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Quantitative Methods in Defense and National Security 2010 Ms. Anne Twist

Acquisition Cost Growth – The Stats Matter!. Quantitative Methods in Defense and National Security 2010 Ms. Anne Twist Deputy Director, Resource Analysis Office of the Under Secretary of Defense (AT&L) 25 May 2010. MDAP Portfolio Tornado Chart.

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Quantitative Methods in Defense and National Security 2010 Ms. Anne Twist

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  1. Acquisition Cost Growth – The Stats Matter! Quantitative Methods in Defense and National Security 2010 Ms. Anne Twist Deputy Director, Resource Analysis Office of the Under Secretary of Defense (AT&L) 25 May 2010

  2. MDAP Portfolio Tornado Chart We have a bad behaving population of MDAPs; the magnitude of the JSF program makes portfolio-wide statistics meaningless. Measuring portfolio cost growth and other similar statistics is Bad Math.

  3. Measuring Cost Growth:GAO Method vs. AT&L Method The Stats Matter!

  4. Doomsday Press Reports April 1, 2008: The Government Accountability Office found that 95 major systems have exceeded their original budgets by a total of $295 billion, bringing their total cost to $1.6 trillion, and are delivered almost two years late on average. In addition, none of the systems that the GAO looked at had met all of the standards for best management practices during their development stages. Auditors said the Defense Department showed few signs of improvement since the GAO began issuing its annual assessments of selected weapons systems six years ago. "It's not getting any better by any means," said Michael Sullivan, director of the GAO's acquisition and sourcing team. "It's taking longer and costing more." March 31, 2009: Development costs for the Pentagon's major weapons systems soared last year, helping drive overruns that are "staggering," the Government Accountability Office said in a report released yesterday. Overall, the cost overruns associated with the military's major weapons …”total near $300 billion, and the average program delay has stretched from 21 to 22 months,” The figures reflect a weapons development and procurement system that is woefully broken… “Pentagon planners don't do a good enough job of analyzing those requirements to understand whether they have the technologies and designs to build to them," GAO analyst Michael J. Sullivan said.

  5. GAO Methodology • Single Program Example: DDG 51 • Oldest 10 programs • MDAP Portfolio Measuring Cost Growth:GAO Method vs. AT&L Method “The new GAO report continues to sensationalize the assessed cost growth of $296 billion on 96 programs. This number has been cited by many people as a condemnation of the defense procurement process. I have analyzed the components of this GAO number, and I would suggest that the number is misleading, out-of-date, and largely irrelevant to the current management of DoD programs.” The Stats Matter! --Mr. John J. Young, former USD(AT&L), 2009

  6. GAO Methodology • GAO publishes an annual report on cost growth • Summarizes all Major Defense Acquisition Programs (MDAPs) – highlight is their “Total Cost Growth” calculation • The FY10 report did not give a total cost growth figure • GAO defines cost growth as the change in total program acquisition costs from the first original estimate to the current estimate • Problems with GAO’s methodology: 1) Procurement of additional quantities and/or required capability counts as cost growth 2) Poor early performers can never recover, even if they have been performing well for many years 3) Differing “portfolios” compared on an annual basis 4) Pre-Milestone B estimates used (i.e., before the program defined) 5) Acquisition painted with broad brush as if all programs are broken

  7. GAO Methodology • Quantity growth and age of the programs greatly inflate cost growth • The fine print…. • Past sins are never forgiven: Many programs have been in the portfolio for more than 15 years and continue to carry huge cost growth figures even if they have been performing well for years • Quantity Changes are Leadership Decision to Shape the Force: Procurement of additional quantities and/or required capability is included in GAO’s cost growth calculation, often making more desired programs appear to be broken • These two factors consistently had impact on program cost, and therefore we must isolate these factors to really understand what drives cost growth Focus on Measurement: Cost growth is an issue that must be controlled; however, the amount of cost growth has been significantly overstated.

  8. DDG 51 Example The DDG 51 is a multi-mission guided missile destroyer designed to operate offensively and defensively, independently, or as units of Carrier Strike Groups (CSG), Expeditionary Strike Groups (ESG), and Missile Defense Action Groups in multi-threat environments that include air, surface, and subsurface threats.  These ships will respond to Low Intensity Conflict/Coastal and Littoral Offshore Warfare (LIC/CALOW) scenarios as well as open ocean conflict providing or augmenting power projection, forward presence requirements, and escort operations at sea.

