The other day, I published an article describing the 8 distinct (and different) costs DoD defines for weapons systems under development.\u00a0 While I touched on the utility of some of them briefly, I didn\u2019t really say much regarding how each of those costs can be used.<\/p>\n
They\u2019re not meaningless bookkeeping exercises.\u00a0 Each is useful \u2013 even if some are more useful than others.<\/p>\n
Today, I\u2019ll discuss the uses of those 8 costs.\u00a0 For ease of following along, I\u2019ll follow the order used in my first article.\u00a0 You can find that prior article here<\/em><\/a>.<\/p>\n Development Cost<\/span>.<\/p>\n It might seem as if examining development costs would be rather pointless.\u00a0 And in truth, they are in general \u201csunk costs\u201d.\u00a0 Once they\u2019re incurred, there\u2019s no way to recover them.\u00a0 Even if they program is cancelled, that money is gone. So why would we care about it?<\/p>\n However, other than the obvious fact that the US taxpayer foots that bill, knowing a system’s development cost is useful in other ways.\u00a0 The amount of development cost can be (and often is) an indicator of two things.\u00a0 First, a high development cost in anything but a space system generally indicates one of three things:\u00a0 (a) a program that is using \u201cbleeding edge\u201d technology, or is developing new technology altogether; (b) a program that is having difficulty and is having to \u201cre-do\u201d things, or (c) both.\u00a0 Second, it often indicates that the system being produced may be a bit problematic \u2013 at least initially.<\/p>\n A case in point is the B2.\u00a0 It had a huge development cost – $29+B out of a total program cost of around $45B, though in fairness it\u2019s production was curtailed by political action.\u00a0 It indeed developed serious new technology (curved surface stealth) and made use of other highly advanced (for the day) technologies.\u00a0\u00a0 It also had a somewhat extended and troubled development, and is also reputedly somewhat difficult and expensive to maintain.\u00a0 Draw your own conclusions regarding whether the those are related.<\/p>\n Flyaway Cost<\/span>.<\/p>\n The flyaway cost (or sailaway or rollaway cost, if instead you\u2019re talking about ships or ground systems) is actually a quite useful cost.\u00a0 However, it\u2019s not useful in perhaps quite the way you might think.<\/p>\n For starters:\u00a0 the flyaway cost does not<\/span> give you the full cost to DoD of the system.\u00a0 It doesn\u2019t include development costs essential equipment that is required but not part of the system itself; initial spares; or a few other things.\u00a0 So the flyaway cost isn\u2019t the answer to the question, \u201cHow much did (or will) that (whatever) cost Uncle Sam?\u201d<\/p>\n Further, flyaway cost changes over time.\u00a0 This is because as more of an item are produced production line efficiency improves.\u00a0 The workforce gets more efficient; procedures get streamlined and improved, with \u201ckinks\u201d getting worked out; the management team gets more experience at managing the process; and the same all occurs with suppliers of components.\u00a0 It\u2019s not unusual to see the last of a particular weapon system produced have a far lower flyaway cost than the first.<\/p>\n So, how is it useful?\u00a0 It\u2019s useful for projections.\u00a0 Since the flyaway cost is the cost of producing one item, for systems near end of production the current flyaway cost is effectively the marginal cost of producing one more item than originally planned \u2013 or the savings associated with producing one less.\u00a0 It can be used to answer such questions as, \u201cHow much would another 50 (whatevers) cost?\u201d or \u201cHow much would cutting production by 25 save Uncle Sam?\u201d\u00a0 Decision-makers sometimes need to know this.<\/p>\n Weapon System Cost<\/span> and Procurement Cost<\/span>.<\/p>\n Weapons System Cost is simply Flyaway Cost plus the cost of other items (e.g., prime movers, system-unique test equipment and special tools, associated radios) that were not developed as part of the system under development, but which are nonetheless needed for its normal operation.\u00a0 Procurement Cost adds to that initial spares and a couple of other things.\u00a0 As such, the uses of these two costs \u2013 and the pitfalls associated with each \u2013 are effectively the same as for the Flyaway Cost.\u00a0 Indeed, the Procurement Cost is actually what you want if you\u2019re going to do accurate \u201cwhat if\u201d drills regarding changing numbers produced.<\/p>\n Program Acquisition Cost<\/span>.<\/p>\n The Program Acquisition Cost is probably the most useful cost for answering the question, \u201cHow much will (or did) that (whatever) cost Uncle Sam to develop and field?\u201d\u00a0 This cost is the sum of Development Cost and Procurement Cost.\u00a0 As such, it represents virtually everything DoD actually spends to develop a system and deploy it to the field<\/em>.\u00a0 So if that\u2019s what someone wants to know the total cost to field a particular system \u2013 or wants to know how much each copy cost Uncle Sam to buy \u2013 that number is essential.<\/p>\n What it does NOT include is the cost of actually operating the system<\/em>.\u00a0 So while it tells you how much $$$ is needed (or was spent) to buy<\/em> it, it doesn\u2019t tell you squat about how much you\u2019ll spend to use<\/em> the system for 10 or 20 or 30 (or more) years.<\/p>\n For anything but a space system, Total Program Cost is generally only somewhere between 20% and 40% of the total cost of owning and operating the system.\u00a0 So while you hear a lot about it for weapons being developed, it’s not even really the “biggie” in terms of overall $$$.<\/p>\n Operations and Support Cost<\/span>.<\/p>\n Operations and Support Cost is what it costs to actually use the system after it’s fielded – e.g., fuel, maintenance, spare parts (other than initial spares), operator salaries, etc . . . .\u00a0 While system developers determine these costs, their programs aren\u2019t the one to pay for them \u2013 units operating the systems do.\u00a0 So \u201cBig Army”\/HQAF\/DoNavy\/HQ USMC and their subordinate HQs are the ones who care about these.<\/p>\n You have to know these costs in order to calculate future budget requests.\u00a0 And as the bureaucrat from DC put it to the test pilots in the movie The Right Stuff<\/em><\/span>:\u00a0 \u201cFunding. That\u2019s what makes your ships go up . . . . No bucks, no Buck Rodgers.\u201d<\/p>\n Disposal Cost<\/span>.<\/p>\n Since this is the cost of demilitarizing and disposing of a system being retired, anyone involved in that activity needs to know this cost.\u00a0 And while it’s usually a relatively small cost with respect to the overall system’s Life-Cycle Cost (next), it can still be substantial in absolute terms.<\/p>\n It’s also an area that you really don’t want to neglect if you’re responsible for same.\u00a0 Ask the folks who formerly worked at Edgewood Arsenal<\/em><\/a> how not having enough funding to properly dispose of stuff worked out for them.<\/p>\n Life-Cycle Cost<\/span>.<\/p>\n This is the total cost of ownership of the system \u2013 including buying, selling, and disposing of it when it\u2019s no longer needed.\u00a0 This is of keen interest to high-level policy makers in DoD who manage DoD\u2019s budget and requests for funding.<\/p>\n . . .<\/strong><\/p>\n That\u2019s all for today.\u00a0 In the next few days, I\u2019ll take a bit more of an in-depth look at what we know about the F-35\u2019s program costs\u00a0 and production.\u00a0 I’ll also do a bit of “what if” to project what might happen if (as is virtually certain to occur based on recent past history) the number currently planned to be produced is reduced due to lack of funding.<\/p>\n","protected":false},"excerpt":{"rendered":"