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TITLE VIII--ACQUISITION POLICY, ACQUISITION MANAGEMENT, AND RELATED MATTERS

Subtitle B--Provisions Relating to Major Defense Acquisition Programs

P. L. 111-

Joint Explanatory Statement of the Committees on Armed Services of the U. S. Senate and House of Representatives on H. R. 6523

From H. R. 6523

SEC. 811. COST ESTIMATES FOR PROGRAM BASELINES AND CONTRACT NEGOTIATIONS FOR MAJOR DEFENSE ACQUISITION AND MAJOR AUTOMATED INFORMATION SYSTEM PROGRAMS.

Section 2334 of title 10, United States Code, is amended--

(1) in subsection (d)--

(A) in paragraph (1)--

(i) by striking `paragraph (2)' and inserting `paragraph (3)'; and

(ii) by striking `, the rationale for selecting such confidence level, and, if such confidence level is less than 80 percent, the justification for selecting a confidence level of less than 80 percent; and' and inserting `and the rationale for selecting such confidence level;';

(B) by redesignating paragraph (2) as paragraph (3); and

(C) by inserting after paragraph (1) the following new paragraph (2):

`(2) ensure that such confidence level provides a high degree of confidence that the program can be completed without the need for significant adjustment to program budgets; and';

(2) by redesignating subsections (e) and (f) as subsections (f) and (g), respectively; and

(3) by inserting after subsection (d) the following new subsection (e):

`(e) Estimates for Program Baseline and Analyses and Targets for Contract Negotiation Purposes- (1) The policies, procedures, and guidance issued by the Director of Cost Assessment and Program Evaluation in accordance with the requirements of subsection (a) shall provide that--

`(A) cost estimates developed for baseline descriptions and other program purposes conducted pursuant to subsection (a)(6) are not to be used for the purpose of contract negotiations or the obligation of funds; and

`(B) cost analyses and targets developed for the purpose of contract negotiations and the obligation of funds are based on the Government's reasonable expectation of successful contractor performance in accordance with the contractor's proposal and previous experience.

`(2) The Program Manager and contracting officer for each major defense acquisition program and major automated information system program shall ensure that cost analyses and targets developed for the purpose of contract negotiations and the obligation of funds are carried out in accordance with the requirements of paragraph (1) and the policies, procedures, and guidance issued by the Director of Cost Assessment and Program Evaluation.

`(3) Funds that are made available for a major defense acquisition program or major automated information system program in accordance with a cost estimate conducted pursuant to subsection (a)(6), but are excess to a cost analysis or target developed pursuant to paragraph (2), shall remain available for obligation in accordance with the terms of applicable authorization and appropriations Acts.

`(4) Funds described in paragraph (3)--

`(A) may be used--

`(i) to cover any increased program costs identified by a revised cost analysis or target developed pursuant to paragraph (2);

`(ii) to acquire additional end items in accordance with the requirements of section 2308 of this title; or

`(iii) to cover the cost of risk reduction and process improvements; and

`(B) may be reprogrammed, in accordance with established procedures, only if determined to be excess to program needs on the basis of a cost estimate developed with the concurrence of the Director of Cost Assessment and Program Evaluation.'.

From S. 3454, National Defense Authorization Act for Fiscal Year 2011

SEC. 802. COST ESTIMATES FOR PROGRAM BASELINES AND CONTRACT NEGOTIATIONS FOR MAJOR DEFENSE ACQUISITION AND MAJOR AUTOMATED INFORMATION SYSTEM PROGRAMS.

Section 2334 of title 10, United States Code, is amended--

(1) in subsection (d)--

(A) in paragraph (1)--

(i) by striking `paragraph (2)' and inserting `paragraph (3)'; and

(ii) by striking `, the rationale for selecting such confidence level, and, if such confidence level is less than 80 percent, the justification for selecting a confidence level of less than 80 percent; and' and inserting `and the rationale for selecting such confidence level;';

(B) by redesignating paragraph (2) as paragraph (3); and

(C) by inserting after paragraph (1) the following new paragraph (2):

`(2) ensure that such confidence level provides a high degree of confidence that the program can be completed without the need for significant adjustment to program budgets; and';

(2) by redesignating subsections (e) and (f) as subsections (f) and (g), respectively; and

(3) by inserting after subsection (d) the following new subsection (e):

`(e) Estimates for Program Baseline and Contract Negotiation Purposes- (1) The policies, procedures, and guidance issued by the Director of Cost Assessment and Program Evaluation in accordance with the requirements of subsection (a) shall provide that--

`(A) cost estimates developed for baseline descriptions and other program purposes specified in subsection (a)(6) are not to be used for the purpose of contract negotiations or the obligation of funds; and

`(B) cost estimates developed for the purpose of contract negotiations and the obligation of funds are based on the government's reasonable expectation of successful contractor performance in accordance with the contractor's proposal and previous experience.

