfill them.” Although historically most cost growth occurs during the engineering and manufacturing development phase (Milestone B), from 2007 to 2015, more than half of the Nunn-McCurdy breaches occurred in the production and deployment phase.

B. How Poor Acquisition Practices Can Result in a Nunn-McCurdy Breach: A Look into the Failed VH-71 Presidential Helicopter Program

Nunn-McCurdy Act breaches can also stem from poor acquisition practices, as seen in the case of the VH-71 Presidential Helicopter Program. The replacement program for the existing fleet of presidential helicopters first began in March 1998 when the Marine squadron responsible for flying Marine One submitted a Fleet Operational Needs document for new presidential helicopters. “The program, initially designated VXX, was managed by the Naval Air Systems Command (NAVAIR)… .” NAVAIR estimated an initial operational capability for FY2009, but the plans changed following the September 11, 2001 terrorist attacks. In response to a White House memo requesting that the helicopter be made available earlier, “the Navy developed an accelerated program plan to develop and initially field a new helicopter by the end of 2008,” as it was re–designated the VH-71 program This project acceleration involved the use of poor acquisition practices, which ultimately resulted in the termination of the VH-71 program.

First, the VH-71 program started with “a faulty business case,” and NAVAIR did not “perform appropriate systems engineering analysis to gain knowledge at the right times,” thereby failing to “make necessary trade-offs between resources and requirements even after years of development.” Instead of following acquisition best practices by conducting early systems engineering, the VH-71 program knowingly utilized a high-risk acquisition strategy to accelerate the program’s initial delivery of helicopters from 2011 to 2008. The focal point of the Navy’s high-risk strategy was the initiation of production at the same time it began development. And by beginning “without completing systems engineering until well after development start,” the program “never achieved design stability.”

Cost and schedule problems often arise from overly ambitious product developments that embody too many technical unknowns and insufficient knowledge about performance and production risks. Furthermore, “[i]f this early systems engineering is not performed, as has often been the case with [the DoD’s] major acquisitions in the past, significant cost increases can occur as the system’s requirements become better understood by the government and contractor.” Moreover, the Office of Performance Assessments and Root Cause Analyses (PARCA) noted that “incorrect assumptions (or conditions that make the assumptions invalid) can cause a program to miss its budget forecasts” and often lead to Nunn-McCurdy breaches. These “framing assumptions” are so-called because “they so shape the program performance expectations that, if incorrect, they lead to significant cost growth, performance shortfalls, schedule slippage, or all three.”

The cost overruns and schedule delays that plagued the VH-71 program can be traced to a lack of systems engineering knowledge to achieve a match between required capabilities and resources. The lack of flexibility to make early trade-offs in product design and customer expectations to avoid exceeding available resources also negatively impacted the program. Because stringent performance requirements for the helicopters existed before the start of development, there did not appear to be “significant consideration of trade-offs of cost, performance, and schedule negotiated between the customer and the developer.” Consequently, the Pentagon began building the helicopters without having a design and testing the key components, causing Senior Pentagon officials to later describe the VH-71 as an example of “how military systems should not be bought.”

Beyond the lack of engineering knowledge, ongoing changes to fleet requirements first endangered, and then destroyed, the $1.7 billion VH-71 program. Lockheed Martin attributed the program’s cost overruns and subsequent Nunn-McCurdy breach to both the Navy and the White House proposing extensive changes to the original specifications including range, capacity, communications, self-protection, and creature comforts. In 2005, the estimated cost of the VH-71 fleet increased to $6.5 billion, and continued escalating cost projections put the program into a Nunn-McCurdy breach as early as 2007, requiring the Pentagon to notify Congress and to reconsider the project. By 2008, “the program’s ballooning costs and requirements” resulted in a “cost per aircraft equal or greater than the President’s Air Force One 747s.”

The DoD spent billions of dollars to develop the VH-71 helicopter fleet, but technical problems, such as the aircraft being overweight and the desire for it to be “outfitted with sophisticated electronic gear that [had] not yet been developed[,] repeatedly forced the program’s restructuring” and the Pentagon to “reassess its design and necessity.” On February 23, 2009, when discussing the “myriad of compelling examples of terrible waste associated with cost of defense spending overruns” at a summit with lawmakers and President Obama, Senate Armed Services Committee chair and ranking member Senator John McCain cited the VH-71 program as experiencing an eighty-five percent cost increase. Following schedule delays, performance issues, and a doubling of cost estimates, the Navy determined that the VH-71 program was a Nunn-McCurdy breach and subsequently moved to terminate the program.

