{"id":73718,"date":"2017-07-31T13:30:57","date_gmt":"2017-07-31T17:30:57","guid":{"rendered":"http:\/\/valorguardians.com\/blog\/?p=73718"},"modified":"2017-07-31T19:43:24","modified_gmt":"2017-07-31T23:43:24","slug":"cost-confusion","status":"publish","type":"post","link":"https:\/\/www.azuse.cloud\/?p=73718","title":{"rendered":"Cost Confusion"},"content":{"rendered":"

This article was inspired by thoughts brought to mind by Poetrooper’s F35 article yesterday<\/em><\/a>.<\/p>\n

. . .<\/strong><\/p>\n

Here’s a conversation you might hear somewhere inside the DC Beltway:<\/p>\n

Congressional Staffer:\u00a0 \u201cSo tell me, Mr. Program Manager \u2013 just what will one of those systems you\u2019re developing for DoD cost?\u00a0\u00a0 Senator Whositz wants to know.\u201d<\/em><\/p>\n

Program Manager:\u00a0 \u201cWell, that depends. \u00a0What cost does he want?\u201d<\/em><\/p>\n

Congressional Staffer:\u00a0 \u201cC\u2019mon, bud \u2013 don\u2019t play games.\u00a0 What will each of the systems cost?\u201d<\/em><\/p>\n

Program Manager:\u00a0 \u201cI\u2019m not playing games.\u00a0 What cost does he want?\u201d<\/em><\/p>\n

Congressional Staffer:\u00a0 \u201cAre you trying to get Congress to cut your program’s budget?\u201d<\/em><\/p><\/blockquote>\n

Introduction<\/u>.<\/p>\n

The above might sound like an Abbot and Costello comedy routine \u2013 but it\u2019s not.\u00a0 When it comes to weapons systems, a question seemingly as simple as \u201cHow much will it cost?\u201d can be hard to answer \u2013 because DoD, in it\u2019s \u201cinfinite wisdom\u201d, has defined at least eight distinct costs<\/em> associated with a defense system under development.\u00a0 Each means something different, and each is calculated differently.\u00a0 And several (but not all of them) can be used, along with the total projected number of systems to be produced, to come up with a valid \u201cunit cost\u201d for the system by dividing the cost in question by the number of systems to be produced.<\/p>\n

And, yes \u2013 which one is quoted to the press often depends on politics and desired \u201cspin\u201d.<\/p>\n

The purpose of this article is to give an overview of the ways costs for DoD systems are calculated.\u00a0 Just as importantly, it will also indicate what is \u2013 and what is not \u2013 included in each cost.<\/p>\n

To help understanding, I\u2019ll try to relate these costs to something we all presumably know all too well:\u00a0 the cost of owning a car.<\/p>\n

Obligatory warning:\u00a0 the subject matter can be a bit soporific.\u00a0 Might want to grab a caffeinated beverage or two before reading further.\u00a0 (smile)<\/p>\n

. . .<\/strong><\/p>\n

The eight costs DoD defines for a system under development are the Development Cost; the Flyaway\/Rollaway\/Sailaway Cost; the Weapon System Cost; the Procurement Cost; the Program Acquisition Cost; the Operations and Support Cost; the Disposal Cost; and the Life Cycle Cost.\u00a0\u00a0 All of these except Disposal Cost have been around for a while \u2013 since at least the release of DoD 5000.4-M in December 1992, and perhaps before.\u00a0 The Disposal Cost is a relative newcomer.<\/p>\n

So, what do these costs mean, and how are they calculated? Glad you asked.<\/p>\n

1.\u00a0 Development Cost<\/u>.<\/p>\n

Development cost is pretty simple.\u00a0 It\u2019s essentially the cost of virtually all activities needed to develop a new weapon system from Day 1 up to the point of production.\u00a0 This includes research and development (R&D); design and engineering activities; much if not the vast majority of the system\u2019s test activities; extensive modeling and simulation (or model development), if required; development of new technology or materials, if required; construction of prototypes and test articles\/systems; and other activities.\u00a0 In short, it\u2019s what you gotta do before you set up the production line to make sure the system \u201cworks\u201d (the quotes are intentional).<\/p>\n

