The Status of Coast Guard Cutter Acquisition Programs





Statement of
Ronald O'Rourke
Specialist in Naval Affairs
Before
House Transportation and Infrastructure Committee
Coast Guard and Maritime Transportation Subcommittee
Hearing on
The Status of Coast Guard Cutter Acquisition
Programs
February 3, 2016
Congressional Research Service
https://crsreports.congress.gov
TE10004




Congressional Research Service
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Chairman Hunter, Ranking Member Garamendi, distinguished members of the subcommittee, thank you
for the opportunity to appear before you today to discuss the status of Coast Guard cutter acquisition
programs. As requested, my testimony focuses on how multiyear procurement (MYP) and block buy
contracting (BBC) could reduce the acquisition cost of new Coast Guard cutters.
Some Key Points Up Front
Some key points that can be made up front include the following:
 MYP and BBC are two forms of multiyear contracting. The Coast Guard, like the Navy
and the other armed services, has authority under 10 USC 2306b to use MYP. Specific
legislation has been used to grant the Navy authority to use BBC in two of its
shipbuilding programs. Based on this precedent, it would appear that specific legislation
could be used to grant the Coast Guard authority to use BBC in cutter acquisition
programs.
 MYP can reduce the unit procurement costs of ships by roughly 10%, compared to unit
procurement costs under the standard or default approach of annual contracting. BBC can
reduce the unit procurement costs of ships by amounts comparable to those of MYP, if
the authority granted for using BBC explicitly includes authority for making economic
order quantity (EOQ) purchases (i.e., up-front batch purchases) of components. If the
authority granted for using BBC does not explicitly include authority for making EOQ
purchases, then the savings from BBC will be less—in the range of roughly 5%. EOQ
authority comes automatically with MYP authority, but must be explicitly included in
legislation granting BBC authority.
 The Navy in recent years has used MYP and BBC in shipbuilding and aircraft acquisition
programs to reduce the acquisition costs of those programs. The Coast Guard, in contrast,
to date has not used MYP or BBC in cutter acquisition programs. The Coast Guard has
used contracts with options in cutter acquisition programs. A contract with options may
look like a form of multiyear contracting, but operates more like a series of annual
contracts. Contracts with options do not achieve the reductions in acquisition costs that
are possible with MYP and BBC.
 MYP contracts and block buy contracts can be awarded competitively. 10 USC 2306b
requires MYP contracts to be fixed price contracts. BBC contracts can also be fixed price
contracts.
 BBC, unlike MYP, can be used at the outset of a shipbuilding program, starting with the
lead ship in the class. MYP, in contrast, cannot be used until the lead ship has completed
construction. Thus, for a class of ships that is procured at a rate of one ship per year and
in which each ship takes five years to build, BBC can be a contracting option starting
with the first ship in the class, and MYP can become a contracting option starting with
the fifth or sixth ship in the class. This difference is due to the requirement under the
statute governing MYP (10 U.S.C. 2306b) that a program must demonstrate design
stability to qualify for MYP. In a shipbuilding program, design stability is typically
demonstrated by completing the construction of the lead ship in the class.
 From a congressional perspective, tradeoffs in making greater use of MYP and BBC
include the following:
 reduced congressional control over year-to-year spending, and tying the hands of
future Congresses;
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 reduced flexibility for making changes in Coast Guard acquisition programs in
response to unforeseen changes in strategic or budgetary circumstances (which can
cause any needed funding reductions to fall more heavily on acquisition programs not
covered by MYP or BBC contracts);
 a potential need to shift funding from later fiscal years to earlier fiscal years to fund
EOQ purchases of components;
 the risk of having to make penalty payments to shipbuilders if multiyear contracts
need to be terminated due to unavailability of funds needed for the continuation of
the contracts; and
 the risk that materials and components purchased for ships to be procured in future
years might go to waste if those ships are not eventually procured.
 The Offshore Patrol Cutter (OPC) program and the polar icebreaker (PIB) program can
be viewed as candidates for using BBC, and the Fast Response Cutter (FRC) program can
be viewed as a candidate for using either MYP or BBC. Using MYP and BBC for all
three of these programs might produce savings totaling about $1.2 billion, an amount
roughly equivalent to the average annual funding level in the Coast Guard’s Acquisition,
Construction, and Improvements (AC&I) account. In considering whether to grant
authority for using MYP or BBC for these programs, Congress may weigh the potential
savings of these contracting mechanisms against the tradeoffs listed above.
 In discussing MYP and BBC, it can be helpful to distinguish contracting mechanisms
from funding approaches such as incremental funding. Contracting mechanisms and
funding approaches are often mixed together in discussions of acquisition programs,
sometimes leading to confusion. For more on the distinction between contracting
mechanisms and funding approaches, see Appendix A. For additional background
information on MYP and BBC, see Appendix B.
 Incremental funding has been used more extensively in certain Navy shipbuilding
programs in recent years to mitigate budget “spikes” associated with the procurement of
very expensive ships that are procured at a rate of less than one per year, such as aircraft
carriers and LHA-type amphibious assault ships. Based on this precedent, the polar
icebreaking program can be viewed as a candidate for using incremental funding.
 Using incremental funding distributes the acquisition cost of a ship across multiple years,
but as a general matter does not materially change the total acquisition cost of the ship.
Mitigating budget spikes associated with funding polar icebreakers, however, might
reduce the need for the Coast Guard to shift the acquisition of other items to years before
and after the spike. Since such shifts can increase costs for those other programs by
disrupting their acquisition schedules, using incremental funding in the PIB program
might help avoid cost increases to other programs. This would not be a savings, but rather
an avoided cost increase.
Context for Considering Coast Guard Cutter Acquisition
Programs
The context for considering Coast Guard cutter acquisition programs is formed by several elements,
including those discussed below.
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Mission Needs and Planned Number of Cutters
In assessing the potential use of MYP and BBC in Coast Guard cutter acquisition programs, it can be
noted, as a starting point, that the Coast Guard’s planned number of new cutters falls considerably short
of the number that the Coast Guard has calculated would be needed to fully perform the Coast Guard’s
statutory missions in coming years. For example, the Coast Guard has calculated that fully performing its
missions in coming years would require 9 NSCs, 49 OPCs, and 91 FRCs (149 cutters in total), or about
64% more than the 8 NSCs, 25 OPCs, and 58 FRCs (91 cutters in total) that are included in the Coast
Guard’s program of record (POR).
Although the POR force would have considerably more mission capability and capacity than the Coast
Guard’s legacy force, the Coast Guard has estimated that the POR force would nevertheless have
capability or capacity gaps for performing six of the Coast Guard’s 11 statutory missions in coming
years—search and rescue; defense readiness; counter-drug operations; ports, waterways, and coastal
security; protection of living marine resources; and alien migrant interdiction operations. The Coast
Guard has judged that some of these mission performance gaps would be “high risk” or “very high risk.”
The mission performance gaps of the POR force, which have not been emphasized in public discussions
of Coast Guard planning and budgeting, are discussed in some detail in the CRS report on Coast Guard
cutter procurement.1 If limits on Coast Guard acquisition funding lead to a future Coast Guard with fewer
and/or older platforms than called for under the POR, the mission performance gaps noted above will be
greater still.
Funding Level of Coast Guard’s Acquisition (AC&I) Account
The Coast Guard has testified over the years that acquiring the ships and aircraft in its POR on a timely
basis while also adequately funding other Coast Guard acquisition programs would require a funding
level for the Coast Guard’s AC&I account of roughly $1.5 billion to $2.5 billion per year. As shown in
Table 1, the Administration’s FY2013 budget submission programmed an average of about $1.5 billion
per year in the AC&I account. As also shown in the table, subsequent budget submissions have reduced
that figure to between $1 billion and $1.2 billion per year.
Table 1. Funding in AC&I Account in FY2013-FY2016 Budgets
Millions of dollars, rounded to nearest tenth

FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Avg.
FY13 budget
1,217.3
1,429.5
1,619.9
1,643.8
1,722.0



1,526.5
FY14 budget

951.1
1,195.7
901.0
1,024.8
1,030.3


1,020.6
FY15 budget


1,084.2
1,103.0
1,128.9
1,180.4
1,228.7

1,145.0
FY16 budget



1,017.3
1,125.3
1,255.7
1,201.0
1,294.6
1,178.8
Source: Coast Guard FY2013-FY2016 budget submissions.
At a June 26, 2013, hearing before this subcommittee, I testified that the FY2014 budget submission’s
one-third reduction in the average AC&I account funding level compared to the level in the FY2013
budget submission.
is one of the largest percentage reductions in funding that I have seen a five-year acquisition account
experience from one year to the next in many years.

1 See the section entitled “Planned NSC, OPC, and FRC Procurement Quantities” in CRS Report R42567, Coast Guard Cutter
Procurement: Background and Issues for Congress
, by Ronald O'Rourke.
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About twenty years ago, in the early 1990s, Department of Defense (DOD) five-year procurement
plans were reduced sharply in response to the end of the Cold War—a large-scale change in the
strategic environment that led to a significant reduction in estimated future missions for U.S.
military forces. In contrast to that situation, there has been no change in the Coast Guard’s strategic
environment since last year that would suggest a significant reduction in estimated future missions
for the Coast Guard.2
The Coast Guard has testified that funding the AC&I account at a level of about $1 billion to $1.2 billion
per year would make it difficult to fund various Coast Guard acquisition projects, including a new polar
icebreaker, and improvements to Coast Guard shore installations. Coast Guard plans call for procuring
OPCs at an eventual rate of two per year. If each OPC costs roughly $400 million, procuring two OPCs
per year in an AC&I account of about $1 billion to $1.2 billion per year would leave about $200 million
to $400 million per year for all other AC&I-funded programs.
Using figures from the FY2014 budget submission, the Coast Guard has about 12.9% as many active-duty
personnel as the Navy.3 If the amount of funding for the surface ship acquisition and sustainment part of
the AC&I account were equivalent to 12.9% of the amount of funding in the Navy’s shipbuilding account,
the surface ship acquisition and sustainment part of the AC&I account would be about $1.8 billion per
year.4 Navy surface ship acquisition, unlike Coast Guard surface ship acquisition, includes substantial
numbers of large and complex ships, including nuclear-powered aircraft carriers, highly capable surface
combatants, and large amphibious and auxiliary ships. Accounting for this difference in Navy and Coast
Guard surface ship acquisition by reducing the $1.8 billion figure by, say, one-half or one-third would
produce an adjusted figure of about $900 million to about $1.2 billion per year for surface ship acquisition
and sustainment.
Again using figures from the FY2014 budget submission, funding in the Navy’s shipbuilding account is
equivalent to about 51% of the Navy’s funding for active-duty personnel.5 If Coast Guard funding for
surface ship acquisition and sustainment were equivalent to 51% of Coast Guard funding for military pay
and allowances, the surface ship acquisition and sustainment part of the AC&I account would be about
$1.7 billion per year.6 Reducing the $1.8 billion figure by, say, one-half or one-third to account for
differences in the types of surface ships acquired by the Navy and Coast Guard (see previous paragraph)
would produce an adjusted figure of about $850 million to about $1.1 billion per year for surface ship
acquisition and sustainment.7
Navy Use of MYP and BBC in Shipbuilding Programs
With congressional approval, the Navy in recent years has made significant use of MYP and BBC in its
shipbuilding and aircraft acquisition programs. Among other things, the Navy in recent years has used
MYP or BBC for all three of its year-to-year shipbuilding programs—the Virginia-class attack submarine

