The analysis on the correlation between the lead branch of military service responsible for MDAPs and cost growth patterns reveals that programs led by the Army appear to have fewer, smaller overruns, followed by the Navy and then the Air Force, while DoD-wide programs tend to accrue significant larger cost overruns. The picture alters slightly when utilizing baseline-weighted averages with the Navy showing the least overruns followed by the Army, the Air Force, and DoD-wide programs. The considerable difference for the Army’s results – 11 percent on average versus 20 percent for baselineweighted averages – is driven by the cancelled Future Combat System. It is important to note that DoD wide includes both programs managed by DoD agencies and joint programs such as the Joint Strike Fighter…
Another predictor for program performance could be the identity of the prime contractor for a given program. One striking trend in Figure 6 that is visible for the “big five” U.S. defense companies is the fact that Raytheon on average appears to be associated with significantly better cost performance outcomes than other defense companies. Due to a lack of data granularity, the other companies category includes joint ventures and projects that are split between multiple contractor.
That was from Cost and Time Overruns for Major Defense Acquisition Programs.
A few things to note. First, the difference between the services corresponds to my experience. The Army is sometimes unfairly called the “dumb” service, but it seems that the Air Force embarks on the biggest and worst managed programs. The Army kind of learns from past failures and, possibly because of its requirements, has been more incremental. The Air Force keeps on going from one massive cost overrun to the next and defies oversight. Perhaps it is the Air Force, failing to learn from the past, which deserves the Army’s current title.
Another thing is to explain why the Navy became a better performer than the Army when they moved the analysis to “baseline weighted.” The authors pointed to the FCS program, which was a billion dollar cancellation. But I don’t think that’s the only thing going on.
The data for this report came from the Selected Acquisition Report (SAR). SAR baselines are quoted in “base year” (or inflation adjusted) dollars. Now, I personally checked that every major program over the past decade has used the same price index to deflate dollars to the base year — the GDP Price Index (i.e., the economy-wide inflation rate). They are only different by the outlay profiles in the Weighted Index form.
Yet for ships under the Shipbuilding and Conversion, Navy appropriation (SCN), these programs get normalized using a weird index (called SCN/BLS Hist). The history of the SCN index is represented by BLS calculations of ship labor and material prices (generally 1% above inflation). The future of the SCN index is just inflation itself. To make a long story short, this method the Navy uses to deflate is programs to the official baseline hides cost growth under the guise of inflation. So, unless the authors swapped the index and used the proper one (not reported in the SAR), they got it wrong. Period.
The effect isn’t small either. Navy ship programs (e.g., CVN-78 carrier, Virginia-class submarine, LCS, LPD-17, DDG-1000, etc.) can grow 15-20% above baseline over 10-15 years without any budge to the official numbers. If I have time I’d like to recreate that work using public data. OSD and the Navy were made aware, but decided it was too contentious to do anything about it. (It’s not the current program manger’s fault!)
The final thing I’d point to is the difference between contractor profit rates. Again, the authors got this information from the SAR. That means the profit rates are basically planned profits from EVMS data. They are not actually what the contractors are making. Most of those contracts are reported in execution and stop reporting when 90% complete. What happens after 90%? Goes to profit? Who knows? You can be sure that contractors will make profits look reasonable.
One top DOD official told us that when he audited one major supplier’s contracts at their locations, he easily found 40-60% profits. When I looked at “official” reports from 95% complete or so, no more than 15-20%.
Profitability isn’t really known until after the contract is closed out, and even then, it can take a great deal of work to rebuild the contractor’s books in the necessary classifications to support the analysis. Generally, contractors proposals, accumulations, and reporting are done in different ways. This is a complicated area that I think we like to just shy away from.
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