Development cost may be relatively small for a system using mature technology.\u00a0 For one that was\/is using “bleeding edge” technology (like the B-2), it can end up being a huge part of the total cost of getting the system to the field \u2013 particularly if the number of intended systems is cut dramatically after the program has begun.\u00a0 (I\u2019ll have more to say on that in a sidebar near the end of this article.)<\/p>\n

To reference this to buying a car, it\u2019s what Chevrolet (or Honda or BMW or Hyundai) spends to design the model you bought.\u00a0 The buyers of new cars pay this.\u00a0 You\u2019ll probably never know how much of the purchase price it was for your car.<\/p>\n

2. Flyaway\/Rollaway\/Sailaway Cost<\/u>.<\/p>\n

This is generally the most-favorable (e.g., lowest) cost for the system.\u00a0 It is the cost of producing the system, including the costs associated with setting up and running the production line.\u00a0 No spares, no essential associated equipment, no personnel to operate it or maintain it, no supplies or fuel.\u00a0 Just the end item.<\/p>\n

This cost will tend to go down over time.\u00a0 The more systems are produced, the more widely the cost of setting up the production line gets distributed \u2013 and the more proficient the workforce tends to be at producing the item.\u00a0 Both a current and an average flyaway\/rollaway\/sailaway cost can be calculated.\u00a0 The current one is almost always the most favorable (lowest).<\/p>\n

For buying a car, this equates to most – but not all – of what you paid for the vehicle.\u00a0 No insurance, no maintenance, no associated tools or other equipment you need – just part of the cost of the car.\u00a0 (Part of what you pay is actually the manufacturer recovering some of their development costs and the dealer\u2019s overhead, but for commercial items this isn\u2019t information that\u2019s typically readily available to the consumer.)<\/p>\n

3.\u00a0 Weapon System Cost<\/u>.<\/p>\n

This cost is defined as the cost of the system, plus any required equipment needed to make it fully functional<\/em>.\u00a0 For example:\u00a0 if the system requires an already-existing generator or a prime mover (truck or track) or radio to make it fully mission capable \u2013 or if it requires special test equipment or tools that aren\u2019t already in the system \u2013 then those costs get added to the \u201cflyaway\u201d cost to produce the Weapon System Cost.<\/p>\n

For buying a car, there isn\u2019t any real hardware equivalent \u2013 unless maybe you were foolish enough to buy a Volt or some other fully electric vehicle that required you to install a charging station in your garage.\u00a0 In that case, the cost of the charging station would be added.\u00a0 However, mandatory charges such as taxes, title fees, and required insurance could arguably be added here \u2013 though these IMO better fit into the \u201cOperations and Support Cost\u201d category.<\/p>\n

4.\u00a0 Procurement Cost<\/u>.<\/p>\n

The procurement cost for an item takes the Weapon System Cost and adds a few things:\u00a0 initial spares and (for ships) often also includes outfitting and post-delivery costs.\u00a0 If memory serves, it also includes costs associated with initial training and transportation of the system to the field users; however, I\u2019ve been away from the \u201cgame\u201d for a bit, and no longer have access to some of my former references.\u00a0 \u00a0I could be wrong about those latter two items.<\/p>\n

If you tend to keep a spare set of plugs and filters on-hand, adding the cost of the first set of each you\u2019d have to buy for a newly-purchased car might be an analog to the added costs here.\u00a0 If you had to travel to pick up your new car and stay overnight, those costs could also be considered an \u201cadd-on\u201d here \u2013 as could the charges for \u201cdealer prep\u201d and \u201ctransportation\u201d.<\/p>\n

5.\u00a0 Program Acquisition Cost<\/u>.<\/p>\n

Program Acquisition Cost is the sum of Development Cost and Procurement Cost.\u00a0 As such, it\u2019s one of the overall figures that actually is<\/u> meaningful.\u00a0 Taking this figure, and dividing it by the projected number of such systems to be produced, gives a meaningful answer to the question, \u201cHow much will each of these systems cost?\u201d<\/p>\n

Unfortunately, this is why reducing the numbers to be produced often causes the overall unit cost of a system to skyrocket.\u00a0 If a system\u2019s Development Cost was $1 billion, that adds $1,000,000 to the cost of each system if you plan to produce 1,000 of them ($1B\/1,000 = $1M).\u00a0 If the number produced is cut to 20, that means each system now gets ($1B\/20) = $50,000,000 added to its unit cost.<\/p>\n

