DOD weapon programs range from highly complex and sophisticated aircraft, missile interceptors, submarines, and space-based sensors, to new communication and ground control systems that support and interconnect this equipment, to smaller, less complex systems that support the warfighter. Increasingly, individual weapon system investments are getting more complex and more dependent on software. Moreover, in many cases, weapon systems are also expected to incorporate technologies that push the state-of-the-art while operating in harsh and even untested environments—adding daunting technical challenges that increase the cost and complexity of development. DOD typically executes several primary contracts over the life cycle of a weapon system program. These contracts generally cover development, production, or maintenance efforts. Although a program and its contracts are related, they are separate, distinct efforts that can end separately. For the purposes of this review, we refer to the end of a program as a cancellation, and the end of a contract as a termination. For example, DOD may cancel a program but continue a contract related to that program. Alternatively, DOD can terminate a contract but continue the program. In some cases, programs may not be formally canceled, but instead restructured. For example, DOD could continue a program, but change requirements and modify a contract or even change contractors to better align the program with available resources. Cancellation of major programs has not been common in the past, and we have noted in prior work that the acquisition of weapon systems involves strong incentives to reduce the risk that a program will be interrupted or called into question. When programs have been canceled, cost, schedule, and performance problems have often been cited as reasons for this decision, and officials have noted that program cancellation is perceived as failure. However, in some circumstances, program cancellation may be the best choice. As we reported in March 2013, DOD’s 2012 portfolio of 86 major defense acquisition programs is estimated to cost a total of $1.6 trillion. This represents a decrease of about $44 billion from the previous year, due primarily to program cancellations and restructurings. However, compared to original estimates, the total cost of the portfolio has increased by over $400 billion with an average delay of 27 months in the delivery of initial operating capability, which suggests that opportunities exist to improve efficiencies in DOD’s portfolio. In 2008, we concluded that from an investment portfolio perspective, cancellation can be a valuable tool in responding to long-term fiscal imbalances. In 2009, Congress acted to make cancellation the default for programs that experience a breach of a critical cost growth threshold. In recent years, DOD has cited renewed efforts to end troubled programs and to achieve a better capabilities balance, and to that end DOD’s annual budget submissions in recent years have each reflected major program cancellations—at least three per year and as many as eight. In response to potential cancellations, defense stakeholders have sometimes expressed concerns that terminating a contract will cost more than completing it. In our 2008 report, we reviewed DOD’s past experience with program cancellations and contract terminations and found that there are limited circumstances in which it could cost the government more to terminate a contract than to complete it. Of the eight contracts we reviewed, we did not find any cases in which the total amount paid on a terminated contract exceeded the estimated contract price. We recommended DOD review, and as needed amend, termination guidance to ensure it consistently identified the conditions under which it is appropriate to end programs or contracts, and provided the knowledge needed to use terminations as an investment portfolio tool. DOD concurred with this recommendation. However, DOD subsequently determined that no changes to guidance were needed. We also highlighted important lessons for DOD in making decisions to cancel individual programs as well as in managing its broader investment portfolio. For example, when considering cancellation of individual programs, contract termination costs are generally not a compelling reason to continue programs or contracts that otherwise warrant ending. Moreover, while incurred or “sunk” costs in programs being considered for cancellation may be substantial, they must be paid regardless of whether or not a contract is terminated. Therefore, the decision to terminate a contract or cancel a program should not be driven by sunk costs. In addition, when a contract warrants termination, the decision should be made as soon as possible because delaying a termination almost always results in higher settlement costs to the government. Finally, we noted when a program or contract ends, DOD can make choices that would allow the government to retain value from the work completed. Weapon programs acquire various types of assets throughout a program’s life cycle; assets that may include property, including computer hardware, equipment, material, special tooling, facilities, and real property; and software and technical data, which can include manuals, engineering drawings, specifications, data rights, and data delivery. When a program ends, activities related to shutting down the program include determining how to retain the most value from the government’s investment, which, for the purposes of this report, is the government’s expenditures on the program up to the date of