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United States Government Accountability Office: 

Testimony before the Committee on Homeland Security and Governmental 
Affairs, Subcommittee on Federal Financial Management, Government 
Information, Federal Services and International Security, United 
States Senate: 

For Release on Delivery: 
Expected at 2:30 p.m. EDT:
Tuesday, March 29, 2011: 

DOD Cost Overruns: 

Trends in Nunn-McCurdy Breaches and Tools to Manage Weapon Systems 
Acquisition Costs: 

Statement of Michael J. Sullivan, Director:
Acquisition and Sourcing Management: 


Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss tools available to minimize 
Department of Defense (DOD) cost overruns and our recent work on the 
Nunn-McCurdy process. For nearly 30 years, the statutory provision 
known as Nunn-McCurdy[Footnote 1] has been a tool for Congress to use 
to hold DOD accountable for cost growth on major defense programs. The 
purpose of the statute was to provide Congress greater visibility into 
major defense programs' cost growth and to encourage DOD to manage and 
control cost growth. A Nunn-McCurdy breach occurs when a program's 
unit cost exceeds certain thresholds. When that happens, DOD must 
notify Congress of the breach. There are two types of Nunn-McCurdy 
breaches: significant breaches and critical breaches.[Footnote 2] A 
breach of the significant cost growth threshold occurs when the 
program acquisition unit cost or the procurement unit cost increases 
by at least 15 percent over the current baseline estimate or at least 
30 percent over the original baseline estimate.[Footnote 3] A breach 
of the critical cost growth threshold occurs when the program 
acquisition unit cost or the procurement unit cost increases by at 
least 25 percent over the current baseline estimate or at least 50 
percent over the original baseline estimate. The Nunn-McCurdy process 
has been amended a number of times over the years. For example, in the 
Weapon Systems Acquisition Reform Act of 2009, Congress enacted a new 
provision requiring the Secretary of Defense to terminate a program 
that experiences a breach of the critical cost growth threshold, 
unless the Secretary of Defense submits a written certification to 
Congress.[Footnote 4] 

My statement focuses on (1) trends in Nunn-McCurdy breaches, (2) 
factors that may be responsible for these trends, (3) changes DOD is 
making or proposing to make to the Nunn-McCurdy process, and (4) other 
tools DOD can use to minimize cost overruns. My testimony includes 
information from our March 2011 report on Nunn-McCurdy breaches, which 
is being released today.[Footnote 5] The report contains information 
on the scope of our analysis and the methodology used. In addition, we 
drew on our published body of work on weapon system acquisitions and 
best practices to identify tools that can be used to minimize cost 
overruns. The work that supports this statement was performed in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Nunn-McCurdy Breaches Increased after Changes in Statute or 
Presidential Administration: 

Since 1997, there have been 74 Nunn-McCurdy breaches involving 47 
major defense acquisition programs.[Footnote 6] (See figure 1.) There 
were a larger number of breaches in 2001, 2005, 2006, and 2009, which 
coincides with new statutory requirements or changes presidential 
administration. As a result of Congress requiring DOD to measure cost 
growth against the original baseline estimate, the number of breaches 
reported increased in 2005 and 2006. The number of breaches was also 
high in 2001 and 2009--the first years of new presidential 
administrations. During both transitions, no annual comprehensive 
Selected Acquisition Reports (SAR) were submitted, which, along with 
other factors, may have affected when breaches were reported.[Footnote 
7] For example, according to DOD, during the transition from one 
administration to another in 2001, the cost of several programs 
breached Nunn-McCurdy thresholds because of a change in management 
philosophy, which included fully funding these programs to higher 
independent cost estimates. 

Figure 1: Critical and Significant Breaches by Calendar Year, 1997- 

[Refer to PDF for image: stacked vertical bar graph] 

Submission date: 1997; 
Significant: 1; 
Critical: 0. 

Submission date: 1998; 
Significant: 3; 
Critical: 0. 

Submission date: 1999; 
Significant: 1; 
Critical: 2. 

Submission date: 2000; 
Significant: 0; 
Critical: 0. 
No breaches were reported in 2000. 

Submission date: 2001; 
Significant: 2; 
Critical: 9. 

Submission date: 2002; 
Significant: 1; 
Critical: 2. 

Submission date: 2003; 
Significant: 0; 
Critical: 2. 

Submission date: 2004; 
Significant: 4; 
Critical: 3. 

Submission date: 2005; 
Significant: 14; 
Critical: 3. 

Submission date: 2006; 
Significant: 2; 
Critical: 8. 

Submission date: 2007; 
Significant: 4; 
Critical: 1. 

Submission date: 2008; 
Significant: 1; 
Critical: 3. 

Submission date: 2009; 
Significant: 2; 
Critical: 6. 

Source: GAO analysis of DOD data. 