2 Statement of Ronald O’Rourke, Specialist in Naval Affairs, Congressional Research Service, before the House Transportation
and Infrastructure Committee, Subcommittee on Coast Guard and Maritime Transportation, Hearing on Coast Guard Readiness:
Examining Cutter, Aircraft, and Communications Needs, June 26, 2013, p. 1.
3 The Coast Guard for FY2014 appears to be requesting an active-duty end strength—the number of active-duty military
personnel—of 41,594 (measured by the Coast Guard in full-time equivalent [FTE] positions); the Navy for FY2014 is requesting
an active-duty end strength of 323,600.
4 The Navy’s proposed FY2014 budget requested $14,078 million for the Shipbuilding and Conversion, Navy (SCN)
appropriation account.
5 The Navy’s proposed FY2014 budget requested $27,824 million for the Military Personnel, Navy (MPN) appropriation
account.
6 The Coast Guard’s proposed FY2014 budget requested $3,425.3 million for military pay and allowances.
7 For further discussion, see the section entitled “Funding Level of Coast Guard’s Acquisition Account” in CRS Report R42567,
Coast Guard Cutter Procurement: Background and Issues for Congress, by Ronald O'Rourke.
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program, the DDG-51 destroyer program, and the Littoral Combat Ship program. These three programs
account for a significant share of the Navy’s shipbuilding effort: Of the 48 new-construction ships in the
Navy’s FY2016 five-year (FY2016-FY2020) shipbuilding plan, these three programs account for 34, or
about 71%. Savings from the use of MYP recently have, among other things, helped Congress and the
Navy to convert a nine-ship buy of DDG-51 class destroyers in FY2013-FY2017 into a 10-ship buy, and a
nine-ship buy of Virginia-class attack submarines in FY2014-FY2018 into a 10-ship buy.
The Navy’s increasing use of MYP and BBC in recent years amounts to a significant change—some
might say a quiet revolution—in Navy ship and aircraft acquisition. In an interview published on January
13, 2014, Sean Stackley, the Assistant Secretary of the Navy for Research, Development, and Acquisition
(i.e., the Navy’s acquisition executive), stated:
What the industrial base clamors for is stability, so they can plan, invest, train their work force. It
[multiyear contracting] gives them the ability in working with say, the Street [Wall Street], to better
predict their own performance, then meet expectations in the same fashion we try to meet our
expectations with the Hill.
It’s emblematic of stability that we’ve got more multiyear programs in the Department of the Navy
than the rest of the Department of Defense combined. We’ve been able to harvest from that
significant savings, and that has been key to solving some of our budget problems. It’s allowed us
in certain cases to put the savings right back into other programs tied to requirements.8
Opportunities for Using MYP and BBC in Cutter
Acquisition Programs
Certain Coast Guard cutter acquisition programs can be viewed as candidates for using MYP or BBC. In
considering whether to grant authority for using MYP or BBC, Congress may weigh the potential savings
of these measures against the tradeoffs listed earlier. Below are brief discussions of individual cutter
acquisition programs.
Offshore Patrol Cutter (OPC) Program
The Coast Guard wants to procure a total of 25 OPCs, and currently plans to use a contract with options
for acquiring the first 9 to 11 ships in the program. The OPC program can be viewed as a candidate for
instead using BBC for the initial ships in the program, and either BBC or MYP for later ships in the
program. If using BBC and MYP were to reduce the acquisition costs of OPCs by about 10% (compared
to costs under a contract with options), the savings would amount to roughly $1 billion. An alternate way
to characterize such savings would be to say that using BBC or MYP would enable the Coast Guard to get
about two and a half of the 25 OPCs for “free,” or to pay for the acquisition of a polar icebreaker.
Section 223 of the Howard Coble Coast Guard and Maritime Transportation Act of 2014 (S. 2444/P.L.
113-281 of December 18, 2014) states:
SEC. 223. MULTIYEAR PROCUREMENT AUTHORITY FOR OFFSHORE PATROL
CUTTERS.
In fiscal year 2015 and each fiscal year thereafter, the Secretary of the department in which the
Coast Guard is operating may enter into, in accordance with section 2306b of title 10, United States
Code, multiyear contracts for the procurement of Offshore Patrol Cutters and associated equipment.

8 “Interview: Sean Stackley, US Navy’s Acquisition Chief,” Defense News, January 13, 2014: 22.
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Fast Response Cutter (FRC) Program
The Coast Guard plans to soon award a contract with options for acquiring the final 26 ships in the 58-
ship FRC program. The final 26 ships in the program can be viewed as a candidate for instead using either
MYP or BBC. If using MYP or BBC were to reduce the acquisition costs of OPCs by about 10%
(compared to costs under a contract with options), the savings would amount to more than $100 million.
An alternate way to characterize such savings would be to say that using MYP or BBC could enable the
Coast Guard to get about two and a half of the 26 FRCs for “free.”
Polar Icebreaker (PIB) Program
On September 1, 2015, the White House issued a fact sheet in conjunction with a visit to Alaska by
President Obama indicating that the Administration wants to procure a new polar icebreaker in FY2020,
and that the Administration will also “begin planning for construction of additional icebreakers” beyond
the one that the Administration proposes to procure in FY2020.9 On January 13, 2016, the Coast Guard
announced that “the United States Coast Guard (USCG) Polar Icebreaker Replacement Program intends
to host an Industry Day followed by one-on-one meetings with prospective shipbuilders and ship
designers as a part of ongoing market research.... Industry Day is tentatively planned to occur in March
2016.”10
A program to procure multiple polar icebreakers could be viewed as a candidate for using BBC. The
acquisition cost of the first polar icebreaker has been notionally estimated at about $1 billion. On this
basis, if using BBC were to reduce the acquisition costs of a two-ship polar icebreaker program by about
5% (compared to costs under annual contracting),11 the combined savings on the two ships would amount
to upwards of $100 million.

