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Monday, January 7, 2013

The Nunn-McCurdy Act: Background, Analysis, and Issues for Congress

Moshe Schwartz
Specialist in Defense Acquisition

On September 8, 1982, President Ronald Reagan signed into law the Department of Defense (DOD) Authorization Act, 1983 (P.L. 97-252), which included what has come to be known as the Nunn-McCurdy Act (10 U.S.C. §2433). The Nunn-McCurdy Act requires DOD to report to Congress whenever a major defense acquisition program experiences cost overruns that exceed certain thresholds. The purpose of the act was to help control cost growth in major defense systems by holding the appropriate Pentagon officials and defense contractors publicly accountable and responsible for managing costs.

A program that experiences cost growth exceeding any of the established thresholds is said to have a Nunn-McCurdy breach. There are two types of breaches: significant breaches and critical breaches. A “significant” breach is when the Program Acquisition Unit Cost (the total cost of development, procurement, and construction divided by the number of units procured) or the Procurement Unit Cost (the total procurement cost divided by the number of units to be procured) increases 15% or more over the current baseline estimate or 30% or more over the original baseline estimate. A “critical” breach occurs when the program acquisition or the procurement unit cost increases 25% or more over the current baseline estimate or 50% or more over the original baseline estimate.

The Nunn-McCurdy Act has been statutorily amended a number of times over the years. One of the most significant changes to the reporting requirements occurred in the FY2006 National Defense Authorization Act (P.L. 109-163), when Congress added the original baseline estimate as a threshold against which to measure cost growth. The new standard prevents DOD from avoiding a Nunn-McCurdy breach by simply re-baselining a program. Another significant change occurred in the FY2009 Weapon Systems Acquisition Reform Act (P.L. 111-23), when Congress enacted a requirement that programs with critical breaches should be presumed terminated unless the Secretary of Defense certifies the program. For programs that are certified, DOD generally must (1) revoke the prior milestone approval, (2) restructure the program, and (3) provide Congress a written explanation of the root cause of the cost growth. These changes were fueled in part over congressional concern that programs with chronic cost growth and schedule delays were not being terminated and Congress was not being provided specific information explaining what caused the cost growth.

Some analysts believe that the Nunn-McCurdy Act has been effective as a reporting mechanism for informing Congress of cost overruns in major acquisition programs. As a result of the Nunn- McCurdy process, Congress has increased its visibility into the cost performance of the acquisition stage of Major Defense Acquisition Programs (MDAPs). However, some analysts suggest that Nunn-McCurdy is not a sufficiently comprehensive reporting mechanism because program managers can sometimes take steps to avoid a breach and because Nunn-McCurdy does not apply to all elements of a weapon system’s life-cycle costs, such as its operations, support, or disposal costs.

Date of Report: December 26, 2012
Number of Pages: 33
Order Number: R41293
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