Ratio of sustainment to acquisition costs -- is modernization being crowded out?

The graph shows the four phases of a program’s cost over its lifetime: research and development (R&D), procurement, O&S, and disposal, with O&S considered the most expensive of the four phases. The conventional wisdom of this 70:30 or “golden ratio” of O&S to acquisition cost (assuming negligible disposal cost) is that such a pattern holds for a majority of weapon systems.

… The notion of O&S costs being 70 percent of LCC has been circulating around the DoD acquisition community for more than 35 years, and has repeatedly been emphasized in several recent GAO reports. The origin of this 70:30 ratio comes from an amalgamation of estimates of the O&S weapon systems’ costs given by program offices or other official sources, such as SARs. However, by analyzing the actual sustainment costs in VAMOSC and AFTOC, the 70 percent O&S to 30 percent Acquisition cost ratio for a “typical” DoD weapon system appears not to be valid. Our data suggest that O&S costs are quite varied, with a mean of 55 percent.

Proportion of weapon systems costs attributed to Operations & Support costs by commodity type.

That was from a great paper, “Investigation Into the Ratio of Operating and Support Costs to Life-Cycle Costs for DoD Weapon Systems.”

There’s no law of nature that sustainment must be 70% of weapons lifecycle costs. The rise of information technology (really, intangible asset creation) and harnessing disaggregated/attritable systems can help the DoD flip the proportion so that 70% is in acquisition and 30% is in sustainment. As the authors found, missiles (which are expendable) have less than 10% of lifecycle costs in sustainment, and electronic equipment just 15%.

Unmanned aerial systems makes for an interesting counterpoint. These systems actually have high sustainment costs. That’s partially because they have low acquisition costs (besides Global Hawk/Triton), and also because they require numerous operators and ground equipment. As more UAV information is pulled together into better information systems, that will help drive down the sustainment costs. Similarly, as UAVs incorporate more autonomy, that’ll also drive it down.

The following isn’t a perfect proxy (e.g., missing Military Personnel costs), but in 1963 RDT&E + Procurement titles were 67% of the budget and O&M was just 34%. In 2021, acquisition fell to 46% and O&M rose to 54%.

Ratio of Acquisition to Operations & Maintenance costs from DoD budget over time.

The figure above comes from data I collected across four DoD budgets requests. The FY1952 figures are a bit different than the rest, because FY1963 was the first post-PPBS modern budget. So take FY1952 with a gain of salt. But FY1963 through FY2021 should have relatively consistent classifications.

If you do a simple log-linear regression on the percent of acquisition costs, the forecast is that by 2050, acquisition share of budget will fall from 46% to 37%, and by 2080 it will fall to just 29%. Of course, there is no reason to believe that this trend will persist in the same way. Indeed, it should start to flip. But it is rather surprising how linear the decline in acquisition share has been.

Here’s my narrative of the vicious cycle. Once DoD moved to monolithic winner-take-all platforms, industry’s incentive was to create high cost maintenance procedures to get the system through development and into production on time. Sustainment costs then grew until roughly 50-70% where renewed emphasis was put on modernization. It becomes militarily, industrially, and politically unpalatable for even more funds to go into sustainment. As a result, readiness figures started to decline as a “pressure relief valve.”

If readiness were kept at high levels, then it would require even more funding to be funneled into sustainment than it is present. Then SecDef Mattis’ demand that aircraft mission capable rates increase to 80% was recently abandoned. As Air Force Materiel Command’s Arnold Bunch reported:

The really big lesson we learned is that if we put the money into the system, and we tell industry what we want to go do, we can improve the mission capable rate.

No kidding! But the Air Force won’t make that tradeoff with modernization. And thus, readiness falls and sustainment costs are held steady.

One benefit of this vicious cycle is that the DoD has excess weapon systems relative to what it can operate. That means it has some slack for surge capacity in case of emergency, since it takes many years to actually produce more systems. But the DoD also wants to retire many systems early rather than mothball them, so there’s a counterpoint.