9 The White House, “FACT SHEET: President Obama Announces New Investments to Enhance Safety and Security in the
Changing Arctic,” September 1, 2015, accessed September 2, 2015, at https://www.whitehouse.gov/the-press-office/2015/09/01/
fact-sheet-president-obama-announces-new-investments-enhance-safety-and.
10 “USCG Polar Class Icebreaker Replacement Program,” accessed January 15, 2016, at https://www.fbo.gov/index?s=
opportunity&mode=form&id=a778c49349c443d2658666e19cc100e9&tab=core&tabmode=list&= .
As part of this announcement, the Coast Guard released an industry data package for the polar icebreaker replacement program.
A notional schedule for the program included in the package shows a draft Request for Proposals (RFP) being released in the first
quarter of FY2017, a final RFP being released in the fourth quarter of FY2017 or the first quarter of FY2018, a contract award
being made between the fourth quarter of FY2018 and the fourth quarter of FY2019, and construction of the ship beginning as
soon as the fourth quarter of FY2019. (Polar Icebreaker Industry Data Package, undated, released January 13, p. 3. Accessed
January 15, 2016, at https://www.fbo.gov/index?tab=documents&tabmode=form&subtab=core&tabid=
a82ce0769a3dc86fc8984d6854dea47f .)
For more on the PIB program, see CRS Report RL34391, Coast Guard Polar Icebreaker Modernization: Background and Issues
for Congress
, by Ronald O'Rourke.
11 For a program involving two ships rather than a larger number of ships, the potential savings under BBC, even with EOQ
authority, might be closer to 5% than 10%. When the Navy, as part of its FY1983 budget submission, proposed procuring two
Nimitz (CVN-68) class aircraft carriers (CVN-72 and CVN-73) together in a single year, the Navy estimated that doing so would
reduce the combined cost of CVN-72 and CVN-73 by 5.6% in real terms. Congress, in its action on the FY1983 defense budget,
fully funded CVN-72 and CVN-73 in the FY1983. When the Navy, as part of its FY1988 budget submission, proposed procuring
two more Nimitz-class aircraft carriers (CVN-74 and CVN-75) under a two ship block buy, with CVN-74 to be procured in
FY1990 and CVN-75 to be procured FY1993, the Navy estimated that the block buy would reduce the combined cost of CVN-74
and CVN-75 by a considerably larger percentage. The Government Accountability Office (GAO) stated that the savings would be
considerably less than the Navy estimated, but agreed that a two-ship acquisition strategy is less expensive than a single-ship
acquisition strategy, and that some savings would occur in a two-ship strategy for CVN-74 and CVN-75. Congress, in its action
on the FY1988 budget, accelerated the procurement of CVN-74 and CVN-75 to FY1988 and fully funded the two ships in
FY1988. For further discussion, see the section entitled “Potential Two-Ship Block Buy on CVN-79 and CVN-80” in the
December 22, 2014, version of CRS Report RS20643, Navy Ford (CVN-78) Class Aircraft Carrier Program: Background and
Issues for Congress
, by Ronald O'Rourke, available from the author to congressional clients upon request.
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Based on precedents in Navy shipbuilding, the PIB program can also be viewed as a candidate for using
incremental funding. Using incremental funding in the PIB program would not materially reduce the
acquisition costs of polar icebreakers, but it would reduce the funding spikes associated with funding
polar icebreakers and thereby reduce the need for the Coast Guard to shift the acquisition of other items to
years before and after such spikes. Since such shifts can increase costs for those other programs by
disrupting their acquisition schedules, using incremental funding in the PIB program might help avoid
cost increases to other programs. This would not be a savings, but rather an avoided cost increase.
The three above instances of potential savings from using MYP and BBC—roughly $1 billion for the
OPC program, more than $100 million for the FRC program, and upwards of $100 million for the PIB
program—total about $1.2 billion, an amount roughly equivalent to the average annual funding level in
the Coast Guard’s AC&I account.
As mentioned earlier, in considering whether to grant authority for using MYP or BBC in cutter
acquisition programs, Congress may weigh the potential savings of these measures against the tradeoffs
listed earlier.

Mr. Chairman, this concludes my statement. Thank you again for the opportunity to testify, and I will be
pleased to respond to any questions the subcommittee may have.
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Appendix A. Contracting Mechanisms and Funding
Approaches
In discussing MYP and BBC, it can be helpful to distinguish contracting mechanisms from funding
approaches such as incremental funding. Contracting mechanisms and funding approaches are often
mixed together in discussions of acquisition programs, sometimes leading to confusion. Stated briefly:
Funding approaches are ways that Congress can appropriate funding for weapon
procurement programs. Examples of funding approaches include traditional full funding
(the standard or default approach), incremental funding, and advance appropriations. In
Department of Defense (DOD) acquisition, any of these funding approaches might make
use of advance procurement (AP) funding.12 As a general matter, funding approaches do
not materially change the total procurement cost of a ship.
Contracting mechanisms are ways contract for the procurement of weapons systems,
once funding for those systems has been appropriated by Congress. Examples of
contracting mechanisms include annual contracting (the standard or default approach),
MYP, and BBC. Contracting mechanisms can materially change the total procurement
cost of a ship.
The use of a particular funding approach in a defense acquisition program does not dictate the use of a
particular contracting mechanism. Acquisition programs consequently can be implemented using various
combinations of funding approaches and contracting mechanisms. Most DOD weapon acquisition
programs use a combination of traditional full funding and annual contracting. A few DOD programs,
particularly certain Navy shipbuilding programs, use incremental funding as their funding approach. A
limited number of DOD programs use MYP as their contracting approach, and to date two Navy
shipbuilding programs have used BBC as their contracting approach. The situation is summarized in
Table A-1.
Table A-1. DOD Use of Contracting Mechanisms and Funding Approaches
Funding approaches
Advance

Full funding
Incremental funding
appropriations
Annual
A few DOD programs (e.g.,
Most DOD programs

contracting
CVNs, LHAs, DDG-1000s)
Contracting
MYP
Selected DOD programs


mechanisms
Virginia-class submarines
Block buy
(units 1-4) and Littoral


contracting
Combat Ships (units 5-24)
Source: Table prepared by CRS.
Notes: Advance procurement (AP) can be used with any of the funding approaches. As a general matter, funding
approaches do not materially change the total procurement cost of a ship. (By mitigating budgets spikes, however,
incremental funding might prevent disruptions to other programs.) Contracting approaches can materially change the total