Note: This figure uses the terms significant and critical to 
categorize reported program cost growth. We note, however, that prior 
to 2006, the statute did not use those terms to describe the cost 
growth thresholds. 

[End of figure] 

The Air Force had a higher proportion of total breaches compared to 
its proportion of total programs, whereas the Navy had a smaller 
proportion of breaches compared to its proportion of programs. 
Aircraft, satellite, and helicopter programs have experienced the 
largest number of breaches. Of the 47 programs that breached, 18 
programs breached more than one time. Only one of the programs with 
multiple breaches--the Armed Reconnaissance Helicopter--was not 
recertified after a breach of the critical cost growth threshold and 
was terminated. The Navy Area Theater Ballistic Missile Defense was 
also not recertified and was terminated because of poor performance 
and projected future cost and schedule problems. Some programs that 
have experienced a critical breach--including the Advanced Seal 
Delivery System, Army Tactical Missile System-BAT, Comanche 
Reconnaissance Attack Helicopter, Land Warrior, and VH-71 Presidential 
Helicopter Replacement--have also been terminated. 

Engineering and Design Issues Are Most Cited by DOD as being 
Responsible for Nunn-McCurdy Breaches: 

Nunn-McCurdy breaches are often the result of multiple, interrelated 
factors. Our analysis of DOD data and SARs showed that the primary 
reasons cited for the unit cost growth that led to Nunn-McCurdy 
breaches were engineering and design issues, schedule issues, and 
quantity changes. For example, we reported in 2003 that the Space 
Based Infrared System High program began with immature technologies 
and was based on faulty and overly optimistic assumptions about 
software reuse and productivity levels, the benefits of commercial 
practices, management stability, and the level of understanding of 
requirements.[Footnote 8] The program has breached four times. A large 
number of programs that breached also cited revised estimates, due in 
part to changing assumptions; requirements changes; and economic 
changes, such as labor and overhead rates, as factors that contributed 
to the breaches. (See figure 2.) For example, we previously reported 
that initial development cost estimates for the Army's Warfighter 
Information Network-Tactical communications system were understated by 
at least $1.3 billion, or nearly 160 percent, as of July 2008, in part 
because the estimates assumed that commercial-off-the-shelf radio 
technology would be available.[Footnote 9] This assumption proved to 
be wrong, and the program breached in 2006. 

Figure 2: Factors Cited in SARs as being Responsible for Nunn-McCurdy 

[Refer to PDF for image: vertical bar graph] 

Factor responsible for breach: Engineering/design issues; 
Number of breaches citing this factor: 50. 

Factor responsible for breach: Schedule issues; 
Number of breaches citing this factor: 44. 

Factor responsible for breach: Quantity changes; 
Number of breaches citing this factor: 41. 

Factor responsible for breach: Revised estimates; 
Number of breaches citing this factor: 38. 

Factor responsible for breach: Economic changes; 
Number of breaches citing this factor: 35. 

Factor responsible for breach: Requirement changes; 
Number of breaches citing this factor: 34. 

Factor responsible for breach: Support costs; 
Number of breaches citing this factor: 23. 

Factor responsible for breach: Funding issues; 
Number of breaches citing this factor: 21. 

Factor responsible for breach: Production issues; 
Number of breaches citing this factor: 16. 

Source: GAO analysis of DOD data. 

[End of figure] 

DOD Has Introduced New Practices to Mitigate Risk of Breaches and 
Plans to Propose Changes to Nunn-McCurdy Process: 

DOD has instituted a process to provide earlier warning of potential 
Nunn-McCurdy breaches and plans to propose changes to the Nunn-McCurdy 
process to reduce several statutory requirements for breaches caused 
by quantity changes. 

Specifically, the Joint Staff has implemented a process to provide an 
earlier evaluation of the factors that are contributing to cost growth 
so that programs can take mitigating actions before experiencing a 
significant Nunn McCurdy breach. This new process has merit, as our 
analysis shows that nearly 40 percent of Nunn-McCurdy breaches 
occurred after a production decision had been made--when a program has 
fewer options for restructuring. DOD plans to propose a legislative 
amendment to reduce several statutory requirements added in 2009 for 
Nunn-McCurdy breaches when it determines that a breach was caused 
primarily by quantity changes that were unrelated to poor performance. 
According to DOD, not all breaches are indicators of poor performance 
because quantity reductions or capabilities added to a program after 
it begins can affect unit cost. DOD officials point to Excalibur as an 
example of a program that would qualify for this relief. The Excalibur 
program experienced a Nunn-McCurdy breach of the critical cost growth 
threshold after the Army reduced quantities from 30,000 to 6,264. The 
quantity reductions were the result of Army assessments that concluded 
it did not need as many of these munitions as planned, rather than in 
response to program-specific cost concerns. While in the case of 
Excalibur the Army reduced quantities based on capability needs, we 
have previously reported that quantities are often reduced in response 
to cost overruns on programs.[Footnote 10] Tracking changes in 
research and development costs, which are not sensitive to quantity 
changes, would be one way DOD could evaluate program performance in 
this context. 

