Pricey Pentagon Programs and the "Kill Fee"
As the president and Congress debate cutting government spending they should keep one thing in mind: if Congress wants to kill a large Pentagon program, it could cost hundreds of millions of dollars.
That's because each major Pentagon contract comes with a clause that dictates a "termination liability cost" that must be negotiated and paid if the contract is canceled. And that means the cost savings from killing a program often won't be realized for a year or more.
The "kill fee" for contracts can be as high as one year's budget for a project. So when the Pentagon announced it wanted to terminate the $12 billion Expeditionary Fighting Vehicle (EFV) in early January because it was too expensive, the press release didn't mention that they would still have to pay an estimated $185 million to kill it.
"This isn't you get your money back," says Kendell Pease, Spokesman for the EFV defense contractor General Dynamics. "There's no savings," he said.
The companies say the kill fees are necessary because of the cost to the company of winding down massive product lines that have been developed exclusively for the U.S. government.
Pease likens it to the consequences of a renter breaking a lease, "You don't always get your deposit back," he said.
The Marines have been working on designing and testing the EFV with General Dynamics since the mid 1990's and have already spent $3 billion on the research and development phase. The vehicle is designed to deliver troops for beach landings.
The watchdog group Taxpayers for Common Sense says the EFV "prototype still breaks down every eight hours on average and is more than 10 years behind schedule for delivery". It notes that the United States military hasn't landed on a beach in fifty years.
General Dynamics' Pease says if taxpayers want the value of the research and development they should pay to complete the testing of the vehicle.
"You are going to pay the money no matter what, whether they terminate or not, so you should at least get some value," he said.
Cutting Pentagon Budget Red Tape
Nick Schwellenbach, the Director of Investigations at the Project on Government Oversight says even if contracts are canceled the government will retain the rights to the technology.
"A lot of the supporters of particular weapons programs will sometimes use the argument it will cost more money to cancel a program than to keep it alive," Schwellenbach says, "but the GAO has said that is generally not the case and that those arguments are overblown."
Schwellenbach points to the 2006 example of the effort to kill the C-130J airplane where the Pentagon's inspector general "basically found that the Air Force had overestimated the cost of canceling the C-130J program by $1.1 billion."