12 AP funding is provided in one or more years prior to the year of procurement of a weapon system for the procurement of long-
leadtime components—components with long construction times. Such components must be funded prior to the procurement of
the remainder of the weapon system if they are to be ready for installation in the weapon system at the appropriate point in the
construction process. AP funding is a permitted exception to the full funding provision. AP funding is not to be confused with
advance appropriations.
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procurement cost of a ship. Funding a ship inside or outside the procurement title of the DOD appropriation act can affect
the application of the full funding policy, and thus how funds can be used for purposes such as making combined purchases
of components for multiple ships in a class.
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Appendix B. Background Information On MYP and BBC
This appendix provides basic background information on DOD use of MYP and BBC.13 The Coast Guard,
like DOD, has authority under 10 USC 2306b to use MYP. Specific legislation has been used to grant the
Navy authority to use BBC in two of its shipbuilding programs. Based on this precedent, it would appear
that specific legislation could be used to grant the Coast Guard authority to use BBC in cutter acquisition
programs.
Multiyear Procurement (MYP)
MYP in Brief
What is MYP, and how does it differ from annual contracting? MYP, also known as multiyear
contracting, is an alternative to the standard or default approach of annual contracting. Under annual
contracting, DOD uses one or more contracts for each year’s worth of procurement of a given kind of
item. Under MYP, DOD instead uses a single contract for two to five years’ worth of procurement of a
given kind of item, without having to exercise a contract option for each year after the first year. DOD
needs congressional approval for each use of MYP.
To illustrate the basic difference between MYP and annual contracting, consider a hypothetical DOD
program to procure 20 single-engine aircraft of a certain kind over the five-year period FY2015-FY2019,
at a rate of four aircraft per year:
Under annual contracting, DOD would issue one or more contracts for each year’s
procurement of four aircraft. After Congress funds the procurement of the first four
aircraft in FY2015, DOD would issue one or more contracts (or exercise a contract
option) for those four aircraft. The next year, after Congress funds the procurement of the
next four aircraft in FY2015, DOD would issue one or more contracts (or exercise a
contract option) for those four aircraft, and so on.
Under MYP, DOD would issue one contract covering all 20 aircraft to be procured
during the five-year period FY2015-FY2019. DOD would award this contract in FY2015,
at the beginning of the five-year period, following congressional approval to use MYP for
the program, and congressional appropriation of the FY2015 funding for the program. To
continue the implementation of the contract over the next four years, DOD would request
the FY2016 funding for the program as part of DOD’s proposed FY2016 budget, the
FY2017 funding as part of DOD’s proposed FY2017 budget, and so on.
Potential Savings Under MYP
How much can MYP save? Compared with estimated costs under annual contracting, estimated savings
for programs being proposed for MYP have ranged from less than 5% to more than 15%, depending on
the particulars of the program in question, with many estimates falling in the range of 5% to 10%. In
practice, actual savings from using MYP rather than annual contracting can be difficult to observe or
verify because of cost growth during the execution of the contract that was caused by developments
independent of the use of MYP rather than annual contracting.

13 Material in this appendix is adapted from CRS Report R41909, Multiyear Procurement (MYP) and Block Buy Contracting in
Defense Acquisition: Background and Issues for Congress
, by Ronald O'Rourke and Moshe Schwartz.
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A February 2012 briefing by the Cost Assessment and Program Evaluation (CAPE) office within the
Office of the Secretary of Defense (OSD) states that “MYP savings analysis is difficult due to the lack of
actual costs on the alternative acquisition path, i.e., the path not taken.”14 The briefing states that CAPE
up to that point had assessed MYP savings for four aircraft procurement programs—F/A-18E/F strike
fighters, H-60 helicopters, V-22 tilt-rotor aircraft, and CH-47F helicopters—and that CAPE’s assessed
savings ranged from 2% to 8%.15
A 2008 Government Accountability Office (GAO) report stated that
DOD does not have a formal mechanism for tracking multiyear results against original expectations
and makes few efforts to validate whether actual savings were achieved by multiyear procurement.
It does not maintain comprehensive central records and historical information that could be used to
enhance oversight and knowledge about multiyear performance to inform and improve future
multiyear procurement (MYP) candidates. DOD and defense research centers officials said it is
difficult to assess results because of the lack of historical information on multiyear contracts,
comparable annual costs, and the dynamic acquisition environment.16
How does MYP potentially save money? Compared to annual contracting, using MYP can in principle
reduce the cost of the weapons being procured in two primary ways:
Contractor optimization of workforce and production facilities. An MYP contract
gives the contractor (e.g., an airplane manufacturer or shipbuilder) confidence that a
multiyear stream of business of a known volume will very likely materialize. This
confidence can permit the contractor to make investments in the firm’s workforce and
production facilities that are intended to optimize the facility for the production of the
items being procured under the contract. Such investments can include payments for
retaining or training workers, or for building, expanding, or modernizing production
facilities. Under annual contracting, the manufacturer might not have enough confidence
about its future stream of business to make these kinds of investments, or might be unable
to convince its parent firm to finance them.
Economic order quantity (EOQ) purchases of selected long-leadtime components.
Under an MYP contract, DOD is permitted to bring forward selected key components of
the items to be procured under the contract and to purchase the components in batch form
during the first year or two of the contract. In the hypothetical example introduced earlier,
using MYP could permit DOD to purchase, say, the 20 engines for the 20 aircraft in the
first year or two of the five-year contract. Procuring selected components in this manner
under an MYP contract is called an economic order quantity (EOQ) purchase.17 EOQ
purchases can reduce the procurement cost of the weapons being procured under the