`(2) The Program Manager and contracting officer for each major defense acquisition program and major automated information system program shall ensure that cost estimates developed for the purpose of contract negotiations and the obligation of funds are carried out in accordance with the requirements of paragraph (1) and the policies, procedures, and guidance issued by the Director of Cost Assessment and Program Evaluation.

`(3) Funds that are made available for a major defense acquisition program or major automated information system program in accordance with a cost estimate developed pursuant to subsection (a)(6), but are excess to a cost estimate developed pursuant to paragraph (2), shall remain available for obligation in accordance with the terms of applicable authorization and appropriations Acts, but may not be obligated without the written approval of the Milestone Decision Authority for such major defense acquisition program or major automated information system program.

`(4) Funds described in paragraph (3)--

`(A) may be used--

`(i) to cover increased program costs, as reflected in a revised cost estimate developed pursuant to paragraph (2); or

`(ii) to acquire additional end items in accordance with the requirements of section 2308 of this title; and

`(B) may be reprogrammed, in accordance with established procedures, only if determined to be excess to program needs on the basis of a revised cost estimate developed pursuant to subsection (a)(6).'.

Cost estimates for program baselines and contract negotiations for major defense acquisition and major automated information system programs (sec. 811)

The Senate committee-reported bill contained a provision (sec. 802) that would amend section 2334 of title 10, United States Code, to clarify that cost estimates developed for baseline descriptions and budgetary purposes are not appropriate for use in contract negotiations and the obligation of funds.

The House bill contained no similar provision.

The agreement includes the Senate provision with a clarifying amendment.

We expect the next annual report prepared by the Director of Cost Assessment and Performance Evaluation to include an assessment of whether and to what extent personnel responsible for cost estimates developed for major defense acquisition programs by military departments and defense agencies are independent and the impact that any lack of independence may have on the quality and reliability of such cost estimates.
 

From S. Rpt. 111-201, to accompany S. 3454, NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2011

Cost estimates for program baselines and contract negotiations for major defense acquisition and major automated information system programs (sec. 802)

The committee recommends a provision that would amend section 2334 of title 10, U.S. Code, to clarify the distinction between cost estimates developed for baseline descriptions and budgetary purposes, and cost estimates developed for the purpose of contract negotiations and the obligation of funds. Under this provision, cost estimates developed for baseline descriptions and budgetary purposes would be developed to provide a high degree of confidence that the program can be completed without the need for significant adjustment to program budgets. Cost estimates developed for contract negotiation purposes would be based on the government's reasonable expectation of successful contractor performance in accordance with the contractor's proposal and previous experience.

The committee understands that the phrase `a high degree of confidence that the program can be completed without the need for significant adjustment to program budgets' means no less than a 50 percent confidence level. In programs with a wide range of uncertainty, a confidence level of greater than 50 percent may be required to ensure a high degree of confidence that significant budget adjustments will not be required.

Section 2334 was included in the Weapon Systems Acquisition Reform Act of 2009 (Public Law 111-23) to address the problems caused by the reliance of the Department of Defense (DOD) on unrealistic and overly optimistic cost estimates to make program and budget decisions. Senator Levin explained the need for the provision as follows:

`[C]ontractors and program offices have every reason to produce optimistic cost estimates and unrealistic performance expectations, because programs that promise revolutionary change and project lower costs are more likely to be approved and funded by senior Administration officials and by Congress. In other words, we get the information we need to run our programs from people who have a vested interest in overpromising. . . .

`The consequences of using such optimistic estimates were correctly identified by DOD's Acquisition Performance Assessment (DAPA) panel two years ago. The DAPA panel found that `Using optimistic budget estimates . . . forces excessive annual reprogramming and budget exercises within the Department, which in turn causes program `restructuring' that drives long-term cost, causes schedule growth, and opens the door to requirements creep.'

Unfortunately, some DOD program officials have taken the view that the conservative cost estimates developed for budgetary purposes should also be used for contract negotiation purposes, i.e., that if DOD has decided that it should be prepared for the possibility that a program might cost significantly more than the contractor predicts, we should pay the contractor on that basis. This approach would lock in a worst case cost scenario and eliminate any incentive for the contractor to achieve more successful program outcomes. The committee concludes that budgetary estimates necessarily differ from estimates used for contract negotiation purposes, because they serve a different purpose.