[Sidebar<\/u>:\u00a0 This is precisely why the B-2 ended up being a $2 billion aircraft.\u00a0 Original plans for the B-2 called for 132 aircraft to be produced.\u00a0 When this ended up being cut to 21, a huge development cost of substantially over $29 billion was \u201csplit\u201d among only 21 aircraft \u2013 yielding a Procurement Acquisition Unit Cost for the B-2 of roughly $2.13 billion EACH ($44.75B \/ 21). \u00a0The flyaway cost for the B-2 was a bit over 1\/3 of that, and would have continued to drop as more were produced.\u00a0 However, even in that case IMO its average cost likely would have still been somewhere well above $500M each.]<\/em><\/p><\/blockquote>\n

For the automobile example, this is much of what you paid for the car, with the other adds noted above for initial spare parts, tag, tax, title, etc . . . .\u00a0 As noted above, the development costs are hidden in the sticker price of the car; you\u2019ll pay a pro-rata portion of them regardless, but you\u2019ll probably never know how that was broken down.<\/p>\n

6.\u00a0 Operating and Support Costs<\/u>.<\/p>\n

Operating and Support costs are simple in concept.\u00a0 They\u2019re what it costs to operate the system after it\u2019s deployed.\u00a0 This includes operator salaries; fuel and lubricants; maintenance; post-deployent engineering upgrades and fixes; spare parts other than initial spares, and all other costs associated with normal operations and maintenance.<\/p>\n

For most systems other than space systems, this is actually the single biggest cost category \u2013 anywhere from 50+% to 80% a typical military system’s life cycle cost, with somewhere around 2\/3 being typical for non-software systems. \u00a0Space systems are the \u201coutlier\u201d here \u2013 they have much lower operating and support costs (and consequently higher development and procurement costs) than other military systems.\u00a0 That’s generally because servicing a space system in orbit is still somewhat problematic.\u00a0 (smile)<\/p>\n

Since they are paid out of O&M funds (or, for military salaries, the military personnel appropriation), you virtually never hear about these costs when systems under development are discussed.\u00a0 That\u2019s too bad, because they\u2019re typically the lion\u2019s share of the cost of any weapon system.<\/p>\n

An automotive analog is the recurring cost of license plates\/insurance\/oil\/gas\/filters\/tires\/brakes\/other maintenance and repair that the vehicle requires post-purchase.\u00a0 Drive a lot \u2013 or buy a lemon – and these costs are likely to exceed the purchase cost of the vehicle within a few years.<\/p>\n

7.\u00a0 Disposal Cost<\/u>.<\/p>\n

Although it seems as if we do, we really don\u2019t keep military systems around forever.\u00a0 Eventually they get retired.\u00a0 But you can\u2019t just haul them off to the local dump at end of life.<\/p>\n

Demilitarizing a former weapons system isn\u2019t free.\u00a0 The cost may be low (\u201cSGT Jones \u2013 go check to see that none of the troops stuffed anything sensitive or classified in the glovebox or under the seats of that deuce-and-a-half we\u2019re sending to PDO or left any personal gear there.\u201d).\u00a0 Or it may be high (think prepping a ship for sinking as an artificial reef – which is why many end up sold to shipbreakers for scrapping).\u00a0 It may actually result in a gain for Uncle Sam \u2013 e.g., the proceeds of selling a former military vehicle at auction.\u00a0 But it\u2019s only coincidentally zero, so it’s a cost to be considered.<\/p>\n

For an automotive example, think selling that old clunker in the driveway –\u00a0 or having to pay someone to tow it away.<\/p>\n

8\u00a0 Life Cycle Cost<\/u>.<\/p>\n

This is the true \u201cwhole enchilada\u201d with respect to a DoD system.\u00a0 It\u2019s the total cost of buying, owning, using, and disposing of a system from Day One to the day the system is completely \u201cwashed out\u201d of DoD’s inventory.\u00a0 It\u2019s the sum of Program Acquisition Cost, Operations and Support Cost, and Disposal Cost.\u00a0 Counter-intuitively, it\u2019s also not one you hear that much about.<\/p>\n

For an automobile, this is every penny you ever spent on that car.\u00a0 Every last cent.\u00a0 And for a privately owned auto, that neglects the value of your time, business use of car possibly excepted.<\/p>\n

