Defense Procurement- Back to the Future

Defense procurement is broken. No surprise there. Look at any big-ticket procurment program today, and it’s a dog’s breakfast. Cost overruns, gold-plated requirements, contracts steered to favored Congressional districts, and diminishing returns in numbers of platforms purchased.

Ever heard of the procurement death spiral? An ambitious program starts, with estimates for a given program cost, and simultaneously an estimate for a unit purchase cost and a given timeline. Let’s say the Army wants to buy a new helicopter. They announce this new program to buy 1000 new choppers, at $5mm a piece, over 10 years for a total program cost to buy of $5bn dollars. That announced program budget includes research and development costs, as well as actual production costs for the program.

Life being life, the R&D costs of the program go up even before the design of the helicopter is finalized, let alone before the first one is built. Sometimes that is the result of unforeseen technical challenges. Often it is the result of additional requirements laid on the contractor by the end user (the Army, or DoD) either as a result of a whish list, or adapting to evolving technologies. For instance, suddenly the Army insists the chopper be capable of being operated as a drone. So let’s figure these changes add an additional $2bn to the total program costs (because not only is R&D up, eventually the production costs of adding this stuff will go up). Suddenly, our $5mm chopper is a $6mm chopper.  And all these changes take time to incorporate as well. Our program has suddenly gone from a 10 year timeline to a 12 year timeline. Well, guess what? Time really IS money. That stretch of the timeline is going to cost us another $2bn. Total program cost, $14bn. And unit cost is now $7mm. That’s a 40% increase in cost.

Congress, always happy to complain about cost overruns in the DoD budget, slashes the programmed buy from 1000 helicopters to 750. Should save about a quarter of the money, right? Wrong. The costs of the last 250 aircraft in the program are usually the lowest. The sunk costs of R&D, infrastructure and production tooling are the same whether you build 100 or 1000 aircraft. And by the end of a production run, efficiencies in the production process have been learned and implemented. It takes less time and labor to build the last aircraft in a production run than the first. And that time and labor is money. So effectively, cutting a quarter of the buy leaves the total program cost almost the same as before. So instead of saving a quarter of our total program costs, we’ve left them roughly the same, but have lost a quarter of production. So the unit cost of each chopper has gone up 25%.  So now the cost of each chopper is $8.75mm. That’s more than twice the original programmed unit cost.

Congress, incensed at the spiraling costs of the program cuts production again, with the same results, and eventually the unit cost of a program is so high, the program either becomes the poster child for bad procurement (B-2 bomber, F-22 fighter, DDG-1000 destroyer) or is cancelled outright. The problem with the outright cancellation is that the Army still needs to buy a new helicopter, but Congress and the public are skeptical of the Army’s ability to buy a reasonably priced helicopter.

This is, of course, a grossly simplified example of procurement woes. I am cognizant that many of the things DoD buys are incredibly complex, and complex stuff costs money.

It doesn’t help, either, that DoD procurement is the most byzantine process in the world (with the possible exception of the Federal Travel Regulations or FTR!).  Walter Pincus has an interesting article showing what the latest “what’s wrong with DoD procurement” commission has just told us:

In June 1986, after a year-long investigation, then-President Ronald Reagan’s Blue Ribbon Commission on Defense Management — later known as the Packard Commission — filed a final report.

It was established to investigate Pentagon procurement after an enormous increase in defense spending and the discovery of the infamous $435 hammer and $600 toilet seat. The panel was chaired by David Packard, co-founder of Hewlett-Packard Co., and deputy defense secretary in the Nixon administration.

Its declaration: “The Department of Defense’s acquisition system continues to take longer, cost more and deliver fewer quantities and capabilities than originally planned.” Among causes listed were “stifling burdens of regulation, reporting and oversight.”

Last month, a Defense Business Board task force, established a year ago by the vice chairman of the Joint Chiefs of Staff, Adm. James A. Winnefeld Jr., reported exactly the same “unacceptable” finding. The task force conclusion came after a study that included 221 interviews and review of 300 past studies and commission findings.

As you can see, it’s not like it is a huge secret that procurement is a nightmare. Several of my online friends work for companies that contract with the DoD. They have plenty of horror stories about the hoops they have to jump through providing products and services. Surprisingly little of their effort goes to the actual product or service. They spent incredible amounts of time ensuring their compliance with obscure rules of procurement. Time, again, is money. And that monetary expense is charged right back to the government. So you and I end up paying twice what we should be. And don’t forget, the DoD also has to hire scads of people to monitor and enforce these procurement regulations. So we’re paying for that as well.

