By Jason Sherman
When the U.S. military budget is constrained, weapon system acquisition programs are more likely to experience cost growth, according to a Pentagon-sponsored study that sheds new light on a key factor that has tripped up modernization projects for more than 30 years.
A May study by the Institute for Defense Analyses found that average unit cost of weapon systems between 1970 and 2007 increased by more than one-third during periods when the Pentagon topline was contracting, compared to average cost growth of roughly 10 percent during periods when the DOD budget was expanding.
The study found “a recurring pattern” — that major defense acquisition programs that passed into engineering and manufacturing development “during periods when the DOD top line was contracting or tight, on average, had much higher [program acquisition unit cost] growth than those that passed [into EMD] when the topline was growing or high.”
The paper — “Cost Growth, Acquisition Policy and Budget Climate” by David McNicol — contains inauspicious insights for U.S. military leaders contemplating continued reduction in funding compared to planned spending, including the prospect of dramatic sequester cuts in fiscal year 2016.
McNicol, a former senior Pentagon official in what is now the office of cost assessment and program evaluation, explored the impact of various acquisition reform efforts over nearly four decades by tracking changes in program acquisition unit cost (PAUC), the unit cost that accounts for both development and procurement. The analysis considered only projects that proceeded at least into the EMD milestone of the acquisition process.
Curiously, McNicol found the variations in PAUC over the years do not suggest any clear connection to acquisition reform efforts. However, when these programs were sorted into periods of topline budget contraction and expansion, clear patterns emerged, according to the study.
The “relevant context for understanding PAUC growth is the interface between the acquisition process and the resource allocation process,” the paper argues. “The crucial evidence behind this point is the strong association between budget climate and PAUC growth.”
Frank Kendall, the Pentagon’s acquisition executive, said the IDA paper marks an important addition to the Defense Department’s understanding of factors that impact weapon system cost and schedule, illuminating understanding of a challenge his office did not think to investigate.
“Dave McNicol’s work shows very clearly that in tight budget times we take risk,” Kendall said in a Sept. 19 address at the Center for Strategic and International Studies.
“Industry takes risk in bidding, because there are fewer things to go after; people who do programs and budgets take risk because they try to cram more in,” Kendall said. “And they force people like program managers and acquisition leaders to cut corners and make assumptions that turn out not to be true. That’s how you end up with cost overruns and schedule slips. There is a very strong correlation. You may have noticed that we are in a tight budget time right now. So that makes it very important.”
Pentagon modernization accounts are slated to be reduced by $66 billion if Congress does not lift the current statutory spending caps between fiscal years 2016 and 2019, a move that would slow planned growth in investment and curtail research and development spending.
Compared to the Pentagon’s fiscal year 2011 long-range spending plan, the U.S. military has reduced actual and planned spending by nearly $600 billion, decrements that are part of discretionary spending cuts agreed to by the White House and House Republicans as part of an August 2011 deal to raise the federal borrowing limit.