Then-Secretary of Defense Robert Gates proposed termination of the VH-71 program on April 6, 2009. At this point, the program schedule had fallen six years behind with estimated final costs exceeding $13 billion and “[ran] the risk of not delivering the requested capability.” The following month, the DoD acquisition executive directed that the VH-71 program be canceled, and immediately issued a stop-work order for the program. On June 1, 2009, the Navy formally announced its plan to terminate the VH-71 program.

By the time the DoD decided to terminate the VH-71 program, the Navy’s expenditures totaled about $3.3 billion for nine VH-71A helicopters. This caused some members of Congress to protest the termination and instead recommend modifying and continuing the VH-71 program to “gain some return on the $3.3 billion invested.” In July 2009, Congress approved a $485 million appropriation to make the five production VH-71As operational, but in a subsequent congressional hearing, Defense Secretary Gates “suggested that no single helicopter design could meet the requirements of routine presidential trips and for secure escape during a major threat.” Thus, the Navy “completed the termination of the VH-71 program and directed all remaining funds be used for upgrades and service life extensions of the existing helicopters.” The Navy ultimately terminated the VH-71 program after it reported a Nunn-McCurdy breach of the critical cost growth threshold in what President Obama then described as military procurement “gone amok.”

A few months later, on October 22, 2009, the end of the VH-71 program became solidified when the Senate passed the conference report to H.R. 2647, the National Defense Authorization Act for Fiscal Year 2010, following the House of Representatives’ approval of the conference report two weeks prior. The bill would authorize $550 billion for the DoD and another agency, but per the administration’s wishes, the bill did not authorize funding for the VH-71 program. Thus, after ten years and at least $3.3 billion spent on the VH-71 program, the Navy “ended up with nothing but sizable termination expenses and a costly life extension requirement for existing [presidential] helicopters.” Following the termination of the VH-71 Program, Canada bought the nine VH-71s for $164 million (about five percent of $3.3 billion), along with more than 800,000 spare parts and test equipment.

IV. The Nunn-McCurdy Act Should Incorporate Additional Language that Furthers the Act’s Purpose as a Cost Control Mechanism

Although the Nunn-McCurdy Act currently serves the function of providing Congress insight into MDAPs when they experience cost overruns, the Act fails as an effective tool in ensuring these cost overruns do not continually happen. Given that a program can experience an overrun and simply be certified by the Secretary of Defense to continue, little incentivizes contractors and project managers to keep costs down. This section explores language that could be added to the Nunn-McCurdy Act to provide more cost-controlling power, as well as steps to take during termination to receive at least a minimal return on investment.

A. Language Should Be Added That Requires a Program Experiencing Three Nunn-McCurdy Breaches Be Terminated Unless Congress Reviews and Certifies the Program.

Although previous amendments to the Nunn-McCurdy Act have attempted to make the Act more of a cost control measure, some analysts and government officials want more done to make the Nunn-McCurdy Act more effective as a cost control mechanism. For example, testimony before the Senate Homeland Security and Governmental Affairs Committee has called for “a Nunn-McCurdy on steroids that really punishes programs that have failed.” Some suggested enhancements include shorter and more frequent program phases that align with the tours of the program managers, and independent assessment offices to review the cost, performance, and technological maturity of programs.

In addition to these potential changes, Congress should amend the Nunn-McCurdy Act to include language that requires a program that has experienced three breaches to be terminated unless certified by Congress. Essentially, this language would remove the ability of the Secretary of Defense to certify a program experiencing cost overruns for a third time, and instead only allow that program to continue if Congress sees fit. This process would run similarly to the current certification process, but instead of the Secretary of Defense certifying a program that has experienced multiple breaches for a third time, the Secretary of Defense would request that Congress review the program and approve an additional certification.

Not triggering this provision until the program experiences its third breach allows the Secretary of Defense to maintain a certain level of discretion in certifying programs to try to get escalating costs under control. Additionally, given that only eighteen programs experienced two or more breaches between 1997 and 2009, this provision would not be overly burdensome, and would still provide Congress an effective tool to reign in or even put a stop to programs consistently experiencing cost overruns.