Using Knowledge-Based Acquisition Practices Can Help Minimize the Risk 
of Cost Overruns: 

The Nunn-McCurdy process can be a useful mechanism for holding 
programs accountable for cost growth and restructuring them in the 
wake of cost growth; however, its effect is limited because, in 
general, programs have already experienced significant problems by the 
time it is triggered. It is not realistic to expect cost growth to be 
entirely preventable, but it can be significantly reduced. To put 
programs in a position to minimize the risk of cost growth, DOD must 
use the tools available to it to establish programs in which there is 
a match between requirements and resources--including funding--from 
the start and execute those programs using knowledge-based acquisition 
practices. In our previous work, we have identified proven management 
practices--many of which have been incorporated into DOD policy, but 
have yet to be fully implemented in practice--that can serve as tools 
to prevent DOD cost overruns.[Footnote 11] Greater adherence to the 
following practices at key phases of the acquisition process can help 
reduce weapon system costs, contain pressures for increased funding, 
and better address critical warfighter needs. 

* Early and continued systems engineering analysis: Early systems 
engineering, ideally beginning before a program is initiated and a 
business case is set, is critical to designing a system that meets 
requirements within available resources, such as technologies, time, 
money, and people.[Footnote 12] Specifically, a robust analysis of 
alternatives and preliminary design review (PDR)--which analyze the 
achievability of required capabilities before committing to a program--
can help ensure that new programs have a sound, executable business 
case that represents a cost-effective solution to meeting warfighters' 
needs. Such engineering knowledge can identify key trade-offs in 
requirements and technology that are essential to managing cost. 
Systems engineering continues to be an important tool through a 
program's critical design review (CDR) and system demonstration. 

* Leveraging mature technologies and processes: Programs often have 
insufficient knowledge about the maturity of technology. More 
prototyping early in programs could help DOD ensure that a system's 
proposed design can meet performance requirements. Further, having 
predictable manufacturing processes before decisions are made to move 
into production can reduce unknowns.[Footnote 13] 

* Establishing realistic cost and schedule estimates that are matched 
to available resources: Cost and schedule estimates are often based on 
overly optimistic assumptions. Our previous work shows that without 
the ability to generate reliable cost estimates, programs are at risk 
of experiencing cost overruns, missed deadlines, and performance 
shortfalls.[Footnote 14] Inaccurate estimates do not provide the 
necessary foundation for sufficient funding commitments. Engineering 
knowledge is required to achieve more accurate, reliable cost 
estimates at the outset of a program. 

* Clear, well-defined requirements: Our work has shown that DOD's 
culture and environment often allow programs to start with too many 
unknowns, for example, entering the acquisition process without a full 
understanding of requirements.[Footnote 15] Additionally, minimizing 
requirements changes could decrease the amount of cost growth 
experienced by acquisition programs. 

* Incremental approach to acquiring capabilities: Programs can put 
themselves in a better position to succeed by implementing incremental 
acquisition strategies that limit the time in development.[Footnote 16] 

Our prior work on best product development practices found that 
successful programs use these tools as they progress through the 
acquisition process to gather knowledge that confirms that their 
requirements are achievable, their technologies are mature, their 
designs are stable, and their production processes are in control. 
Successful product developers ensure a high level of knowledge is 
achieved by key junctures in development. We characterize these 
junctures as knowledge points. The following figure depicts how these 
tools can come into play as a program moves through its development 
process and into production. It summarizes the activities necessary 
for successful outcomes at each key knowledge point. 

Figure 3: DOD Acquisition Process and GAO Knowledge-Based Acquisition 

[Refer to PDF for image: illustration] 

DOD acquisition process: 

Materiel development	decision: 

Materiel solution analysis: 
Milestone A: 
Technology development: 
Milestone B: Development start. 

Engineering and manufacturing development: Integrated system design: 
Knowledge Point 1: Technologies, time, funding and other resources 
match customer needs. Decision to invest in product development.	
Key steps:	
* Preliminary design review completed;	
* Technologies demonstrated to high levels; 
* Incremental acquisition strategy in place; 
* Knowledge-based cost estimate. 

Engineering and manufacturing development: Capability and	
manufacturing	demo:	
Knowledge Point 2: Design is stable and performs as expected. Decision 
to start building and testing production representative prototypes. 
Key steps:	
* System-level CDR and subsystem design reviews completed; 
* Ninety percent of engineering drawings released; 
* Integrated system prototype demonstrated;	
* Critical manufacturing processes identified. 

