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[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 32 Introduced in Senate (IS)]

110th CONGRESS
  1st Session
                                 S. 32

To reform the acquisition process of the Department of Defense, and for 
                            other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                              May 22, 2007

  Mr. McCain introduced the following bill; which was read twice and 
              referred to the Committee on Armed Services

_______________________________________________________________________

                                 A BILL

 
To reform the acquisition process of the Department of Defense, and for 
                            other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Defense Acquisition Reform Act of 
2007''.

SEC. 2. JOINT REQUIREMENTS OVERSIGHT COUNCIL EVALUATION OF MAJOR 
              DEFENSE ACQUISITION PROGRAMS EXPERIENCING CERTAIN COST 
              INCREASES.

    (a) In General.--Chapter 144 of title 10, United States Code, is 
amended by inserting after section 2433 the following new section:
``Sec. 2433a. Joint Requirements Oversight Council evaluation of 
              programs experiencing certain cost increases
    ``(a) In General.--The Secretary concerned may not reprogram funds 
for a major defense acquisition program described in subsection (b), or 
otherwise provide or provide for additional funding for such a program, 
until the Joint Requirements Oversight Council submits to the Secretary 
an assessment of the performance requirements for the item to be 
procured under the contract, including the effect of such requirements 
on cost increases under the program.
    ``(b) Covered Major Defense Acquisition Programs.--A major defense 
acquisition program described in this subsection is any major defense 
acquisition program as follows:
            ``(1) A major defense acquisition program that experiences 
        a percentage increase in the program acquisition unit cost of--
                    ``(A) at least 10 percent over the program 
                acquisition unit cost for the program as shown in the 
                current Baseline Estimate for the program; or
                    ``(B) at least 25 percent over the program 
                acquisition unit cost for the program as shown in the 
                original Baseline Estimate for the program.
            ``(2) A major defense acquisition program that is a 
        procurement program that experiences a percentage increase in 
        the procurement unit cost of--
                    ``(A) at least 10 percent over the procurement unit 
                cost for the program as shown in the current Baseline 
                Estimate for the program; or
                    ``(B) at least 25 percent over the procurement unit 
                cost for the program as shown in the original Baseline 
                Estimate for the program.
    ``(c) Definitions.--In this section:
            ``(1) The terms `program acquisition unit cost' and 
        `procurement unit cost' have the meaning given those terms in 
        section 2432(a) of this title.
            ``(2) The terms `Baseline Estimate' and `procurement 
        program' have the meaning given those terms in section 2433(a) 
        of this title.''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
such title is amended by inserting after the item relating to section 
2433 the following new item:

``2433a. Joint Requirements Oversight Council evaluation of programs 
                            experiencing certain cost increases.''.

SEC. 3. MEMBERSHIP OF THE JOINT REQUIREMENTS OVERSIGHT COUNCIL.

    Section 181(c) of title 10, United States Code, is amended--
            (1) in paragraph (1)--
                    (A) in subparagraph (D), by striking ``and'' at the 
                end;
                    (B) in subparagraph (E), by striking the period at 
                the end and inserting a semicolon; and
                    (C) by adding at the end the following new 
                subparagraphs:
            ``(F) the Under Secretary of Defense for Acquisition, 
        Technology, and Logistics; and
            ``(G) the Under Secretary of Defense (Comptroller).'';
            (2) by redesignating paragraphs (2) and (3) as paragraphs 
        (3) and (4), respectively; and
            (3) by inserting after paragraph (1) the following new 
        paragraph (2):
    ``(2) The Director of Program Analysis and Evaluation shall be an 
advisor to the Council in the performance of its mission under this 
section.''.

SEC. 4. REQUIREMENT OF APPROVAL OF JOINT REQUIREMENTS OVERSIGHT COUNCIL 
              FOR INITIAL OPERATIONAL TEST AND EVALUATION IN 
              ENVIRONMENT NOT SPECIFIED IN TEST AND EVALUATION MASTER 
              PLAN.

    Section 2399(b) of title 10, United States Code, is amended--
            (1) by redesignating paragraphs (2) through (6) as 
        paragraphs (3) through (7), respectively;
            (2) by inserting after paragraph (1) the following new 
        paragraph (2):
    ``(2) Initial operational test and evaluation of a major defense 
acquisition program may not be conducted in an environment other than 
the environment specified and defined in the test and evaluation master 
plan (TEMP) concerned without the approval of the Joint Requirements 
Oversight Council.'';
            (3) in paragraph (4), as redesignated by paragraph (1) of 
        this subsection, by striking ``paragraph (2)'' and inserting 
        ``paragraph (3)'';
            (4) in paragraph (5), as so redesignated, by striking 
        ``paragraph (2)'' and inserting ``paragraph (3)''; and
            (5) in paragraph (6), as so redesignated--
                    (A) by striking ``paragraph (4)'' and inserting 
                ``paragraph (5)''; and
                    (B) by striking ``paragraph (2)'' and inserting 
                ``paragraph (3)''.

