Categories  Merging & Acquisition Policy US DoD

DoD ‘Should-Cost’ and “Will-Cost” estimating strategy

The Pentagon will implement a new cost estimating strategy on 14 major acquisition programs in an attempt to make the weapons’ projected price tags more realistic and save money, according to a April 22 Department of Defense (DoD) memo obtained by Inside Defense.com.

“These programs will be used to communicate and demonstrate to
other DoD offices and Congress the intent and advantages associated with managing to a should-cost estimate that is lower than the program budget,” Pentagon acquisition executive Ashton Carter wrote in the memo to senior DoD officials. “The delta between Should-Cost and Will-Cost will be managed consistently with the contract type(s) being used in the program.”

  • Air Force        Joint Strike Fighter (F-35)
  • Air Force        Global Hawk Blocks 30 & 30 (GH BLK 30 & 30)
  • Air Force        Space Based Infrared System (SBIRS)
  • Air Force        Evolved Expendable Launch Vehicle (EELV)
  • Air Force        Advanced Extremely High Frequency (AEHF) Satellite System
  • Army              Joint Air Ground Missile (JAGM)
  • Army              Black Hawk (UH-60M)
  • Army              Ground Combat Vehicle (GCV)
  • Army              Paladin Product Improvement (PIM)
  • Army              NETT Warrior
  • Navy              Joint Strike Fighter (F-35)
  • Navy              Hawkeye (E-2D)
  • Navy              Presidential Helo (VXX)
  • Navy              Littoral Combat Ship (LCS)
  • Navy              Ohio Replacement Program

The memo by Ashton Carter, the Pentagon’s chief procurement official, is part of the DoD’s attempt to improve management of its weapons portfolio.
For decades, with relatively few exceptions, each new generation of weapons is increasingly more expensive per unit (even after adjusting for inflation) than the last, takes longer to develop, and leads to a much smaller force structure that is more expensive to maintain.

“It is essential that we eliminate cost overruns and begin to deliver programs below budget baselines that are set using independent Will-Cost estimates,” Carter wrote. “I believe this is achievable if Program Managers continuously perform Should-Cost analysis that scrutinizes every element of government and contractor cost.”

Carter has directed the services to prepare an annual report on will-cost and should-cost management, the first of which is due to him Nov. 1.

Carter’s should-cost teams could help DoD prime contractors operate more efficiently, according to Nick Schwellenbach – director of investigations for the Project on Government Oversight, a nonprofit government watchdog.

“You use independent cost estimate will-cost to help plan budgets over the long run, tame unreasonable expectations at the onset, and control for the contractors’ and military services’ rosy expectations of technological performance, integration, and cost,” Schwellenbach
wrote on the organization’s blog. “You use should-cost to help negotiate better contracts with a relatively uncompetitive defense industry. Ideally, you beat the will-cost expectations, but there are risks.”

Carter’s initiative is not necessarily an attempt to save taxpayer
dollars, although obviously that can be a side effect. For instance, you can spend an equal amount of taxpayer dollars on a canceled/poorly-managed program that produces few units as you might on a well-managed program that produces large numbers of units. Carter wants the latter, rather than the former.

The essence of should-cost is “what work should cost after the fat is
squeezed out”. Carter detailed some of what he dubbed the “ingredients of should-cost management” in his April 22 memo. Some of the ingredients he listed are:

  • “Scrutinize each contributing ingredient of program cost and justify it. Why is it as  reported or negotiated? What reasonable measures might reduce it?”
  • “Particularly challenge the basis for indirect costs in contractor proposals”
  • “Benchmark against similar DoD programs and commercial analogues (where possible),  and against other programs performed by the same contractor or in the same
    facilities.”
  • “Promote Supply Chain Management to encourage competition and incentivize cost  performance at lower tiers.”
  • “Identify items or services contracted through a second or third party vehicle.
  • Eliminate unnecessary pass-through costs by considering other contracting  options.”

Carter’s April memo states there are three ways to approach should-cost, and leaves it up to program managers and other service acquisition officials to determine which approach or combination of approaches to use. Each service is supposed to produce their first should-cost progress report to Carter on November 1, 2011, so it remains to be seen how the DoD will actually use should-cost.

The second prong of Carter’s strategy is “will-cost,” which is an effort to better budget and plan for weapons programs using more realistic independent cost estimates rather than rosy, mostly contractor-derived estimates.

The new Cost Assessment and Program Evaluation (CAPE) office at the Pentagon, created by the Weapons System Acquisition Reform Act of 2009, is the latest attempt to impose improved cost estimates on the DoD.

If both should-cost and will-cost parts of Carter’s strategy are implemented aggressively by hard-nosed analysts at the beginning of programs, in theory, taxpayers could be surprised—programs could come in on time and on budget, or perhaps even under budget and faster than expected.

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