Military Cost Assessments: It’s All In The Assumptions (And Who Gets To Make Them)

Over the past year, the credibility of the Department of Defense’s (DoD) acquisition system has been shaken repeatedly by disputes regarding the costs associated with a wide range of programs. First there was the report that the life cycle costs for the F-35 Joint Strike Fighter — that is the costs associated with actually operating and sustaining the approximately 2,500 aircraft in the planned fleet — would slightly exceed $1 trillion. Then the Pentagon’s Cost Assessment and Program Evaluation office declared that the Army’s new Ground Combat Vehicle was likely to cost a lot more than the ceiling price established for that system: $17 million a copy versus $10.4 million. This same service has been in a running argument with General Dynamics regarding the costs of shutting down and then restarting the Lima Army Tank Plant. Most recently, the Air Force seems to have been at odds with itself and with the Air National Guard over the life cycle costs for operating the C-27J Spartan tactical airlifter. Three different analyses produced a range of answers from a high of $308 million per aircraft to a middle estimate of $200 million and a low case of $111 million.

It turns out that the answer that comes out of the cost models depends very much on the input assumptions. Put goose liver in the Cuisinart and you get pate; put in diced carrots and you get puree. The $1 trillion figure to sustain the F-35 was based on assumptions such as a 50-year life span, a relatively high inflation rate over that period and an oversized and lavish basing and support structure. Using such assumptions, we at Lexington calculated that the Pentagon’s current fleet of fighters would cost around $4 trillion to maintain for the same period of time. Moreover, as my colleague Loren Thompson wrote in Early Warning last year, based on these kinds of input assumptions the cost of maintaining military bands would be $50 billion. The conflicting estimates for the operating costs for the C-27J appear to suffer similarly from the effects of different input assumptions. The costs associated with restarting tank production at Lima depend very heavily on how difficult and expensive you believe it is to recruit and qualify the workforce and reestablish a qualified chain of suppliers.

DoD has suffered from a similar problem with respect to its decisions to insource sustainment work being done by the private sector. Without any evidence at all, the Air Force made the assumption that it could save 40 percent in labor costs by insourcing — even though the best historical evidence showed no more than a 20 percent savings in the best of cases. When DoD conducts business case analyses (BCAs) prior to making an insourcing decision it often has stacked the deck in favor of the public sector depots and logistics centers by not including all the costs associated with the public sector workforce. Fail to include the costs of benefits for public sector workers, which the Congressional Budget Office concluded in a recent study are between 16 and 36 percent higher than for their private sector counterparts, and you can pretty much guess how the answer comes out. The same can be true when BCAs fail to include the costs associated with things like supply chain management, spare parts inventory controls or the cost of acquiring proprietary data rights. These are examples of the old truism “garbage in, garbage out.”

Getting the input assumptions right is absolutely critical to doing credible cost assessments. It is also extremely important to account for all the significant cost variables both in cost assessments and in efforts to identify places to save money. We tend to think that the cost of government contracts is all in the labor, materials and profits. But it is clear that other factors such as the requirement to comply with regulations and government oversight requirements also drive costs.