14 Slide 10 from briefing entitled “Multiyear Procurement: A CAPE Perspective,” given at DOD cost analysis symposium,
February 15-17, 2012, posted at InsideDefense.com (subscription required) May 14, 2012.
15 Slide 12 from briefing entitled “Multiyear Procurement: A CAPE Perspective,” given at DOD cost analysis symposium,
February 15-17, 2012, posted at InsideDefense.com (subscription required) May 14, 2012. Slide 12 also stated that these assessed
savings were based on comparing CAPE’s estimate of what the programs would cost under annual contracting (which the
briefing refers to as single-year procurement or SYP) to the contractor’s MYP proposal.
16 Government Accountability Office, Defense Acquisitions[:] DOD’s Practices and Processes for Multiyear Procurement
Should Be Improved
, GAO-08-298, February 2008, p. 3.
17 The term EOQ is occasionally used in discussions of defense acquisition, somewhat loosely, to refer to any high-quantity or
batch order of items, even those that do not take place under MYP or BBC. As a general matter, however, EOQs as described
here occur only within MYP and block buy contracts.
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MYP contract by allowing the manufacturers of components to take maximum advantage
of production economies of scale that are possible with batch orders.18
What gives the contractor confidence that the multiyear stream of business will materialize? At least
two things give the contractor confidence that DOD will not terminate an MYP contract and that the
multiyear stream of business consequently will materialize:
 For a program to qualify for MYP, DOD must certify, among other things, that the
minimum need for the items to be purchased is expected to remain substantially
unchanged during the contract in terms of production rate, procurement rate, and total
quantities.
 Perhaps more important to the contractor, MYP contracts include a cancellation penalty
intended to reimburse a contractor for costs that the contractor has incurred (i.e.,
investments the contractor has made) in anticipation of the work covered under the MYP
contract. The undesirability of paying a cancellation penalty acts as a disincentive for the
government against canceling the contract. (And if the contract is canceled, the
cancellation penalty helps to make the contractor whole.)19
Permanent Statute Governing MYP
Is there a permanent statute governing MYP contracting? There is a permanent statute governing MYP
contracting—10 U.S.C. 2306b. The statute was created by Section 909 of the FY1982 Department of
Defense Authorization Act (S. 815/P.L. 97-86 of December 1, 1981), revised and reorganized by Section
1022 of the Federal Acquisition Streamlining Act of 1994 (S. 1587/P.L. 103-355 of October 13, 1994),
and further amended on several occasions since. DOD’s use of MYP contracting is further governed by
DOD acquisition regulations.
Under this statute, what criteria must a program meet to qualify for MYP? 10 U.S.C. 2306b(a) states
that to qualify for MYP, a program must meet several criteria, including the following.
Substantial savings. DOD must estimate that using an MYP contract would result in
“substantial savings” compared with using annual contracting.

18 A 2008 GAO report on multiyear contracting lists five areas of savings, most of which are covered in the two general areas of
savings outlined above. One of GAO’s five areas of savings—limited engineering changes due to design stability—can also
occur in programs that use annual contracting. The GAO report states:
Multiyear procurement can potentially save money and improve the defense industrial base by permitting the
more efficient use of a contractor’s resources. Multiyear contracts are expected to achieve lower unit costs
compared to annual contracts through one or more of the following sources: (1) purchase of parts and
materials in economic order quantities (EOQ), (2) improved production processes and efficiencies, (3) better
utilized industrial facilities, (4) limited engineering changes due to design stability during the multiyear
period, and (5) cost avoidance by reducing the burden of placing and administering annual contracts.
Multiyear procurement also offers opportunities to enhance the industrial base by providing defense
contractors a longer and more stable time horizon for planning and investing in production and by attracting
subcontractors, vendors, and suppliers. However, multiyear procurement also entails certain risks that must
be balanced against potential benefits, such as the increased costs to the government should the multiyear
contract be changed or canceled and decreased annual budget flexibility for the program and across DOD’s
portfolio of weapon systems. Additionally, multiyear contracts often require greater budgetary authority in
the earlier years of the procurement to economically buy parts and materials for multiple years of production
than under a series of annual buys.
Government Accountability Office, Defense Acquisitions[:] DOD’s Practices and Processes for Multiyear Procurement Should
Be Improved
, GAO-08-298, February 2008, pp. 4-5.
19 Annual contracts can also include cancellation penalties.
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Realistic cost estimates. DOD’s estimates of the cost of the MYP contract and the
anticipated savings must be realistic.
Stable need for the items. DOD must expect that its minimum need for the items will
remain substantially unchanged during the contract in terms of production rate,
procurement rate, and total quantities.
Stable design for the items. The design for the items to be acquired must be stable, and
the technical risks associated with the items must not be excessive.
Section 811 of the FY2008 National Defense Authorization Act (H.R. 4986/P.L. 110-181 of January 28,
2008) amended 10 U.S.C. 2306b to require the Secretary of Defense to certify in writing, by no later than
March 1 of the year in which DOD requests MYP authority for a program, that these and certain other
criteria have been met. It also requires that the Secretary provide the congressional defense committees
with the basis for this determination, as well as a cost analysis performed by DOD’s office of Cost
Assessment and Program Evaluation (CAPE) that supports the findings.20 Section 811 further amended 10
U.S.C. 2306b to require the following:
Sufficient prior deliveries to determine whether estimated unit costs are realistic. A
sufficient number of the type of item to be acquired under the proposed MYP contract
must have been delivered under previous contracts at or within the most current estimates
of the program acquisition unit cost or procurement unit cost to determine whether
current estimates of such unit costs are realistic.
No Nunn-McCurdy critical cost growth breaches within the last five years. The
system being proposed for an MYP contract must not have experienced within five years
of the anticipated award date of the MYP contract a critical cost growth breach as defined
under the Nunn-McCurdy act (10 U.S.C. 2433).21
Fixed-price type contract. The proposed MYP contract must be a fixed-price type
contract.22
What is meant by “substantial savings”? The meaning of “substantial savings” is open to interpretation
and might depend on the circumstances of the program in question. In practice, estimated savings of at
least 5% might be judged substantial, and estimated savings in the range of 10% (or more) are more likely
to be judged substantial. The amount of savings required under 10 U.S.C. 2306b to qualify has changed
over time; the requirement for “substantial savings” was established by Section 808(a)(2) of the FY1991
National Defense Authorization Act (H.R. 4739/P.L. 101-510 of November 5, 1990), which amended 10
U.S.C. 2306b in this regard.23
What is meant by “stable design”? The term “stable design” is generally understood to mean that the
design for the items to be procured is not expected to change substantially during the period of the
contract. Having a stable design is generally demonstrated by having already built at least a few items to
that design (or in the case of a shipbuilding program, at least one ship to that design) and concluding,