. . .<\/strong><\/p>\n

So What?<\/u><\/p>\n

So, how are these used?\u00a0 Well, as one DoD organization frequently puts it:\u00a0 \u201cThat depends.\u201d\u00a0 (smile)<\/p>\n

A PM trying to defending their program will generally try to make it seem as efficiently run and as low cost as possible.\u00a0 That means they\u2019ll likely focus any public statements on their system’s flyaway\/rollaway\/sailaway cost \u2013 typically the smallest of the costs – and will downplay others.\u00a0 His or her position will be that, \u201cFuture improvements will keep those other costs under control, and we believe we’ll be able to lower them over time.\u201d<\/p>\n

Conversely, a system critic will focus on making the system appear costly.\u00a0 Life Cycle Cost will be something he or she is VERY interested in determining. Barring that, they’ll focus on either Operations and Support or Program Acquisition Costs.\u00a0 The latter is generally available.<\/p>\n

Finally, when it comes to the unit cost of a particular system the number of items produced can matter A LOT.\u00a0 Cut the numbers produced on a system with only minor Development Cost and there\u2019s not a big effect.\u00a0 Cut the numbers to be produced on a system with a huge R&D cost, and you could well triple the cost of the system.\u00a0 That\u2019s pretty much what happened on the B-2.<\/p>\n

In any event, a meaningful number for the real unit cost of developing a military system under development can be obtained from two pieces of information:\u00a0 the Program Acquisition Cost and the total estimated number of systems to be produced.\u00a0 Using those two, a \u201cbest case\u201d overall projected average unit cost for the system in question can be calculated.\u00a0 I say \u201cbest case\u201d because reducing the number to be produced virtually always raises the overall unit cost of any system – the development cost gets spread among fewer units, and you see less production line improvement due to workforce learning.<\/p>\n

This is why I\u2019m VERY concerned with the F-35. Per info I found yesterday while considering Poetrooper’s article about the F-35, the Program Acquisition Cost for the F-35 is currently estimated at approximately $406.5 billion<\/span>.\u00a0 The total number to be produced is currently estimated at 2,456.That yields a \u201cbest case\u201d unit<\/span> cost for the F-35 of $165+ million<\/span><\/strong> each.\u00a0 That’s twice that of the F\/A-18E\/F.<\/p>\n

Reduce the number to be produced \u2013 either through Congress cutting the budget or foreign customers deciding that it\u2019s simply too damn expensive \u2013 and we could conceivably see a unit cost of 2 or 3 times that.\u00a0 Add to that the fact that it simply can’t adequately replace the A-10, and, well . . . the term “white elephant” comes to mind.<\/p>\n

Yes, that could indeed happen.\u00a0 It already did once with the B-2.<\/p>\n

A weapon system that is too expensive to buy in sufficient quantity, or is too expensive to use, is worse than not having one at all.\u00a0 It won\u2019t do the job \u2013 and the money wasted on such a white elephant could easily have been used to buy something useful instead.<\/p>\n

. . .<\/strong><\/p>\n

Well, I hope this helps.\u00a0 Might have a detail or two wrong above (I have been away from that for a few years now), but I’m pretty sure it’s in general correct.<\/p>\n

 <\/p>\n

References<\/u>:<\/p>\n

https:\/\/dap.dau.mil\/acquipedia\/Pages\/Default.aspx<\/p>\n

https:\/\/biotech.law.lsu.edu\/blaw\/dodd\/corres\/pdf\/50004m_1292\/p50004m.pdf<\/p>\n

https:\/\/dap.dau.mil\/aap\/pages\/qdetails.aspx?cgiSubjectAreaID=8&cgiQuestionID=108656<\/p>\n","protected":false},"excerpt":{"rendered":"

This article was inspired by thoughts brought to mind by Poetrooper’s F35 article yesterday. . . … Cost Confusion<\/span>Read more<\/a><\/p>\n","protected":false},"author":623,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[84],"tags":[],"class_list":["post-73718","post","type-post","status-publish","format-standard","hentry","category-military-issues"],"_links":{"self":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts\/73718","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/users\/623"}],"replies":[{"embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=73718"}],"version-history":[{"count":0,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=\/wp\/v2\/posts\/73718\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=73718"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=73718"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.azuse.cloud\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=73718"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}