  9. GAO Method: DDG 51 • GAO Method simply subtracts the Original estimate from the Current estimate to calculate the total program cost growth • DDG 51 had a MS B in February, 1988. At that time, only 23 units were planned to be produced. The Dec 2009 SAR estimate shows that DoD now plans to procure 71 units • The increase in unit cost for DDG 51 is relatively small; however it is incurring a huge cost growth penalty for its increase in quantity • The increase in quantity was a leadership decision driven by the fact that this is a successful program – according to GAO, this is one of the worst performers in the inventory! PAUC = Program Acquisition Unit Cost

  10. AT&L Method: DDG 51 • First, we eliminate historical bias by comparing the Current Estimate to the 5 year prior estimate • Second, we separate cost growth due to changes in unit cost from cost growth strictly due to quantity increases • The difference between GAO Method and AT&L Method is significant in many programs – for DDG 51 it is about a $61.5B difference • We used this process for about 100 MDAPs, and saw that when quantity is considered, Actual Cost Growth becomes very concentrated among a few programs PAUC = Program Acquisition Unit Cost

  11. Oldest 10 Programs: GAO Method • If we replicate the GAO Method using Dec 2009 SARs, the 10 oldest programs (out of a total of 98) account for $102.2B of cost growth

  12. Oldest 10 Programs: AT&L Method • From earlier slide, GAO method shows that the 10 oldest programs account for $102.2B of cost growth • When we account for age of the program and quantity increases, the AT&L actual cost growth for these same 10 programs is $8.2B!

  13. GAO Method: FY10 MDAP Portfolio Total Program Cost is represented by the size of the circle Using GAO Method, cost growth is concentrated in JSF and several very old programs, many of which have been performing well for some time.

  14. AT&L Method: FY10 MDAP Portfolio Total Program Cost is represented by the size of the circle The Stats Matter! Using AT&L Method, it is obvious that JSF and a small set of troubled programs account for the bulk of cost growth.

  15. Cost Growth or Capability Trade-off? • There are numerous methods we can use to classify cost growth, but the real issue is determining what capability can be supplied to the warfighter in a given period of time • Sometimes we are willing to “pay,” or incur cost growth for capability • Immediate warfighting needs • Necessary quantity or technology increase • Flexibility from numerous simultaneous acquisition programs • Efficient production schedules • Other times cost growth is not willingly incurred • Poor initial cost estimates • Poor program management • Unrealistic expectations • Premature technology • Redundant capability • Reducing the capability lost to the warfighter as a result of unplanned cost growth should be our primary focus!

  16. F-22 Funding Example The F-22 combines stealth, speed, maneuverability, integrated avionics, multi-role precision attack, and improved supportability.  It is a critical component of the Global Strike concept of operations with unmatched air-to-air and air-to-ground capabilities.  The Raptor ensures air dominance, rapidly and at great distances, by countering and defeating threats, including those attacking friendly forces and those attempting to deny access by our forces.

  17. F-22 RDT&E Program Funding Total R&D Program Cost Relative to Original Baseline FY85$M 80% 60% 4000 40% 20% 0% 3500 -20% SAR Date -40% 3000 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 2500 2000 1500 1000 500 0 '08 '04 '05 '06 '07 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03

  18. F-22 RDT&E Program Funding MS B: Feb 1992 Original Unit Cost: $137M Current Unit Cost: $408M Total R&D Program Cost Relative to Original Baseline FY85$M 80% 60% 4000 40% 20% 0% 3500 -20% SAR Date -40% 3000 Original Estimate Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 2500 2000 Current Estimate 1500 1000 500 0 '08 '04 '05 '06 '07 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03

  19. Acquisition Reform Initiatives • Weapon Systems Acquisition Reform Act (WSARA) of 2009 • MS A and MS B Certifications • IMROVE Acquisition Act: HR 5013 • QDR & FY11 Budget • Acquisition Workforce Reform • Tactical Acquisition Reform • Strategic Acquisition Reform

  20. WSARA Funding Requirements • OSD(CAPE) responsible for developing guidance governing cost estimation and cost analysis processes, including confidence levels for cost estimates and conducting independent estimates/analyses for all MDAP and MAIS for which USD(AT&L) is the Milestone Decision Authority (MDA) • D,CAPE and the Secretaries of Military Departments must disclose the confidence level used in cost estimates for MDAPs/MAISs • If less than 80 percent, include such disclosure in any documentation approving a cost estimate, and in the next Selected Acquisition Report (SAR) or quarterly report

  21. Funding to 80% Confidence Level • Previously, MDAPs were funded so it was equally likely that actual costs will be higher or lower than the estimate • Problems with funding to the 80% confidence level: • What is the underlying distribution? • Money into the program is more than we expect to spend - is this a self-fulfilling prophecy? • MDAP spending in 2011 is $77B – what would it be if we had to fund to 80% confidence level?

  22. Ongoing Studies • Numerous studies on program stability and portfolio cost growth have been done • Common themes: • Funding Stability • PM Tenure • Accurate cost estimates • Requirements Creep • AT&L is aggressively addressing cost growth: • Formation of a Value Team, headed by the PDUSD(AT&L) • MDAP Transparency Study to identify program costs in the financial & acquisition databases

  23. Conclusions • When controlled for quantity and time, cost growth becomes a much more manageable problem for the Department • Not all cost growth is bad. There are smart and necessary capability increases to platforms that result from deliberate & intelligent decision making for the benefit of the warfighter and National Security • Large cost growth in individual acquisition programs is the exception, not the rule • The Department continues to implement many policies & procedures to help control cost growth – results indicate they are working! • The Stats Matter!

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