Knowledge Point 3: Production meets cost, schedule, and quality 
targets. Decision to produce first units for customer. 
Key steps: 
* Production-representative prototype demonstrated in intended 
* Manufacturing processes in control; 
* Product reliability demonstrated via production-representative 
prototype testing. 

Milestone C: Production start. 


Source: GAO. 

[End of figure] 

Mr. Chairman, this completes my prepared statement. I would be happy 
to respond to any questions you or other members of the subcommittee 
may have at this time. 

Contacts and Acknowledgments: 

For further information about this statement, please contact Michael 
J. Sullivan at (202) 512-4841 or Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Individuals who made key 
contributions to this statement include Ron Schwenn, Assistant 
Director; Morgan Delaney Ramaker; Kristine Hassinger; Leigh Ann Nally; 
Kenneth Patton; and Roxanna Sun. 

[End of section] 


[1] 10 U.S.C. § 2433. The statutory provision is known as Nunn-McCurdy 
because it was first introduced by Senator Nunn and passed as a 1-year 
provision as part of the Department of Defense Authorization Act, 
1982, 127 Cong. Rec. 9760-63 (1981), Pub. L. No. 97-86, § 917. The 
following year, Representative McCurdy introduced a permanent 
provision based on Senator Nunn's provision, which was enacted as part 
of the Department of Defense Authorization Act, 1983, 128 Cong. Rec. 
18345-48 (1982), Pub. L. No. 97-252, § 1107. There are a number of 
statutory provisions that help implement cost growth reporting under 
Nunn-McCurdy. For the purposes of this testimony, we refer to these 
statutory provisions as the Nunn-McCurdy process. 

[2] The Nunn-McCurdy statute did not use the terms "significant" or 
"critical" to describe the cost growth thresholds until 2006, when the 
statute was amended by section 802 of the National Defense 
Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163. 

[3] Program acquisition unit cost is the total cost of development, 
procurement, acquisition operations and maintenance, and military 
construction divided by the number of units procured. Procurement unit 
cost is the total procurement cost divided by the number of units to 
be procured. 

[4] Weapon Systems Acquisition Reform Act of 2009, Pub. L. No. 111-23, 
§ 206 (codified at 10 U.S.C. § 2433a(b)). 

[5] GAO, Trends in Nunn-McCurdy Cost Breaches for Major Defense 
Acquisition Programs, [hyperlink,] (Washington D.C.: Mar. 9, 

[6] See [hyperlink,] for more 
information about the methodology we used to count breaches and remove 
duplicate entries from data provided by DOD. 

[7] DOD is required to submit SARs to Congress at the end of each 
fiscal year quarter on current major defense acquisition programs, 
although certain exceptions apply. SARs for the first quarter of a 
fiscal year are known as comprehensive annual SARs. Each comprehensive 
annual SAR is required to be submitted within 60 days after the date 
on which the President transmits the budget to Congress for the 
following fiscal year. 10 U.S.C. § 2432(b)(1), (c)(4), (f). While DOD 
is required to report breaches in quarterly SAR submissions, most 
breaches are typically reported in comprehensive annual SARs. 

[8] GAO, Defense Acquisitions: Despite Restructuring, SBIRS High 
Program Remains at Risk of Cost and Schedule Overruns, [hyperlink,] (Washington, D.C.: Oct. 31, 

[9] GAO, Defense Acquisitions: A Knowledge-Based Funding Approach 
Could Improve Major Weapon System Program Outcomes, [hyperlink,] (Washington, D.C.: July 2, 

[10] [hyperlink,]. 

[11] GAO, Best Practices: Better Management of Technology Development 
Can Improve Weapon System Outcomes, [hyperlink,] (Washington, D.C.: July 
30, 1999); Best Practices: Better Matching of Needs and Resources Will 
Lead to Better Weapon System Outcomes, [hyperlink,] (Washington, D.C.: Mar. 8, 
2001); Best Practices: Capturing Design and Manufacturing Knowledge 
Early Improves Acquisition Outcomes, [hyperlink,] (Washington, D.C.: July 15, 
2002); [hyperlink,]; Best 
Practices: DOD Can Achieve Better Outcomes by Standardizing the Way 
Manufacturing Risks Are Managed, [hyperlink,] (Washington, D.C.: Apr. 22, 
2010); and Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink,] (Washington, D.C.: Mar. 1, 

[12] [hyperlink,]. 

[13] [hyperlink,]. 

[14] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs, [hyperlink,] (Washington, D.C.: March 2009). 

[15] GAO, Defense Acquisitions: Strong Leadership Is Key to Planning 
and Executing Stable Weapon Programs, [hyperlink,] (Washington, D.C.: May 6, 

[16] [hyperlink,]. 

[End of section] 

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