cancellation. This can include terminating or otherwise restructuring contracts, and assessing how best to leverage the program’s assets. For example, program officials might identify technologies and facilities that can be realigned for use on other programs. Alternately, the government may ultimately sell assets or determine that they are not suitable for continued development. In some cases, assets that are not reused may be destroyed or dismantled. Figure 1 illustrates some examples of program assets. The types of assets a program owns will depend, in part, on the phase of the program. A program in production is more likely to own hardware and other types of tangible assets than a program in development. For this report, our sample included a range of programs in the development phase. Program cancellations often result in contract terminations, creating immediate impacts on programs and their contractors as program offices work with the prime contractor to end work under the contract and determine the costs associated with contract termination. However, the impact of a weapon program cancellation can extend beyond the immediate program and its contractors and ultimately affect a broader industrial base and local economies, as well as other programs and agencies. Consideration of these various effects and consultation with various stakeholders enables officials to have a better understanding of the costs, benefits, and legal requirements involved in a particular cancellation and to take steps that can help mitigate negative effects. In addition, shutdown activities can take years. While the immediate task of shutting down the program falls to the program office, there are other necessary tasks, such as reallocating program funds, that fall beyond the program’s purview. Figure 2 illustrates the potential effects to be considered when a program is canceled. A canceled program does not stop incurring costs immediately upon cancellation. Once a program has been canceled, the program office must undertake shutdown activities, which include determining whether to terminate or otherwise restructure contracts and determining how best to leverage the program’s assets. Conducting tasks such as negotiating with contractors and disposing of inventory requires program staff to remain on duty and can incur cost to the government. When cancellation leads to the termination of a contract for convenience, the Federal Acquisition Regulation (FAR) directs the contractor to submit a proposal to the government for the amount of reimbursement it believes it is entitled to within one year of the official date of the termination. This may include termination costs, the incurred costs for work already performed by the contractor, and possibly a reasonable profit or fee on completed work. Termination costs, which represent costs that the government would not have otherwise incurred if it did not terminate the contract, can include expenses such as preparing the settlement proposal, negotiating with subcontractors, and disposing of inventory. With assistance from the Defense Contracting Audit Agency to audit the settlement proposals, DOD then enters into negotiations with the contractor to determine a settlement. Ultimately, DOD will likely be required to reimburse the contractor for termination costs, which can reach up to the hundreds of millions of dollars for a large program, though these costs can be small relative to the full cost of the program. The final amount of termination cost owed will not be determined until final settlement. For canceled programs, the extent of work associated with a shutdown is sometimes not immediately clear. One case study program official told us decision makers did not initially understand the need to continue to dedicate resources to a canceled program to fund shutdown activities. When DOD cancels a program, it must address not only the costs of terminating any related contracts but the broader impact across the agency, including deciding on how to reallocate funds originally budgeted for the canceled program and determining when those funds will be available. This task extends beyond the canceled weapon system’s program office. For example, when the Army’s Comanche Helicopter program was canceled in 2004, the Army proposed an investment strategy that would redistribute $14.6 billion of planned Comanche funding through fiscal year 2011 to enhance a broad range of Army aviation modernization efforts. After securing approval from the Secretary of Defense and the President, the Army briefed Congress on its plan to redistribute the remaining Comanche funds within the Army aviation portfolio. Based on those discussions, the Army developed a plan to redistribute this funding to 30 different projects and other weapon programs. Cancellation of a program can lead to a delay in providing capabilities to the warfighter. As a result, DOD may need to increase funds for other programs to extend the life of existing or legacy systems. For example, the Navy’s VH-71 program was initiated to build a replacement for the current presidential helicopters with improved transportation, communication, and security capabilities. The Navy’s original plan was to field the first of these new helicopters by 2008. However, after the program experienced schedule slips and continued cost increases, the program was canceled in 2009. The Navy has since initiated a successor VXX Presidential Helicopter Replacement Program, which is still in the early stages of development and not expected to have initial operational capability until fiscal year 2020.