SEC. 5. APPROVAL BY PROGRAM MANAGERS OF CERTAIN COST INCREASES IN 
              CONTRACTS FOR THE ACQUISITION OF PROPERTY.

    (a) Regulations Required.--
            (1) In general.--Not later than 90 days after the date of 
        the enactment of this Act, the Secretary of Defense shall 
        prescribe in regulations certain mechanisms that provide cost 
        control measures in contracts for the acquisition of property 
        for the Department of Defense that may be authorized or 
        approved by the program manager.
            (2) Objectives.--In prescribing the regulations, the 
        Secretary shall seek, to the maximum extent practicable, to 
        achieve cost control, the stabilization of requirements, and 
        timely delivery in accordance with contract specifications in 
        the performance of contracts for the acquisition of property 
        for the Department.
    (b) Covered Cost Increases.--The regulations required by subsection 
(a) shall provide that the cost increases that may be authorized or 
approved by a program manager under a contract shall be limited to the 
following:
            (1) A cost increase necessary to secure or enhance safety 
        in the property procured under the contract where the unsecure 
        or unsafe condition or situation (as officially documented by a 
        responsible oversight organization) is attributable to the 
        Government.
            (2) A cost increase necessary for the correction of a 
        defect in the contract that is attributable to the Government, 
        including a defect in contract specifications, a defect in or 
        the unavailability of Government information necessary for the 
        performance of the contract, or a defect in or the 
        unavailability of Government equipment necessary for the 
        performance of the contract.
            (3) A cost increase associated with the unavailability of 
        Government-specified, contractor-furnished equipment or 
        components.
            (4) A cost increase that is necessary for the modification 
        of the property procured under the contract that is critical 
        for the delivery or completion of operational testing.
            (5) A cost increase resulting from a modification of 
        applicable statutes or regulations, but only if--
                    (A) funds are specifically made available to 
                implement such modification; or
                    (B) in the event funds are not so made available, 
                the service acquisition executive concerned approves 
                the cost increase.
            (6) Any other cost increase approved and funded by an 
        appropriate oversight organization that is the result of new or 
        revised requirements or modifications that would result in an 
        overall reduction in life cycle cost in the property procured 
        under the contract.
    (c) Availability of Change Order Funds for Cost Increases.--The 
regulations shall provide that amounts appropriated for a program and 
available for change orders to contracts under the program shall be 
available for costs authorized or approved under subsection (b).
    (d) Prohibition on Other Cost Increases.--The regulations shall 
prohibit the authorization or approval by a program manager of any cost 
increase under a contract not authorized pursuant to subsection (b).
    (e) Cost Reductions.--The regulations shall also authorize a 
program manager to authorize or approve an administrative change, 
whether engineering or non-engineering, to a contract for the 
acquisition of property for the Department if the change will reduce or 
have no effect on the cost of the contract.
    (f) Prohibition on Use of Certain Cost Reductions for Offset.--The 
regulations shall prohibit the utilization as an offset for a cost 
increase in a contract under subsection (b)(6) of any reduction in the 
cost of the contract resulting from a cost change approved by the 
program manager, including a reduction attributable to a change 
authorized under subsection (e).

SEC. 6. MILITARY DEPUTIES TO THE ASSISTANT SECRETARIES OF THE MILITARY 
              DEPARTMENTS FOR ACQUISITION MATTERS AND THE CHIEFS OF 
              STAFF.

