The U.S. Defense Department carefully selected the programs it wants to cancel in fiscal 2013 to avoid termination fee negotiations that have plagued the Pentagon in prior years.
In some cases, DoD will simply let existing production contracts expire and take delivery of new aircraft, only to turn around and park them in the desert, just to avoid the headache of stopping these efforts midstream/.../
Over the past 10 years, the Pentagon has spent about $46 billion, using current dollar estimates, on development programs that were terminated and never entered production, according to a July 2011 report by Todd Harrison at the Center for Strategic and Budgetary Assessments.
Still, the proposed cancellations themselves are not likely to cost DoD much. It appears that the programs eyed for axing in 2013 are not locked into multiyear or extensive contracts, meaning there would be less cost incurred by DoD when canceling them.
The cost of canceling the programs in 2013 is dependent on the type of contract. How the government cancels a contract is also a factor. If the government terminates a contract for cause — meaning poor performance or being over budget — it might not be responsible for a termination fee. Terminating for convenience is a different issue.
“If it’s not well-defined in the contract to get out of the contract, you may have to negotiate to pay even more to a contractor for them to be willing to let you out of it,” Harrison said. “A lot of these savings from cutting these things, these are just estimates. They don’t really know what the termination costs are going to be until they try to do it.”
Calculating the termination cost for these programs is difficult because individual contract language is unique.
“If you ... signed a contract and said, ‘We’re going to buy 10 of these platforms.’ They ramp up, hire people and start ordering materials in line with your contract, and when you terminate it, they’ve got costs,” Harrison said.