Pentagon management of multiyear procurements questioned

The Defense Department spends roughly $10 billion annually on special multiyear procurements for major weapons systems. But, according to a congressional watchdog agency, the Pentagon's management of these contracts has been inadequate, making it all but impossible to verify that the department saved money using this risky acquisition tactic.

According to a report (GAO-08-298) released last week by the Government Accountability Office, Defense's multiyear procurement strategy has failed to validate projected savings and in several instances, the cost of the programs has far exceeded original estimates.

"Multiyear contracting is big business and promises savings at some risk to the government, yet DoD's management direction and process for justifying multiyear programs to the Congress is limited, raising questions about the appropriateness of some approved multiyear programs and the cost effectiveness of investments made for the risks assumed," the report stated.

Generally, contracts for weapons or other major equipment must be fully funded in the year such items are procured. But under multiyear contracting authority, Defense is allowed to purchase more than one year's worth of requirements under a single contract award without having to exercise an option each year. With Congress' approval, Defense can contract for up to five years' worth of quantities, although funding is still appropriated on an annual basis.

During the past quarter century, Congress has authorized the use of multiyear contracts for approximately 140 acquisition programs, including some more than once, GAO found.

Multiyear procurements potentially can save money and improve systems operations by allowing the contractor to implement a long-term plan for how it will allocate its resources, purchase parts and materials, and attract subcontractors, vendors and suppliers. Defense, meanwhile, is able to avoid the burden associated with administering annual contracts.

Programs are chosen for multiyear procurements based on their expected cost and operations stability over the course of several years, as well as a demonstration of "substantial savings," as compared to a series of annual contracts.

The strategy, however, poses a significant risk of increased costs to the government if a procurement has be changed or is canceled. Multiyear contracts, GAO said, also could limit the department's budget flexibility.

GAO found that it is difficult to determine the financial impact of Defense's multiyear procurements, in part because the department does not track results against original expectations and "makes little effort to validate if actual savings were achieved."

For example, GAO examined multiyear procurements involving the C-17A Globemaster strategic airlifter, the F/A-18E/F Super Hornet strike fighter and the Apache Longbow helicopter. In all three cases, the watchdog found substantial unit cost growth, ranging from 10 percent to 30 percent higher than the original estimates provided to Congress.

GAO found that all three programs were burdened by unexpected cost increases in labor and materials, as well as changes to requirements and funding. Projected savings from the contracts, meanwhile, did not appear to have materialized in budget justifications submitted to Congress, the GAO found.

"While both annual and multiyear contracting are prone to the underestimation of costs and overstatement of benefits … the stakes are arguably higher for multiyear programs because of the increased upfront investment required, considerable cost increases if a program is significantly restructured, and the greater liabilities incurred if multiyear programs are canceled," the report noted.

GAO recommended that Defense provide more information about how decisions are made on multiyear procurements, build a central database for monitoring such contracts, launch a third-party validation process for programs under consideration for use of the technique and conduct after-action assessments.

Defense concurred with the first two recommendations, but demurred slightly on the latter two, arguing that they may be of value for some, but not all, multiyear procurement programs.

In a written response, Pentagon officials said the costs and savings of multiyear procurements are reviewed twice early on in the process and that a third-party validation could result in lengthy delays. Additionally, they said, after-action assessments may be of little benefit because of the difficulties in determining actual savings and the lengthy amount of time -- as long as seven to eight years after the contract is first awarded -- until such a review could be completed.