What GAO Found
United States Government Accountability Office
Why GAO Did This Study
Highlights
Accountability Integrity Reliability
March 2008
DEFENSE ACQUISITIONS
Termination Costs Are Generally Not a Compelling
Reason to Continue Programs or Contracts That
Otherwise Warrant Ending
Highlights of
GAO-08-379, a report to
congressional committees
The nation’s long-term fiscal
imbalances will likely make DOD’s
$1.6 trillion planned investment in
new weapon systems unsustain-
able. Thus, it is critical that DOD
retains the flexibility to end
programs and contracts when
necessary and appropriate.
Although the federal government
generally has the legal right to
terminate contracts for conve-
nience, defense stakeholders have
sometimes expressed concerns
that it will cost more to terminate a
contract than to complete it. To
address this perception, GAO
examined (1) how expected
contract termination costs and
other factors affect DOD decisions
on whether to end programs and
contracts; (2) the circumstances
under which it would cost more to
terminate a contract for conve-
nience than to complete it; and (3)
the options DOD has for retaining
value or reducing costs, when DOD
ends programs or contracts. To do
this, GAO examined DOD data on
terminated contracts over $100
million; reviewed laws, regulations,
and guidance; and met with key
DOD officials.
What GAO Recommends
GAO recommends that DOD
review, and as needed amend,
guidance on terminations across
the military services and DOD
agencies to ensure that termination
guidance identifies the conditions
under which it is appropriate to
end programs or contracts, and
provides knowledge needed to use
terminations as an investment
portfolio tool. DOD agreed.
Contract termination costs were generally not a major factor in Department of
Defense (DOD) decisions to end programs or contracts for the weapon
systems GAO reviewed. GAO found that these program cancellations were
driven by factors such as changes in warfighter need and budgetary
constraints. In the contract termination decisions GAO reviewed, DOD
considered termination costs, but they were generally not as significant as
other factors, such as contract cost growth.
For the contracts reviewed, GAO found that it did not cost more to terminate
than to complete them. When the government terminates a contract for
convenience, it must compensate the contractor for the incurred costs on the
completed work, a fee or profit on that work, and the termination costs.
Federal regulations place various limits on this compensation for both cost-
reimbursement and fixed-price contracts. GAO found eight fully terminated
contracts of weapon systems that were over $100 million in value, terminated
after 1995, and for which data were available. Of these, none cost more to
terminate than to complete.
When a program or contract ends, DOD can retain some value from the work
completed. For example, DOD can end the work immediately and transfer
materials or technology to other efforts. Alternatively, DOD can modify the
scope of a contract and complete a limited portion of the original work.
GAO's review of DOD’s past experience with terminations highlights
important lessons for DOD in making decisions to cancel individual programs
as well as in managing its broader investment portfolio. For example, when
considering cancellation of individual programs, contract termination costs
are generally not a compelling reason to continue programs or contracts that
otherwise warrant ending. Moreover, while incurred or "sunk" costs in
programs being considered for termination may be substantial, they must be
paid regardless of whether or not a contract is terminated. Therefore, the
decision to terminate a contract or cancel a program should not be driven by
sunk costs.
From an investment portfolio perspective, terminations can be a valuable tool
in responding to long-term fiscal imbalances as well as unexpected events that
could constrain spending. More specifically, they can be used to create more
trade space in the over $850 billion that still remains in outstanding
commitments in DOD's planned $1.6 trillion investment in weapons programs.
However, to make the most effective use of this tool, decision-makers need to
be able to anticipate and plan for possible terminations and have a sound
understanding of costs, benefits, and legal requirements. As a result, guidance
on terminations developed by the military services and other DOD entities
should be clear, consistent, proactive, and detailed enough to provide the
knowledge needed to use terminations as an investment portfolio tool.
To view the full product, including the scope
and methodology, click on
GAO-08-379.
For more information, contact Cristina
Chaplain at (202) 512-4841 or