    (a) Department of the Army.--
            (1) In general.--There is in the Army a Military Deputy for 
        Acquisition Matters, appointed by the President, by and with 
        the advice and consent of the Senate, from among officers in 
        the Army who have significant experience in the areas of 
        acquisition and program management.
            (2) Grade.--The Military Deputy for Acquisition Matters has 
        the grade of lieutenant general.
            (3) Duties.--The Military Deputy for Acquisition Matters 
        shall have the following duties:
                    (A) To assist the Assistant Secretary of the Army 
                with responsibility for acquisition matters in the 
                supervision of acquisition matters for the Army.
                    (B) To report to the Chief of Staff of the Army 
                regarding such matters.
    (b) Department of the Navy.--
            (1) In general.--There is in the Navy a Naval Deputy for 
        Acquisition Matters, appointed by the President, by and with 
        the advice and consent of the Senate, from among officers in 
        the Navy and Marine Corps who have significant experience in 
        the areas of acquisition and program management.
            (2) Grade.--The Naval Deputy for Acquisition Matters has 
        the grade of vice admiral or lieutenant general.
            (3) Duties.--The Naval Deputy for Acquisition Matters shall 
        have the following duties:
                    (A) To assist the Assistant Secretary of the Navy 
                with responsibility for acquisition matters in the 
                supervision of acquisition matters for the Navy.
                    (B) To report to the Chief of Naval Operations 
                regarding such matters.
    (c) Department of the Air Force.--
            (1) In general.--There is in the Air Force a Military 
        Deputy for Acquisition Matters, appointed by the President, by 
        and with the advice and consent of the Senate, from among 
        officers in the Air Force who have significant experience in 
        the areas of acquisition and program management.
            (2) Grade.--The Military Deputy for Acquisition Matters has 
        the grade of lieutenant general.
            (3) Duties.--The Military Deputy for Acquisition Matters 
        shall have the following duties:
                    (A) To assist the Assistant Secretary of the Air 
                Force with responsibility for acquisition matters in 
                the supervision of acquisition matters for the Air 
                Force.
                    (B) To report to the Chief of Staff of the Air 
                Force regarding such matters.
    (d) Exclusion of Military Deputies From Distribution and Strength 
in Grade Limitations.--
            (1) Distribution.--Section 525(b) of title 10, United 
        States Code, is amended by adding at the end the following new 
        paragraph:
    ``(9)(A) An officer while serving in a position specified in 
subparagraph (B) is in addition to the number that would otherwise be 
permitted for that officer's armed force for the grade of lieutenant 
general or vice admiral, as applicable.
    ``(B) A position specified in this subparagraph is each position as 
follows:
            ``(i) Military Deputy for Acquisition Matters of the Army.
            ``(ii) Naval Deputy for Acquisition Matters of the Navy.
            ``(iii) Military Deputy for Acquisition Matters of the Air 
        Force.''.
            (2) Authorized strength.--Section 526 of such title is 
        amended by adding at the end the following new subsection:
    ``(g) Exclusion of Military Deputies to Assistant Secretaries of 
the Military Departments for Acquisition Matters.--The limitations of 
this section do not apply to a general or flag officer who is covered 
by the exclusion under section 525(b)(9) of this title.''.

SEC. 7. COMMITTEE ON STRATEGIC INVESTMENT IN MAJOR DEFENSE ACQUISITION 
              PROGRAMS.

    (a) In General.--The Secretary of Defense shall establish within 
the Department of Defense a committee to ensure the effective 
allocation within major defense acquisition programs of the financial 
resources available for such programs.
    (b) Members.--
            (1) In general.--The committee established under subsection 
        (a) shall be composed of the following:
                    (A) The Under Secretary of Defense for Acquisition, 
                Technology, and Logistics.
                    (B) The Vice Chairman of the Joint Chiefs of Staff.
                    (C) The Director of Program Analysis and 
                Evaluation.
                    (D) Any other officials of the Department of 
                Defense jointly agreed upon by the Under Secretary and 
                the Vice Chairman.
            (2) Chairs.--The officials referred to in subparagraphs (A) 
        through (C) of paragraph (1) shall serve as joint chairs of the 
        committee.
    (c) Duties.--
            (1) In general.--The committee established under subsection 
        (a) shall, at each point in the acquisition of a major defense 
        acquisition program specified in paragraph (2), determine the 
        most effective allocation among such program of the financial 
        resources available to such program at such point. In making 
        such determinations, the committee shall balance requirements, 
        technological maturities, and available resources under such 
        program utilizing solutions bounded by a time-certain and 
        available resources (commonly referred to as ``bounded 
        solutions''), portfolio management techniques, and other 
        appropriate investment evaluation techniques to identify the 
        most appropriate allocation of financial resources to meet 
        requirements.
            (2) Points within acquisition process.--The points in the 
        acquisition of a major defense acquisition program specified in 
        this paragraph are the points as follows:
                    (A) At an appropriate point early in the 
                acquisition jointly specified by the Under Secretary 
                and the Vice Chairman.
                    (B) At such other point in the acquisition as the 
                Under Secretary and the Vice Chairman shall jointly 
                specify for purposes of this section or otherwise 
                jointly specify for purposes of the program.
    (d) Major Defense Acquisition Program Defined.--In this section, 
the term ``major defense acquisition program'' means a major defense 
acquisition program for purposes of chapter 144 of title 10, United 
States Code.

