Five years after its introduction, will-cost/ should-cost has proved its value as a tool for boosting productivity and affordability in acquisition programs—more so in some circumstances than others. The question now is how to further that success.
by Mr. Michael E. Lebrun and Mr. Dale N. Fletcher
The evidence is in: The Better Buying Power (BBP) initiative known as “will-cost/should-cost management” has resulted, as intended, in improving cost and schedule performance of DOD acquisition programs. Because should-cost is a success, it makes sense to ask what parts are working and why, so that the success can be duplicated.
Dr. Ashton B. Carter, then the undersecretary of defense for acquisition, technology and logistics (USD(AT&L)) and now the secretary of defense, introduced the principles of will-cost/should-cost management, now commonly referred to simply as “should cost,” among the original BBP initiatives in 2010. Carter directed program managers to look for innovative methods and approaches that could save money or avoid expenditure compared with the originally expected contract cost.
As the 2015 report “Performance of the Defense Acquisition System” describes it, should-cost management “requires our managers to actively seek ways to save money and to set targets for doing so, not just to stay within their budgets. This is a major cultural change that seems to be taking hold.” This latest edition of the report, issued annually by the Office of the USD(AT&L), notes, “The number of MDAP [major defense acquisition program] contracts started since 2009 with price reductions has increased significantly compared to earlier contracts.”
According to the report, 57 percent of MDAPs in the developmental phase of acquisition and 79 percent of programs in procurement experienced funding reductions in the period from 2009 to 2014. These results stem, in part, from should-cost management, the report states, as well as from DOD’s efforts to increase the use of stronger, formula-type incentive contracts—such as cost-plus-incentive-fee and fixed-price-incentive contracts—that explicitly tie cost-over-target to contractor financial results.
DOD and the Army measure the success of should-cost management, broadly speaking, by the annual savings from all ongoing contracted activities as they execute to lower figures than budgeted. Follow-on iterations of BBP have strengthened and expanded should-cost management throughout an Army acquisition program’s life cycle. BBP 2.0, unveiled by the Hon. Frank Kendall in November 2013, extended the application of should-cost to all phases of the acquisition life cycle and to the acquisition of related services. In his April 2015 guidance on the implementation of BBP 3.0, Kendall continued to emphasize the importance of making should-cost an enduring best practice in acquisition.
Looking more closely at how program managers are applying should-cost principles, however, it is clear that the success of should-cost management depends in large part on timing.
BREAKING IT DOWN
The Army fully embraces should-cost as a critical BBP initiative and an outstanding device for helping program managers reduce the costs of their programs. Program executive officers (PEOs) are responsible for ensuring that program managers implement should-cost management by identifying opportunities for savings, known as should-cost initiatives, and developing should-cost estimates for their Acquisition Category (ACAT) I, II and III programs.
For example, the PEO for Missiles and Space successfully implemented a multiyear procurement contract for the TOW (Tube-launched, Optically tracked, Wire-guided) 2 missile system that resulted in annual savings from FY12 to FY16. (See Figure 1.) The savings represent the lower procurement costs compared with what the program’s will-cost baseline projected.
In FY15, 88 percent of the Army’s acquisition programs had should-cost initiatives in place. The Office of the Secretary of Defense (OSD) and the Army share a goal of 100 percent of all ACAT programs, regardless of where they fall within the acquisition life cycle.
The Army acquisition executive (AAE) holds PEOs and program managers accountable for should-cost management. There are a number of avenues whereby the AAE receives reports from the PEOs on their progress in implementing should-cost initiatives across their portfolios, including annual reviews of their delegated ACAT II programs and annual summaries of their ACAT III programs.
Project managers for MDAPs or major automated information systems (MAIS) have the opportunity to update the defense acquisition executive (DAE) when they brief the monthly Defense Acquisition Executive Summary (DAES) Senior Meeting Forum. Finally, the AAE also provides the DAE and other senior OSD leaders a quarterly report on should-cost activities at the aggregate Army level during Business Senior Integration Group meetings. All of these forums help maintain a high degree of command emphasis on the importance of should-cost management as an ongoing effort.
THE ARMY’S APPROACH
Within the Office of the Assistant Secretary of the Army for Acquisition, Logistics and Technology (OASA(ALT)), the Office of Performance Assessments and Root Cause Analyses (PARCA) acts as the Army policy proponent and clearinghouse for should-cost activities. The PEOs and program managers provide quarterly updates on their initiatives to PARCA, which then compiles and analyzes the data for updates to the ASA(ALT) leadership and for briefings to the Business Senior Integration Group.
Based on should-cost data that the PEOs and program managers submitted in FY14 and FY15, PARCA identified certain patterns as the Army more consistently implements should-cost across the acquisition enterprise. PARCA’s aim is to identify areas where the Army performs well and areas where the Army can improve. The Army realized a total cost savings of $225.7 million and an additional cost avoidance of $298.3 million for FY15.
One measure of successful implementation is the number of acquisition programs implementing should-cost initiatives. In FY14, 205 of 219 programs reported a total of 326 should-cost initiatives. In FY15, the numbers dropped, with 205 programs implementing 180 initiatives.
Fourteen programs requested and received approval for exemptions in FY14, compared with 25 requested and approved in FY15, allowing the programs to implement no should-cost initiatives. There are three reasons a program may request an exception: 1) It is a joint program with another service as the executive agent; 2) It has either met 90 percent of its fielding requirements or expended 90 percent of its total funding requirements; or 3) Its funding has been eliminated. Exemptions require the AAE’s approval for MDAP and MAIS programs and PEO approval for ACAT II and III programs.
