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Why System Costs Go Sky High

On the heels of a recent GAO report pointing out the mess that is the Pentagon's acquisition process that results in skyrocketing weapons systems costs and frequent schedule delays, comes a report from the eggheads at RAND that aims to get at the issue of why weapons systems cost growth occurs.

RAND crunched the numbers on 35 major weapons programs. Most are Air Force programs, since the study was funded by the Air Force, such as F-22, JSTARS, C-17, some missiles and electronics programs, although a couple of Army helicopter programs were thrown in for good measure, along with two vehicles: Stryker and an upgraded Bradley. RAND usefully broke out cost growth by development, procurement and the program as a whole.

The study showed that weapons system cost growth most often results from changes made to the program by either OSD, the services or Congress. Changes in the quantity of systems built, either cutting numbers or adding on to the original buy, was far and away the most significant factor, accounting for 22 percent of all cases of runaway costs. A classic example is the B-2 bomber, where the total number ordered eventually dropped to 21 from an expected 132 aircraft, sending per-unit costs through the roof.

Changes in system requirements -- such as requiring that the new helicopter used to shuttle the president and his entourage from the White House to Camp David be able to penetrate the world's thickest SAM belts –- accounts for cost growth 13 percent of the time.

An interesting insight is how rarely technical challenges lead to rising weapons costs -- less than 4 percent of the time. The study shows that skyrocketing weapons costs do not result from random events, such as unforeseen technical challenges, rather, policymakers decide to make changes throughout the life of a program, either ordering more of a weapon or cutting back on how many they want or making modifications to the requirements, often knowing full well that prices will go up.

The other big factor RAND identified was overly rosy cost predictions, an "error" that accounts for 18 percent of the difference between the original baseline estimate and a program's real costs in the development phase. This problem is particularly acute when it comes to aircraft and helicopters, the study said.

RAND said a little more honesty is needed early in the decision phase of whether to go ahead with a program or not, "enormous pressure can be placed on the cost analysts to create optimistic estimates so that the proposed program will not be viewed as too expensive to move forward as currently specified."

As RAND notes, more honest cost estimates won't have much effect on the Pentagon's spending problems if the program actually goes forward. The system will still require the money to actually get built, however, "it will better align expectations with reality." What more accurate original cost estimates would do, although RAND doesn't explicitly say this, is cause policymakers to blanch at the price tag and probably say "no go" to more proposed programs.

And one more thing...RAND found that the Air Force doesn't do any better or worse than the other services when it comes to managing program cost growth, all the services are equal-opportunity offenders.

[A sidenote to RAND: I know you're trying to increase the exposure of your experts and boost the impact of your studies. It would really help if you made the reports a little more enjoyable to read. We get the whole academic rigor thing that tends to wring out all those interesting turns of phrase and anecdotal bits. But look, if CSBA can make their reports interesting reads, you can too.]    

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