SEC. 8. COMPTROLLER GENERAL REPORT ON DEPARTMENT OF DEFENSE 
              ORGANIZATION AND STRUCTURE FOR THE ACQUISITION OF MAJOR 
              DEFENSE ACQUISITION PROGRAMS.

    (a) Report Required.--Not later than one year after the date of the 
enactment of this Act, the Comptroller General of the United States 
shall submit to the congressional defense committees a report on 
potential modifications of the organization and structure of the 
Department of Defense for the acquisition of major defense acquisition 
programs.
    (b) Elements.--The report required by subsection (a) shall include 
the results of a review, conducted by the Comptroller General for 
purposes of the report, regarding the feasibility and advisability of, 
at a minimum, the following:
            (1) Establishing system commands within each military 
        department, each of which commands would be headed by a 4-star 
        general officer, to whom the program managers and program 
        executive officers for major defense acquisition programs would 
        report.
            (2) Revising the acquisition process for major defense 
        acquisition programs by establishing shorter, more frequent 
        acquisition program milestones.
            (3) Requiring certifications of program status to the 
        defense acquisition executive and Congress prior to milestone 
        approval for major defense acquisition programs.
            (4) Establishing a new office (to be known as the ``Office 
        of Independent Assessment'') to provide independent cost 
        estimates and performance estimates for major defense 
        acquisition programs.
            (5) Establishing a milestone system for major defense 
        acquisition programs utilizing the following milestones (or 
        such other milestones as the Comptroller General considers 
        appropriate for purposes of the review):
                    (A) Milestone 0.--The time for the development and 
                approval of a mission need statement for a major 
                defense acquisition program.
                    (B) Milestone 1.--The time for the development and 
                approval of a capability need definition for a major 
                defense acquisition program, including development and 
                approval of a certification statement on the 
                characteristics required for the system under the 
                program and a determination of the priorities among 
                such characteristics.
                    (C) Milestone 2.--The time or technology 
                development and assessment for a major defense 
                acquisition program, including development and approval 
                of a certification statement on technology maturity of 
                elements under the program.
                    (D) Milestone 3.--The time for system development 
                and demonstration for a major defense acquisition 
                program, including development and approval of a 
                certification statement on design proof of concept.
                    (E) Milestone 4.--The time for final design, 
                production prototyping, and testing of a major defense 
                acquisition program, including development and approval 
                of a certification statement on cost, performance, and 
                schedule in advance of initiation of low-rate 
                production of the system under the program.
                    (F) Milestone 5.--The time for limited production 
                and field testing of the system under a major defense 
                acquisition program.
                    (G) Milestone 6.--The time for initiation of full-
                rate production of the system under a major defense 
                acquisition program.
            (6) Requiring the Milestone Decision Authority for a major 
        defense acquisition program to specify, at the time of 
        Milestone B approval, or Key Decision Point B approval, as 
        applicable, the period of time that will be required to deliver 
        an initial operational capability to the relevant combatant 
        commanders.
            (7) Establishing a materiel solutions process for 
        addressing identified gaps in critical warfighting 
        capabilities, under which process the Under Secretary of 
        Defense for Acquisition, Technology, and Logistics circulates 
        among the military departments and appropriate Defense Agencies 
        a request for proposals for technologies and systems to address 
        such gaps.
    (c) Consultation.--In conducting the review required under 
subsection (b) for the report required by subsection (a), the 
Comptroller General shall obtain the views of the following:
            (1) Senior acquisition officials currently serving in the 
        Department of Defense.
            (2) Individuals who formerly served as senior acquisition 
        officials in the Department of Defense.
            (3) Participants in previous reviews of the organization 
        and structure of the Department of Defense for the acquisition 
        of major weapon systems, including the President's Blue Ribbon 
        Commission on Defense Management in 1986.
            (4) Other experts on the acquisition of major weapon 
        systems.
            (5) Appropriate experts in the Government Accountability 
        Office.

SEC. 9. CHANGES TO MILESTONE B CERTIFICATIONS.