20 §811 states that the cost analysis is to be performed by DOD’s Cost Analysis Improvement Group (CAIG). In a subsequent
DOD reorganization, CAIG was made part of CAPE.
21 For more on the Nunn-McCurdy provision, see CRS Report R41293, The Nunn-McCurdy Act: Background, Analysis, and
Issues for Congress
, by Moshe Schwartz.
22 The requirement for using a fixed price contract is now codified at 10 U.S.C. 2306b, subsection (i)(3)(F).
23 For a discussion of the evolution of the savings requirement under 10 U.S.C. 2306b, including a figure graphically
summarizing the legislative history of the requirement, see Government Accountability Office, Defense Acquisitions[:] DOD’s
Practices and Processes for Multiyear Procurement Should Be Improved
, GAO-08-298, February 2008, pp. 21-22, including
Figure 3 on p. 22.
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through testing and operation of those items, that the design does not require any substantial changes
during the period of the contract.
Potential Consequences of Not Fully Funding an MYP Contract
What happens if Congress does not provide the annual funding requested by DOD to continue the
implementation of the contract?
If Congress does not provide the funding requested by DOD to continue
the implementation of an MYP contract, DOD would be required to renegotiate, suspend, or terminate the
contract. Terminating the contract could require the government to pay a cancellation penalty to the
contractor. Renegotiating or suspending the contract could also have a financial impact.
Effect on Flexibility for Making Procurement Changes
What effect does using MYP have on flexibility for making procurement changes? A principal potential
disadvantage of using MYP is that it can reduce Congress’s and DOD’s flexibility for making changes
(especially reductions) in procurement programs in future years in response to changing strategic or
budgetary circumstances, at least without incurring cancellation penalties. In general, the greater the
portion of DOD’s procurement account that is executed under MYP contracts, the greater the potential
loss of flexibility. The use of MYP for executing some portion of the DOD procurement account means
that if policymakers in future years decide to reduce procurement spending below previously planned
levels, the spending reduction might fall more heavily on procurement programs that do not use MYP,
which in turn might result in a less-than-optimally balanced DOD procurement effort.
Congressional Approval
How does Congress approve the use of MYP? Congress approves the use of MYP on a case-by-case
basis, typically in response to requests by DOD.24 Congressional approval for MYP contracts with a value
of more than $500 million must occur in two places: an annual DOD appropriations act25 and an act other
than the annual DOD appropriations act.26
In annual DOD appropriations acts, the provision permitting the use of MYP for one or more defense
acquisition programs is typically included in the title containing general provisions, which typically is
Title VIII.
An annual defense authorization act is usually the act other than an appropriations act in which provisions
granting authority for using MYP contracting on individual defense acquisition programs are included.
Such provisions typically occur in Title I of the defense authorization act, the title covering procurement
programs.
Provisions in which Congress approves the use of MYP for a particular defense acquisition program may
include specific conditions for that program in addition to the requirements and conditions of 10 U.S.C.
2306b.
How often is MYP used? MYP is used for a limited number of DOD acquisition programs. Annual DOD
appropriations acts since FY1990 typically (but not always) have approved the use of MYP for one or a
few DOD programs each year.

24 The Anti-Deficiency Act (31 U.S.C. 1341) prohibits the making of contracts in advance of appropriations. A multiple-year
commitment may be made when authorized by Congress by entering into a firm commitment for one year and making the
government’s liability for future years contingent on funds becoming available.
25 10 U.S.C. 2306b, subsection (l)(3).
26 10 U.S.C. 2306b, subsection (i)(1).
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A February 2012 briefing by the Cost Assessment and Program Evaluation (CAPE) office within the
Office of the Secretary of Defense (OSD) shows that the total dollar value of DOD MYP contracts has
remained more or less stable between FY2000 and FY2012 at roughly $7 billion to $13 billion per year.
The briefing shows that since the total size of DOD’s procurement budget has increased during this
period, the portion of DOD’s total procurement budget accounted for by programs using MYP contracts
has declined from about 17% in FY2000 to less than 8% in FY2012.27 The briefing also shows that the
Navy makes more use of MYP contracts than does the Army or Air Force, and that the Air Force made
very little use of MYP in FY2010-FY2012.28
A 2008 GAO report stated:
Although DOD had been entering into multiyear contracts on a limited basis prior to the 1980s, the
Department of Defense Authorization Act, [for fiscal year] 1982,29 codified the authority for DOD
to procure on a multiyear basis major weapon systems that meet certain criteria. Since that time,
DOD has annually submitted various weapon systems as multiyear procurement candidates for
congressional authorization. Over the past 25 years, Congress has authorized the use of multiyear
procurement for approximately 140 acquisition programs, including some systems approved more
than once.30
Block Buy Contracting (BBC)
BBC in Brief
What is BBC, and how does it compare to MYP? BBC is similar to MYP in that it permits DOD to use a
single contract for more than one year’s worth of procurement of a given kind of item without having to
exercise a contract option for each year after the first year.31 BBC is also similar to MYP in that DOD
needs congressional approval for each use of BBC.
BBC differs from MYP in the following ways:
 There is no permanent statute governing the use of BBC.
 There is no requirement that BBC be approved in both a DOD appropriations act and an
act other than a DOD appropriations act.
 Programs being considered for BBC do not need to meet any legal criteria to qualify for
BBC because there is no permanent statute governing the use of BBC that establishes
such criteria.