The extent to which acquisition programs implement should-cost initiatives across the breadth of the acquisition life cycle constitutes another measure of success. Beginning in FY14 and continuing in FY15, the Army programs reported should-cost initiatives in all five phases of acquisition, ranging from (pre-MS A) materiel-solution analysis to the operations and support phases.
This cradle-to-grave planning for should-cost management of acquisition programs is possible only with the cooperation and support of Army organizations outside of ASA(ALT). Initiatives implemented before MS B require input and cooperation from the requirements community, whether that is the U.S. Army Training and Doctrine Command for weapon systems, or other functional proponents for defense business systems. At the other end of the life cycle, the successful implementation of a should-cost initiative must involve ASA(ALT)’s partners in the U.S. Army Materiel Command.
DEGREES OF SUCCESS
Now that program managers are implementing should-cost initiatives across the entire acquisition life cycle, where are they finding the most success in terms of cost savings or avoidance? Statistics gathered at the ASA(ALT) level give some indications.
As noted, the PEOs and program managers generated $255.7 million in cost savings and another $298.3 million in cost avoidance in FY15. PARCA analyzes these results in order to identify where, by phase of the acquisition life-cycle and by general category of acquisition activity, the most successful initiatives concentrate.
Figure 2 shows the dollar value of cost savings and avoidance broken out by the phase of the acquisition life cycle. In FY15, the largest dollar value of savings and avoidance was from initiatives targeting the operations and support phase, with significant but decreasing amounts generated through initiatives in the production and deployment, engineering and manufacturing development, and technology maturity and risk reduction phases.
The concentration of should-cost initiatives by acquisition activity is another telling indicator of the strengths and weaknesses of our current approach to driving costs out of Army programs. The Army applies should-cost to seven target acquisition processes in which programs may be active during any phase in the acquisition life cycle:
- Requirements of the Joint Capabilities Integration and Development System (JCIDS).
- Oversight and review.
- Product deliverables, such as production and delivery of equipment and systems engineering.
- Logistics and sustainment.
- Test and evaluation.
- Miscellaneous activities.
As illustrated in Figure 3, should-cost initiatives targeting contracting activities yielded much greater cost savings and avoidance than any other acquisition activity in FY15.
Taken together, the data clearly show that program managers currently find the greatest success with should-cost initiatives in the operations and support phase of the acquisition life cycle that target contracting activities. The questions that PARCA now wants to explore are why these results are occurring, and if we are missing opportunities to implement successful initiatives in other phases of the life cycle and by targeting other acquisition processes. In other words, are these results unique to 2015?
One possible answer is that many of the Army’s largest acquisition programs are currently executing multiyear production contracts awarded in prior years. In this circumstance, the PEO and project manager take credit for the cost savings and avoidance in the year the contract is awarded, and the benefits are seen at that time rather than in later years. For example, the PEO for Aviation and its Project Manager for Utility Helicopters realized significant cost savings and avoidance through the ongoing multiyear contract for the UH-60M Black Hawk program, including $93.1 million in FY14. Similarly, the TOW 2 missile program accrued large cost savings and avoidance through a multiyear contract awarded for FY12 through FY16. The cost avoidance allowed the Army to reprogram funds from the TOW 2 program to other Army priorities. These results were booked in prior years even though the benefits would occur years after the initial award of the contract.
The more challenging question is why programs do not pursue should-cost initiatives or find success in other phases of the acquisition life cycle and in other target activities. In both FY14 and FY15, the target processes of JCIDS requirements, oversight and review and test and evaluation, yielded relatively small cost savings or avoidance for the Army despite the fact that program managers implemented nearly as many initiatives as in the contracting and production areas.
Is the lack of results in these areas a function of PEOs and project managers claiming success for initiatives in prior years? Have they, in essence, already harvested all of the low-hanging fruit? If this is the case, will we see new opportunities for initiatives in these areas as the Army moves forward with new programs such as the Armored Multi-Purpose Vehicle and Joint Air-Ground Missile, both of which successfully accomplished MS B decisions in 2015 and will begin reporting in 2016?
Without question, should-cost management is an accepted best practice throughout the Army’s acquisition enterprise. As a BBP initiative, it receives constant command emphasis from leadership in the Army and OSD.
Should-cost is also a very successful BBP initiative. Since its initial implementation in 2012, the Army has documented $2.2 billion in cost savings. Programs that execute successful should-cost initiatives are able to reinvest the savings back into their programs, allowing some programs to buy down risk and others to procure greater quantities. Thus, should-cost as a BBP initiative impacts both affordability and productivity or efficiency.
Moving forward, ASA(ALT)’s goal is to streamline and simplify planning and reporting will-cost/should-cost initiatives for the PEOs and project managers. In addition, ASA(ALT) is working closely with the other services and National Defense University to increase should-cost training for all members of the Army acquisition enterprise.
MR. MICHAEL E. LEBRUN is the PARCA director in OASA(ALT). He holds an M.A. in political science from the University of Maryland College Park, an M.S. in national resource management from the Industrial College of the Armed Forces and a B.S. in foreign service from Georgetown University. He is a member of the Army Acquisition Corps (AAC) with Level III certification in program management.
MR. DALE N. FLETCHER is PARCA’s should-cost manager. He holds an M.S. in cost analysis from the Air Force Institute of Technology and a B.S. in mathematics from Chicago State University. He is an AAC member with Level III certifications in cost estimating, financial management and program management.
This article was originally published in the January – March 2016 issue of Army AL&T magazine.
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