    Section 2366a of title 10, United States Code, is amended--
            (1) by redesignating subsections (b), (c), (d), and (e) as 
        subsections (c), (d), (e), and (f), respectively;
            (2) by inserting after subsection (a) the following new 
        subsection (b):
    ``(b) Changes to Certification.--(1) The program manager for a 
major defense acquisition program that has received certification under 
subsection (a) shall immediately notify the milestone decision 
authority of any changes to the program that are--
            ``(A) inconsistent with such certification; or
            ``(B) deviate significantly from the material provided to 
        the milestone decision authority in support of such 
        certification.
    ``(2) Upon receipt of information under paragraph (1), the 
milestone decision authority may withdraw the certification concerned 
or rescind Milestone B approval (or Key Decision Point B approval in 
the case of a space program) if the milestone decision authority 
determines that such action is in the best interest of the national 
security of the United States.'';
            (3) in subsection (c), as redesignated by paragraph (1)--
                    (A) by inserting ``(1)'' before ``The 
                certification''; and
                    (B) by adding at the end the following new 
                paragraph (2):
    ``(2) Any information provided to the milestone decision authority 
pursuant to subsection (b) shall be summarized in the first Selected 
Acquisition Report submitted under section 2432 of this title after 
such information is received by the milestone decision authority.''; 
and
            (4) in subsection (e), as so redesignated, by striking 
        ``subsection (c)'' and inserting ``subsection (d)''.

SEC. 10. BUSINESS CASE ANALYSIS FOR CERTAIN MAJOR DEFENSE ACQUISITION 
              PROGRAMS.

    (a) Analysis Before Milestone B Approval.--The milestone decision 
authority for a major defense acquisition program may not grant 
Milestone B approval for the program until the milestone decision 
authority obtains from a federally funded research and development 
center (FFRDC) a business case analysis for the program meeting the 
requirements of subsection (c).
    (b) Analysis Following Deviations From Milestone B Approval 
Certification.--If the milestone decision authority for a major defense 
acquisition program determines that information provided to the 
milestone decision authority by the program manager reveals changes to 
the program that are inconsistent with the certification for Milestone 
B approval with respect to the program under section 2366a(a) of title 
10, United States Code, or that significantly deviate from the material 
provided to the milestone decision authority in support of such 
certification, the milestone decision authority shall require the 
conduct by a federally funded research and development center of a new 
business case analysis for the program meeting the requirements of 
subsection (c).
    (c) Elements of Business Case Analysis.--The business case analysis 
for a major defense acquisition program under this section shall ensure 
the following:
            (1) That the needs of the user for the system under the 
        program have been accurately defined.
            (2) That alternative approaches to satisfying such needs 
        have been properly analyzed, and that the quantities of the 
        system required are well understood.
            (3) That the system developed or, in the case of a new 
        developmental program, the system to be developed, is 
        producible at a cost that matches the expectations and 
        financial resources of the system user.
            (4) That the developer has the resources to design the 
        system with the features that the user wants and to deliver the 
        system when the user needs the system.
    (d) Submittal to Congress.--Each business case analysis conducted 
under this section shall be submitted to the congressional defense 
committees not later than seven days after the date on which such 
business case analysis is submitted to the milestone decision authority 
under this section.
    (e) Definitions.--In this section:
            (1) The term ``major defense acquisition program'' means a 
        major defense acquisition program for purposes of chapter 144 
        of title 10, United States Code.
            (2) The term ``Milestone B approval'', with respect to a 
        major defense acquisition program, has the meaning given that 
        term in section 2366(e)(7) of title 10, United States Code.

SEC. 11. GUIDANCE ON UTILIZATION OF AWARD FEES IN CONTRACTS UNDER 
              DEPARTMENT OF DEFENSE ACQUISITION PROGRAMS.

