Challenges to the Utility of DoD’s new “Should Cost” Methodology

One of the signature elements of the acquisition reform program instituted by the Secretary of Defense Robert Gates and his then Under Secretary of Defense for Acquisition, Technology and Logistics, Dr. Ashton Carter, is the application of the management concept and strategy known as “Should Cost.” The purpose of “Should Cost” is not just to avoid cost overruns on programs but to drive down costs across the entire acquisition process. The “Should Cost” methodology includes both a long-range projection of a program’s costs and specific nearer-term measures to achieve cost savings. The “Should Cost” methodology contains a number of activities or processes, some of them analytical and others really just good government oversight: close scrutiny of every cost of a program; tough negotiations with contractors even if there is only one bidder; tracking of cost and performance trends; benchmark comparisons of similar programs and other programs from the same contractor; increased use of government-furnished equipment in lieu of that provided by the OEM and identifying alternatives throughout a program’s cycle that could contribute savings. Dr. Carter identified 14 programs as test cases for the application of the “Should Cost” methodology including the F-35 Joint Strike Fighter, Ground Combat Vehicle, Littoral Combat Ship, Ohio SSBN replacement, Evolved Expendable Launch Vehicle, E2-D Hawkeye and VXX Presidential Helicopter.

Potentially, the “Should Cost” approach is a break with the traditional acquisition system. As one observer noted, “it answers the overriding question: ‘What would be the costs of a program in an efficient, highly competitive environment?’” Really, “Should Cost” needs to be renamed “Must Cost Less” since the obvious intent is not simply to understand what the reasonable cost for a platform or product is but to reduce that costs if at all possible.

One immediate challenge with the application of the “Should Cost” methodology is that of the 14 guinea pigs chosen for the initial experiment. All but two, the Presidential Helicopter and Ground Combat Vehicle, were underway when the new approach was instituted. This does not mean that some of the good management practices in “Should Cost” cannot be applied to ongoing programs. However, the Pentagon may have lost its greatest opportunities to influence future costs through restraining requirements and including lifecycle cost considerations at the start of a program. The Army pulled back its original RFP for the Ground Combat Vehicle in order to tailor the requirements in the interest of reducing cost.

A second challenge is that most cost cutting techniques proposed in the “Should Cost” methodology fall on the contractors. There is one suggestion that both government and industry reduce the size of their project staffs, but that is it. In addition to the point made above regarding the need to constrain the services’ from the constant pursuit of new and glitzy technologies in the formulation of requirements the government could do more to reduce program costs. For example, what about ending the practice of having individual service maintenance facilities for systems they have in common such as the Blackhawk Helicopter? Or how about reducing the size of the work force at places such as the Defense Logistics Agency or Army Material Command by relying more on the private sector to run the supply chains for these same programs?

A third challenge to “Should Cost” is estimating the impact of innovative approaches on the future cost of programs. The Pentagon’s projection of future costs for major programs such as the F-35 and Ground Combat Vehicle are based on historical data. Lifecycle cost estimates for the F-35 appear not to account sufficiently for future cost savings resulting from economies of scale and a common infrastructure and IT network for logistics, maintenance and the supply chain. Instead, the estimates are based on projecting forward more than fifty years of the old ways of doing business. Similarly, differences between OSD and the Army on the estimated cost for the new Ground Combat Vehicle are a result of the former using historical data from past armored fighting vehicle programs and the latter projecting the consequences of pursuing innovative cost reduction measures. In essence, although the “Should Cost” methodology relies on breaking with traditional acquisition approaches for its success, DoD current cost estimates presume essentially no changes. This is the equivalent of driving a car while looking in the rear view mirror.

Finally, it is curious that almost all of the techniques recommended by Dr. Carter for reducing costs are rather traditional in nature. There is no mention of using such approaches as performance-based logistics, block purchases, multi-year procurements or advanced appropriations. Perhaps Dr. Carter should publish an addendum to his “Should Cost” guidance memorandum on the subjects of “Should Contract” and “Should Fund.”