In addition to congressional certification, Congress should also assess a penalty on the DoD’s appropriations for the following year for every program that experiences three breaches and becomes subject to its review. The penalty could be based on how many programs experience three breaches and the size of each program’s cost overrun, either individually or collectively. For example, an individual calculation could consider the percentage by which each program exceeded its cost estimate, take the average of the combined percentages, and then reduce appropriations the following year in some way relative to that percentage. As for a collective calculation, Congress could look at the total dollar amount by which all the DoD programs experiencing three breaches exceeded their costs, and then reduce appropriations for the following year relative to that total dollar amount.

The penalty provides consequences for poor acquisition and program management that result in multiple Nunn-McCurdy breaches. Given that the Nunn-McCurdy Act currently does not contain any consequences for programs that experience breaches, no real incentive exists to control cost growth. By assessing a penalty on the DoD’s appropriations in relation to programs that experience multiple breaches, the Secretary of Defense and the Department as a whole should be incentivized to take greater steps to control cost growth. The penalty would only apply to programs that experience multiple Nunn-McCurdy breaches because assessing a penalty for every program that experiences a breach might adversely affect the DoD’s appropriations and impair the department’s ability to carry out its core mission.

B. Language Should Be Added That Encourages the Department of Defense to Find the Most Value-Driven Way to End a Program That Has Experienced a Breach and Will Not Be Certified by the Secretary to Congress.

The Nunn-McCurdy Act’s termination requirement works to put a complete stop to any further cost growth of a defense acquisition program that has breached its critica cost growth threshold. Although this ensures that no further wasteful expenditures are made on an out-of-control program, the Act should clarify how a program should be ended in order to achieve maximum value in return for the funds already spent on the program. The purpose of such clarification would ensure some form of financial or economic analysis prior to final termination in order to determine the best option to recover some value for the funds spent on the program.

The FAR contains a similar provision to the clarification suggested by this Note; the relevant subparts provide that “after receipt of a Notice of Termination,” the contractor “use its best efforts to sell” any property resulting from the contract and that “the proceeds of any transfer or disposition will be applied to reduce any payments to be made by the [g]overnment under this contract.” This FAR provision parallels the termination options offered by this Note, however, the FAR provision focuses on the contractor making the sale instead of the DoD making the sale.

A similarly-worded amendment to the Nunn-McCurdy Act could provide the DoD with three options to terminate a failed defense acquisition program. The Appendix below suggests language to be added to the Nunn-McCurdy Act for termination options. The following analysis illustrates these termination options by comparing them to the VH-71 program.

The first option would be to totally terminate the program and take no further steps. This option would be applicable to programs with a small baseline estimate, which would make its critical breach smaller in scale compared to the average defense acquisition program, and less wasteful if the program were abandoned all together. For example, this option would not apply to the VH-71 program because the DoD already spent billions of dollars on the program. Simply terminating the program and taking no further steps after such a substantial expenditure would not only waste $3.3 billion already spent, but also waste any property the government obtained upon termination of the program.

The second option, similar to a partial termination, would be to complete any units already in production to the point of full operational capacity, and then terminate all additional units. This option would apply to programs that already have reached the production stage and spent considerable funds on prototype or preliminary units. The goal of this option is to round off any units that have received considerable effort from the contactor and considerable funds from the government, thus providing the value of functional units. In terms of the VH-71 program, Congress utilized this option when it approved a $485 million appropriation to make the five production VH-71As operational. At that point, the DoD had spent considerable funds on the VH-71As, so using the appropriation and then terminating the contract would amount to a partial termination resulting in the completion of five aircrafts. Thus, under this option, the DoD would have received something of use for its substantial expenditures.

The third option would be to examine the resale market for any units and make a determination of whether the government could receive greater value in return for selling the units as is, or for paying to complete the units to some minimal level and then selling the units. This option is similar to the second option in that it contemplates partial termination and applies to similar programs, but instead of receiving value in the form of a functioning end product, this method seeks to receive value from fund recovery. Additionally, this option mirrors the sale of property discussed in FAR 45.604, which provides that an agency should consider the sale of property pursuant to the sale authority in 41 C.F.R. § 102-39 when acquiring similar products and when other requirements of the statute are satisfied. Applying this option to the VH-71 program, the DoD would compare the amount it could receive for selling the helicopters as they were at the time of termination to the amount it could receive for spending to completing the helicopters to some level of capability and then selling the units. Using the numbers available, the value comparison would be between the $164 million the DoD received in selling the helicopters to Canada and the value the Department could receive for completing the helicopters then selling them, minus the $485 million it would take the make them operational. This option is the most math intensive of the three and involves multiple competing cost and sale analyses.