    (a) Regulations Required.--Not later than 180 days after the date 
of the enactment of this Act, the Secretary of Defense shall prescribe 
in regulations guidance on the appropriate use of award fees in 
contracts under Department of Defense acquisition programs.
    (b) Utilization of Objective Criteria in Assessment of Contractor 
Performance.--
            (1) In general.--The regulations required by subsection (a) 
        shall provide that, to the extent practicable, objective 
        criteria are utilized in the assessment of contractor 
        performance in Department acquisition programs.
            (2) Mixed utilization of objective and subjective 
        criteria.--The regulations shall provide that, in any case in 
        which objective criteria are available for the assessment of 
        contractor performance, the program manager and contracting 
        officer concerned may elect to assess contractor performance 
        through an appropriate mixture of objective criteria and such 
        subjective criteria as the program manager and contracting 
        officer jointly consider appropriate under a contract providing 
        both incentive fees and awards fees, including a cost-plus-
        incentive/award fee contract or a fixed-price-incentive/award 
        fee contract.
            (3) Utilization of subjective criteria.--
                    (A) In general.--The regulations shall provide 
                that, if it is determined that objective criteria do 
                not exist and it is appropriate to use a cost-plus-
                award-fee contract, the head of the contracting 
                activity concerned shall find that the work to be 
                performed under the contract is such that it is not 
                feasible or effective to establish objective incentive 
                criteria for the contract.
                    (B) Delegation.--The authority to make a 
                determination and finding under subparagraph (A) may be 
                delegated by the head of a contracting activity but 
                only to an official in the contracting activity who is 
                one level lower in the contracting chain of authority 
                than the head of the contracting activity.
    (c) Schedule for Award Fees.--
            (1) In general.--The regulations required by subsection (a) 
        shall set forth a schedule of ratings of contractor performance 
        for award fees in contracts under Department acquisition 
        programs, including--
                    (A) a range of authorized ratings;
                    (B) the contractor performance required for each 
                authorized rating; and
                    (C) the percentage of potential award fees payable 
                as a result of the achievement of each authorized 
                rating.
            (2) Authorized ratings and performance.--The schedule shall 
        set forth a range of authorized ratings and associated 
        contractor performance as follows:
                    (A) Outstanding, for a contractor who meets--
                            (i) the minimum essential requirements of 
                        the contract; and
                            (ii) at least 90 percent of the criteria 
                        for the award of award fees under the contract.
                    (B) Excellent, for a contractor who meets--
                            (i) the minimum essential requirements of 
                        the contract; and
                            (ii) at least 75 percent of the criteria 
                        for the award of award fees under the contract.
                    (C) Good, for a contractor who meets--
                            (i) the minimum essential requirements 
                        under the contract; and
                            (ii) at least 50 percent of the criteria 
                        for the award of award fees under the contract.
                    (D) Satisfactory, for a contractor who meets the 
                minimum essential requirements under the contract but 
                does not meet at least 50 percent of the criteria for 
                the award of award fees under the contract.
                    (E) Unsatisfactory, for a contractor who does not 
                meet the minimum essential requirements under the 
                contract.
            (3) Award fees payable.--The schedule shall provide that 
        the amount payable from amounts available for the payment of 
        award fees under a contract (commonly referred to as an ``award 
        fee pool'') to a contractor who achieves a particular rating 
        under the schedule shall be the percentage of such amounts, as 
        determined appropriate by the contracting officer, from the 
        percentages as follows:
                    (A) In the case of outstanding, 90 percent to 100 
                percent.
                    (B) In the case of excellent, 75 percent to 90 
                percent.
                    (C) In the case of good, 50 percent to 75 percent.
                    (D) In the case of satisfactory, not more than 50 
                percent.
                    (E) In the case of unsatisfactory, 0 percent.
    (d) Establishment of Award Fee Requirements.--The regulations 
required by subsection (a) shall provide that the requirements to be 
satisfied for the award of award fees under a contract shall be 
determined by the contracting officer, in consultation with the program 
manager concerned and the fee determining official for the contract. 
The specification of such requirements in the contract may be referred 
to as the ``Award Fee Plan'' for the contract.
    (e) Rollover of Award Fees to Later Award Periods.--
            (1) In general.--The regulations required by subsection (a) 
        shall establish a negative presumption against the rollover of 
        amounts available for the payment of award fees under a 
        contract from one award fee period under the contract to 
        another award fee period under the contract unless the rollover 
        of such amounts is specifically set forth in the acquisition 
        strategy under which the contract is entered into.
            (2) Limitation on amount of rollover.--The regulations 
        shall set forth specific limits on the amount available for the 
        payment of award fees under a contract that may be rolled over 
        from one award fee period under the contract to another award 
        fee period under the contract. Such limits may be expressed as 
        specific dollar amounts or as percentages of the amount 
        available for payment of award fees under the contract 
        concerned.
            (3) Documentation of rollover.--The regulations shall 
        require that any determination by the fee determining official 
        to roll over amounts available for the payment of award fees 
        under a contract from one award fee period under the contract 
        to another award fee period under the contract shall be 
        included in writing in the contract file for the contract.

SEC. 12. SUBSTANTIAL SAVINGS UNDER MULTIYEAR CONTRACTS.

