Focusing on cost is not the answer.

• Author: Trail, Scott
• Position: PROCUREMENT REFORM

For decades, defense acquisition reforms have aimed to reduce the cost of equipping our nation's defenders. Unfortunately, none of these reforms has produced the kind of reductions envisioned by their originators.

A case could be made that cost-focused acquisition reform has actually increased costs rather than reduced them. Instead of focusing on cost, the acquisition system would be better improved by focusing on incentives, culture and mechanisms.

The counterproductive impact of a cost-focused approach starts at program inception. In order to receive funding for a new program, each service competes with the other. They are incentivized to maintain a competitive appearance against other programs by minimizing cost and maximizing performance. Program baselines are established based on these optimistic assumptions, which lead to overruns.

When faced with a funding shortfall, unplanned and inefficient adjustments are made such as shifting funding between programs, deferring work and associated costs into the future, or cutting procurement quantities. This practice of underestimating costs and compensating with shortsighted adjustments feeds a spiral of ever increasing growth.

The incentive to underestimate cost is further exacerbated during times of decreased funding, as the Defense Department is experiencing now. As funding levels decrease, the competition for funding and the incentive to underestimate program costs increases.

This relationship is supported by a 2014 Institute for Defense Analyses study which found program acquisition unit cost (PAUC) growth was three to five times higher during times of limited funding than during times of plentiful funding. Interestingly, the study found no correlation between PAUC growth and periods of reform or process changes. This finding suggests that incentives to match cost to the funding available trumps attempts to improve the process.

Another cost-focused method is targeting profit. Targeting profit results in consolidation, selecting companies based on cost alone instead of value, reduced internal research funding and serves as a barrier to leveraging commercial items.

While the perception exists that defense contractors command lucrative profits, a 2012 Deloitte study found otherwise. The study showed the aerospace and defense industry had a profit margin of 10.5 percent compared to 18.2 percent for all other industries. With comparatively low profit margins, defense contractors are forced to consolidate to attract investors. This is exactly what has happened in the defense industry over the past several decades. In 1940 there were 16 fixed-wing aircraft manufacturers, in the 1990s there were eight, today there are...