27 Slide 4 from briefing entitled “Multiyear Procurement: A CAPE Perspective,” given at DOD cost analysis symposium,
February 15-17, 2012, posted at InsideDefense.com (subscription required) May 14, 2012.
28 Slide 5 from briefing entitled “Multiyear Procurement: A CAPE Perspective,” given at DOD cost analysis symposium,
February 15-17, 2012, posted at InsideDefense.com (subscription required) May 14, 2012.
29 S. 815/P.L. 97-86 of December 1, 1981, §909.
30 Government Accountability Office, Defense Acquisitions[:] DOD’s Practices and Processes for Multiyear Procurement
Should Be Improved
, GAO-08-298, February 2008, p. 5.
31 Using the hypothetical example introduced earlier involving the procurement of 20 aircraft over the five-year period FY2013-
FY2017, DOD would follow the same general path as it would under MYP: DOD would issue one contract covering all 20
aircraft in FY2013, at the beginning of the five-year period, following congressional approval to use BBC for the program, and
congressional appropriation of the FY2013 funding for the program. To continue the implementation of the contract over the next
four years, DOD would request the FY2014 funding for the program as part of DOD’s proposed FY2014 budget, the FY2015
funding as part of DOD’s proposed FY2015 budget, and so on.
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 A BBC contract can cover more than five years of planned procurements. The BBC
contracts currently being used by the Navy for procuring Littoral Combat Ships (LCSs),
for example, cover a period of seven years (FY2010-FY2016).
 Economic order quantity (EOQ) authority does not come automatically as part of BBC
authority because there is no permanent statute governing the use of BBC that includes
EOQ authority as an automatic feature. To provide EOQ authority as part of a BBC
contract, the provision granting authority for using BBC in a program may need to state
explicitly that the authority to use BBC includes the authority to use EOQ.
 BBC contracts are less likely to include cancellation penalties.
Given the one key similarity between BBC and MYP (the use of a single contract for more than one
year’s worth of procurement), and the various differences between BBC and MYP, BBC might be thought
of as a less formal stepchild of MYP.
When and why was BBC invented? BBC was invented by Section 121(b) of the FY1998 National
Defense Authorization Act (H.R. 1119/P.L. 105-85 of November 18, 1997), which granted the Navy the
authority to use a single contract for the procurement of the first four Virginia (SSN-774) class attack
submarines. The four boats were scheduled to be procured during the five-year period FY1998-FY2002 in
annual quantities of 1-1-0-1-1. Congress provided the authority granted in Section 121(b) at least in part
to reduce the combined procurement cost of the four submarines. Using MYP was not an option for the
Virginia-class program at that time because the Navy had not even begun, let alone finished, construction
of the first Virginia-class submarine, and consequently could not demonstrate that it had a stable design
for the program.
When Section 121(b) was enacted, there was no name for the contracting authority it provided. The term
block buy contracting came into use later, when observers needed a term to refer to the kind of
contracting authority that Congress authorized in Section 121(b).
Potential Savings Under BBC
How much can BBC save, compared with MYP? BBC can reduce the unit procurement costs of ships by
amounts comparable to those of MYP, if the authority granted for using BBC explicitly includes authority
for making economic order quantity (EOQ) purchases of components. If the authority granted for using
BBC does not explicitly include authority for making EOQ purchases, then the savings from BBC will be
less. Potential savings under BBC might also be less than those under MYP if the BBC contract does not
include a cancellation penalty, or includes one that is more limited than typically found in an MYP
contract, because this might give the contractor less confidence than would be the case under an MYP
contract that the future stream of business will materialize as planned, which in turn might reduce the
amount of money the contractor invests to optimize its workforce and production facilities for producing
the items to be procured under the contract.
Frequency of Use of BBC
How frequently has BBC been used? Since its use at the start of the Virginia-class program, BBC has
been used very rarely. The Navy did not use it again in a shipbuilding program until December 2010,
when it awarded two block buy contracts, each covering 10 LCSs to be procured over the six-year period
FY2010-FY2015, to the two LCS builders.32 A third example, arguably, is the Air Force’s KC-46 aerial

32 For further discussion, see CRS Report RL33741, Navy Littoral Combat Ship (LCS)/Frigate Program: Background and Issues
for Congress
, by Ronald O'Rourke. The contracts were later extended to cover FY2016.
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refueling tanker program, which is employing a fixed price incentive fee (FPIF) development contract
that includes a “back end” commitment to procure certain minimum numbers of KC-46s in certain fiscal
years.33
Using BBC Rather than MYP
When might BBC be suitable as an alternative to MYP? BBC might be particularly suitable as an
alternative to MYP in cases where using a multiyear contract can reduce costs, but the program in
question cannot meet all the statutory criteria needed to qualify for MYP. As shown in the case of the first
four Virginia-class boats, this can occur at or near the start of a procurement program, when design
stability has not been demonstrated through the production of at least a few of the items to be procured
(or, for a shipbuilding program, at least one ship).
MYP and BBC vs. Contracts with Options
What’s the difference between an MYP or block buy contract and a contract with options?
The military
services sometimes use contracts with options to procure multiple copies of an item that are procured over
a period of several years. The Navy, for example, used a contract with options to procure Lewis and Clark
(TAKE-1) class dry cargo ships that were procured over a period of several years. A contract with options
can be viewed as somewhat similar to an MYP or block buy contract in that a single contract is used to
procure several years’ worth of procurement of a given kind of item.
There is, however, a key difference between an MYP or block buy contract and a contract with options: In
a contract with options, the service is under no obligation to exercise any of the options, and a service can
choose to not exercise an option without having to make a penalty payment to the contractor. In contrast,
in an MYP or block buy contract, the service is under an obligation to continue implementing the contract
beyond the first year, provided that Congress appropriates the necessary funds. If the service chooses to
terminate an MYP or block buy contract, and does so as a termination for government convenience rather
than as a termination for contractor default, then the contractor can, under the contract’s termination for
convenience clause, seek a payment from the government for cost incurred for work that is complete or in
process at the time of termination, and may include the cost of some of the investments made in
anticipation of the MYP or block buy contract being fully implemented. The contractor can do this even if
the MYP or block buy contract does not elsewhere include a provision for a cancellation penalty.


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.


33 For more on the KC-46 program, see CRS Report RL34398, Air Force KC-46A Tanker Aircraft Program, by Jeremiah Gertler.
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