    (a) Definition in Regulations of Substantial Savings Under 
Multiyear Contracts.--
            (1) In general.--Not later than 60 days after the date of 
        the enactment of this Act, the Secretary of Defense shall 
        modify the regulations prescribed pursuant to subsection 
        (b)(2)(A) of section 2306b of title 10, United States Code, to 
        define the term ``substantial savings'' for purposes of 
        subsection (a)(1) of such section. Such regulations shall 
        specify the following:
                    (A) Savings that exceed 10 percent of the total 
                anticipated costs of carrying out a program through 
                annual contracts shall be considered to be substantial.
                    (B) Savings that exceed 8 percent of the total 
                anticipated costs of carrying out a program through 
                annual contracts, but do not exceed 10 percent of such 
                costs, shall not be considered to be substantial unless 
                the following conditions are satisfied:
                            (i) The program has not breached any 
                        threshold under section 2433 of title 10, 
                        United States Code, during the two-year period 
                        ending on the date on which the military 
                        department concerned first submits to Congress 
                        a multiyear procurement proposal with respect 
                        to the program.
                            (ii) The program is estimated to save at 
                        least $500,000,000 under a multiyear contract, 
                        as compared to annual contracts
                    (C) Savings that do not exceed 8 percent of the 
                total anticipated costs of carrying out a program 
                through annual contracts shall not be considered to be 
                substantial.
            (2) Determination of savings.--The regulations required 
        under this subsection shall require that the determination of 
        the amount of savings to be achieved under a multiyear 
        contract, including whether or not such savings are treatable 
        as substantial savings for purposes of subsection (a)(1) of 
        section 2306b of title 10, United States Code, shall be made by 
        the Cost Analysis Improvement Group (CAIG) of the Department of 
        Defense.
            (3) Effective date.--The modification required by paragraph 
        (1) shall apply with regard to any multiyear contract that is 
        authorized after the date that is 60 days after the date of the 
        enactment of this Act.
    (b) Reports on Savings Achieved.--
            (1) Reports required.--Not later than January 15 of 2008, 
        2009, and 2010, the Secretary shall submit to the congressional 
        defense committees a report on the savings achieved through the 
        use of multiyear contracts that were entered under the 
        authority of section 2306b of title 10, United States Code, and 
        the performance of which was completed in the preceding fiscal 
        year.
            (2) Elements.--Each report under paragraph (1) shall 
        specify, for each multiyear contract covered by such report--
                    (A) the savings that the Department of Defense 
                estimated it would achieve through the use of the 
                multiyear contract at the time such contract was 
                awarded; and
                    (B) the best estimate of the Department on the 
                savings actually achieved under such contract.

SEC. 13. INVESTMENT STRATEGY FOR MAJOR DEFENSE ACQUISITION PROGRAMS.

    (a) Report Required.--Not later than 180 days after the date of the 
enactment of this Act, the Secretary of Defense shall submit to the 
congressional defense committees an investment strategy for the 
allocation of funds and other resources among major defense acquisition 
programs.
    (b) Elements.--The strategy required by subsection (a) shall do the 
following:
            (1) Establish priorities among needed capabilities under 
        major defense acquisition programs, and to assess the resources 
        (including funds, technologies, time, and personnel) needed to 
        achieve such capabilities.
            (2) Balance cost, schedule, and requirements for major 
        defense acquisition programs to ensure the most efficient use 
        of Department of Defense resources.
            (3) Ensure that the budget, requirements, and acquisition 
        processes of the Department of Defense work in a complementary 
        manner to achieve desired results.
    (c) Recommendations.--In submitting the strategy required by 
subsection (a), the Secretary shall include any recommendations, 
including recommendations for legislative action, that the Secretary 
considers appropriate to implement the strategy.
    (d) Utilization for Budget Purposes.--The Secretary shall utilize 
the strategy required by subsection (a) in developing requests for 
funding and other resources to be allocated to major defense 
acquisition programs under the budget of the President to be submitted 
to Congress each fiscal year under section 1105(a) of title 31, United 
States Code.
    (e) Current Programs Beyond Milestone B Approval.--Pending 
completion of the strategy required by subsection (a), the Secretary 
shall, to the extent practicable, establish priorities in the 
allocation of funds and other resources for major defense acquisition 
programs that have Milestone B approval in order to ensure the 
acquisition of items under such programs in the most cost-effective and 
efficient manner.
    (f) Definitions.--In this section:
            (1) The term ``major defense acquisition program'' has the 
        meaning given that term in section 2430 of title 10, United 
        States Code.
            (2) The term ``Milestone B approval'' has the meaning given 
        that term in section 2366(e)(7) of title 10, United States 
        Code.

SEC. 14. ETHICS COMPLIANCE BY DEPARTMENT OF DEFENSE CONTRACTORS.