V. Conclusion

As the DoD’s spending will continue to rise year after year, there needs to be an effective mechanism that not only ensures the DoD spends money wisely, but one that punishes the DoD for repeated wasteful actions. The Nunn-McCurdy can serve as this effective mechanism based on its background, but it currently lacks any elements that would encourage the DoD to better manage program costs. To give the Nunn-McCurdy Act such force, the amendments suggested by this Note look to remove the ability for the Secretary of Defense to certify a program after multiple breaches, as well as essentially tying current program cost levels to future DoD appropriations. Ideally, the threat of losing money for future acquisitions would incentivize the DoD to better manage the cost growth of current programs.

Additionally, while outright termination may be appropriate for certain acquisitions that have gone awry, in certain situations with massive expenditures, a cost recovery method should be utilized when ending a program due to breach of the critical cost growth threshold. In such situations, the additional language proposed by this Note would recommend the DoD analyze whether the contract can be modified so that any units already in production are completed and become operational. If this first option is not viable, the solution then suggests analyzing whether any units can be completed to the point that their resale value justifies the additional expenditure and provides the government with a greater return on its investment.

The historical amendments to the Nunn-McCurdy Act make it clear that Congress seriously wants to control the cost overruns of MDAPs, but the mere exposure of consistent overruns to the public does not incentivize the DoD to take action to impede such consist cost growth. Thus, by incorporating the language suggested by this Note into the Nunn-McCurdy Act, Congress can turn the Act from a reporting requirement into an effective cost control mechanism.

Appendix: Proposed Supplement to the Nunn-McCurdy Act.

10 U.S.C § 2433a. Critical Cost Growth in Major Defense Acquistion Programs

(b) Presumption of termination. — (1) After conducting the reassessment required by subsection (a) with respect to a major defense acquisition program, the Secretary shall terminate the program unless the Secretary submits to Congress, before the end of the 60-day period beginning on the day the Selected Acquisition Report containing the information described in section 2433(g) of this title is required to be submitted under section 2432(f) of this title, a written certification in accordance with paragraph (2).

(2) A certification described by this paragraph with respect to a major defense acquisition program is a written certification that —

(A) the continuation of the program is essential to the national security;
(B) there are no alternatives to the program which will provide acceptable capability to meet the joint military requirement (as defined in section 181(g)(1) of this title) at less cost;
(C) the new estimates of the program acquisition unit cost or procurement unit cost have been determined by the Director of Cost Assessment and Program Evaluation to be reasonable;
(D) the program is a higher priority than programs whose funding must be reduced to accommodate the growth in cost of the program; and
(E) the management structure for the program is adequate to manage and control program acquisition unit cost or procurement unit cost.

(3) A written certification under paragraph (2) shall be accompanied by a report presenting the root cause analysis and assessment carried out pursuant to subsection (a) and the basis for each determination made in accordance with subparagraphs (A) through (E) of paragraph (2), together with supporting documentation.

(4) If a major defense acquisition program has experienced three breaches of its critical cost growth threshold, that program can no longer be certified by the Secretary. Instead, for the program to continue,

(A) the Secretary must request Congress review the program and certify it if it finds that one of the determinations in subparagraphs (A) through (E) of paragraph (2) apply. If Congress determines the program should not be certified, then the program shall be terminated pursuant to section (d) below.
(B) For each program that paragraph (4) applies, Congress reserves the rights to assess a penalty on the Department’s appropriations for the following fiscal year at its discretion in relation to the level of cost overruns in the current fiscal year.

(d) Actions if program terminated. — If a major defense acquisition program is terminated pursuant to subsection (b), the Secretary shall submit to Congress a written report setting forth

(1) an explanation of the reasons for terminating the program;
(2) the alternatives considered to address any problems in the program;
(3) the course the Department plans to pursue to meet any continuing joint military requirements otherwise intended to be met by the program; and
(4) Consideration of the following methods to determine the proper means of ending the program. The methods for ending a major defense acquisition program designated for termination under this subsection include, but are not limited to:
(A) terminate the program and take no further steps;
(B) complete any units that are already in production to the point of full operational capacity, but then terminate the contract and not start production of any additional units; or
(C) to examine the resale market for any units and make a determination of whether the government could receive greater value in relation to expenditure in return for selling the units as is, or for paying to complete the units to some minimal level and then selling the units.