The nation's long-term fiscal imbalances will likely make DOD's 1.6 trillion planned investment in new weapon systems unsustainable. 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 convenience, 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 convenience 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. 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.

Many contract termination actions initiated because of contractor default are subsequently executed for the convenience of the Government. This may result in the loss of the Government's right to recover excess reprocurement costs and other damages. The research effort was designed to determine the scope of the problem and, by analyzing individual cases, to identify common elements leading to termination conversions. United States Air Force contracts over a three-year period were studied, including both those terminations for default that were appealed to the Armed Services Board of Contract Appeals and those converted to termination for convenience by negotiation at the contracting officer level. The investigation was hampered by decentralized data but some conclusions were drawn, especially that most termination conversions are negotiated at the contracting officer level. The use of data base management systems was recommended so that data could be centrally collected for further research and management of this problem area. (Author).

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