    (a) In General.--Not later than 180 days after the date of the 
enactment of this Act, the Secretary of Defense shall prescribe in 
regulations a requirement that a contracting officer of the Department 
of Defense may not determine a contractor to be responsible for 
purposes of the award of a new covered contract for the Department, or 
an agency or component of the Department, unless the entity to be 
awarded the contract has in place, by the deadline specified in 
subsection (c), an internal ethics compliance program, including a code 
of ethics and internal controls, to facilitate the timely detection and 
disclosure of improper conduct in connection with the award or 
performance of the covered contract and to ensure that appropriate 
corrective action is taken with respect to such conduct.
    (b) Elements of Ethics Compliance Program.--Each ethics compliance 
program required of a contractor under subsection (a) shall include the 
following:
            (1) Requirements for periodic reviews of the program for 
        which the covered contract concerned is awarded to ensure 
        compliance of contractor personnel with applicable Government 
        contracting requirements, including laws, regulations, and 
        contractual requirements.
            (2) Internal reporting mechanisms, such as a hot-line, for 
        contractor personnel to report suspected improper conduct among 
        contractor personnel.
            (3) Audits of the program for which the covered contract 
        concerned is awarded.
            (4) Mechanisms for disciplinary actions against contractor 
        personnel found to have engaged in improper conduct, including 
        the exclusion of such personnel from the exercise of 
        substantial authority.
            (5) Mechanisms for the reporting to appropriate Government 
        officials, including the contracting officer and the Office of 
        the Inspector General of the Department of Defense, of 
        suspected improper conduct among contractor personnel, 
        including suspected conduct involving corruption of a 
        Government official or individual acting on behalf of the 
        Government, not later than 30 days after the date of discovery 
        of such suspected conduct.
            (6) Mechanisms to ensure full cooperation with Government 
        officials responsible for investigating suspected improper 
        conduct among contractor personnel and for taking corrective 
        actions.
            (7) Mechanisms to ensure the recurring provision of 
        training to contractor personnel on the requirements and 
        mechanisms of the program.
            (8) Mechanisms to ensure the oversight of the program by 
        contractor personnel with substantial authority within the 
        contractor.
    (c) Deadline for Program.--The deadline specified in this 
subsection for a contractor having in place an ethics compliance 
program required under subsection (a) for purposes of a covered 
contract is 30 days after the date of the award of the contract.
    (d) Determination of Existence of Program.--In determining whether 
or not contractor has in place an ethics compliance program required 
under subsection (a), a contracting officer of the Department may 
utilize the assistance of the Office of the Inspector General of the 
Department of Defense.
    (e) Suspension or Debarment.--The regulations prescribed under 
subsection (a) shall provide that any contractor under a covered 
contract whose personnel are determined not to have reported suspected 
improper conduct in accordance with the requirements and mechanisms of 
the ethics compliance program concerned may, at the election of the 
Secretary of Defense, be suspended from the contract or debarred from 
further contracting with the Department of Defense.
    (f) Covered Contract Defined.--In this section, the term ``covered 
contract'' means any contract to be awarded to a contractor of the 
Department of Defense if, in the year before the contract is to be 
awarded, the total amount of contracts of the contractor with the 
Federal Government exceeded $5,000,000.

SEC. 15. REPORT ON IMPLEMENTATION OF RECOMMENDATIONS ON TOTAL OWNERSHIP 
              COSTS AND READINESS RATES FOR MAJOR WEAPON SYSTEMS.

    (a) Report Required.--Not later than 180 days after the date of the 
enactment of this Act, the Secretary of Defense shall submit to the 
congressional defense committees a report on the extent of the 
implementation of the recommendations set forth in the February 2003 
report of the Government Accountability Office entitled ``Setting 
Requirements Differently Could Reduce Weapon Systems' Total Ownership 
Costs''.
    (b) Elements.--The report required by subsection (a) shall include 
the following:
            (1) For each recommendation described in subsection (a) 
        that has been implemented, or that the Secretary plans to 
        implement--
                    (A) a summary of all actions that have been taken 
                to implement such recommendation; and
                    (B) a schedule, with specific milestones, for 
                completing the implementation of such recommendation.
            (2) For each recommendation that the Secretary has not 
        implemented and does not plan to implement--
                    (A) the reasons for the decision not to implement 
                such recommendation; and
                    (B) a summary of any alternative actions the 
                Secretary plans to take to address the purposes 
                underlying such recommendation.
            (3) A summary of any additional actions the Secretary has 
        taken or plans to take to ensure that total ownership cost is 
        appropriately considered in the requirements process for major 
        weapon systems.
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