Some recent programs of  questionable stability and savings submitted to the Congress for multiyear  authorization raise concerns about DOD’s management and controls for  justifying multiyear candidates. Multiyear costs and savings estimates were not completed in time for  submission with the fiscal year 2007 defense budget. Each was also impacted by  contract provisions and changes in business conditions. Cost Increases Lead to Questions about Realism of Budget Estimates Used to Justify Multiyear

We found that unit cost growth on these programs ranged from 10 to 30  percent more than projected by the budget justification data. While this tendency would apply to annual as well as multiyear contracts,  it is arguably more problematic for multiyear contracts because of the  government’s increased exposure to risk over multiple years. Impacts on Cost and Performance from Contract Provisions and Other Factors

We also collected information on multiyear contract provisions for the  three programs with completed multiyear contracts and for the recently  awarded F-22A contract. Although a direct causal link is not demonstrated, our  analysis of multiyear programs approved by Congress shows that  estimated savings were on average higher before the substantial savings  requirement than after. Other factors—lower quantities of modern systems  being procured, stricter termination liability allowances, and contraction  in the defense industrial base—may also contribute to decreased  estimated savings for current and future systems by lessening the benefits  from large quantity buys and efficient production rates, key attributes of  multiyear contracts. Cancellation liability changes. According to DOD and  defense research center officials as well as the studies they conducted,  calculating the actual cost savings from the use of a multiyear contract and  comparing results to original expectations is very problematic for several  reasons: (1) multiyear cost and other program data is unavailable; (2) lack  of comparable data on costs of annual contracts; and (3) original  assumptions change from the justification package, such as design  modifications and variations in buy quantities, labor, and material rates. Furthermore, DOD does not track and evaluate actual performance on  multiyear contracts for major DOD weapon systems. Assessing results could provide valuable insights and lessons learned on  prior experience and identify opportunities to improve future multiyear  procurements. Some concerns noted in this report, such as the practice of understating  costs and overselling benefits, apply also to annual contracts, but the  standards should be higher for multiyear contracts because of the larger  up-front investments required and the government’s exposure to risk  should the program fail or be substantially changed. Recommendations

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: (1) 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; (2) establish a process for third party validation of the costs  and savings data submitted for such candidate programs; and (3)  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. We conducted limited case studies for selected multiyear aircraft  contracts to assess outcomes and the internal and external events  affecting performance.
Why GAO Did This Study

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.

What GAO Found

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.