DoD procurement regulations are effectively a Gordian knot, and improvements won’t come from tying a few more twists on the free end. We need to cut the knot.

7 thoughts on “Defense Procurement- Back to the Future”

  1. There was a good opinion piece about the latest Air Force procurement debacle. From the opinion piece, it sounds like most of what they wanted to buy was already on the GSA Schedule. Of course, once they selected the winning bid, the other 9 companies filed 10 protests (one company filed two protest, it seems). Now, it all has to be re-bid. http://washingtontechnology.com/blogs/editors-notebook/2012/05/netcents-bid-protest-debacle.aspx?s=wtdaily_030512

    Sometimes, I wonder why they don’t just put NCOs in charge of acquiring supplies on the local economy. Crapgame would love it.

    1. At Ft. Carson, they DID give us local economy procurement. The unit Supply Sgt. had a GSA credit card, valid at half a dozen or so vendors in town. Stuff that used to be bought at SSSC (Self Service Supply Center) was bought downtown instead. Stuff like mops, sponges, cleaners, and other day to day supplies.

      It worked pretty well, but man, getting an off post dispatch for a deuce-and-a-half was a flaming pain.

  2. To put in perspective, the DoD is it’s absolute worst enemy. Whether is the multiple layers of bureaucrats, the intereference of the huge military contractors too-close relationship with Congress and flag officers, things that should cost X cost Y cubed. The $600 toilet seat? It probably cost to the average consumer a tenth of that. Add the layers of regulation that a) require it be manufactured by an acceptable company, b) be tested to destruction and c) provide what is infamously known as “certificate of compliance” for the workmanship and materials. The toilet seat company started out with 10 people between management and workers…then you have to add all the compliance personnel and a federal contracts person. And to be compliant and available to provide materials to the DoD, you have to keep these people around on payroll..and who gets the bill?

    I laughed myself silly when ships started receiving their first “COTS” computers. By the time they got them in, they were already 2 generations old and my God, did they charge them out the ass for it!

    Do I have answers? None that don’t involve a dull knife, a rope and a tank full of sharks.

    1. The worst part about all of those compliance jobs is that they have a vested interest in making the process more complicated, more time-consuming and more padded in paperwork. Job security and a feeling of self-importance obscure the fact that they’re making things worse for the warfighters, not better.

    2. Byron,
      My youngest brother would use a tank full of starving Piranha. Smaller bites, it’s true, but there’s lot more of them and it would probably be faster.

      I can’t remember the name of the guy who made his name as a program minion on the C-5 in the late 60s. The AF hated him in the end, but he was dead on. Lockheed almost went under because of the Galaxy and they would have richly deserved it. The Lockheed disease has metastasized throughout the defense industry and they have learned to milk it as well.

  3. David, to a simple shipfitter/planner (who has to produce work orders, obtain drawings, interpret them, ship check, and order material, dealing with the compliance people both on my side of the money and on the vendor side of the money is a serious pain in the ass. Not long ago I order a 4’x10’x 1/4″ sheet of steel…with a slightly abnormal material specification of ASTM-DH-36 (slightly harder than regular carbon steel, or ASTM-A-36) I got the plate in 3 days which was good…but it sat another 4 days with my foreman growing more and more impatien while the vendor supplied the ‘Certificate of Compliance”, which means the chemical analysis of the properties of this particular plate (or rather, the pour at the mill). You see, the plate can’t be released by the Receiving Dept. until all the terms of the order are satisfied. Woe behold us if we get audited by those fine people in Compliance (of the Navy). So yes, it’s a freakin’ pain in the ass, and yours truly is part of the compliance machine, since I have to back up my requisitions with drawings (sigh). Now, anyone want to bet whether or not the yard that built the damn ship had to pony up this paperwork?

  4. The Arabs say “Success has many fathers, failure only one.” With so many GS types and field grades chasing jobs and promotions of course procurement becomes a cluster fark.

    Mil-Spec was viewed as too expensive. Along came commercial off the shelf (COTS). And contractors grew fat double billing Uncle Sam. And the ranks of Flag Officers and GS flunkies grew at the expense of the common grunt.

    Wanna cut the knot? Cut the numbers of O-5 and above, E-8 and above who just sit stateside sitting in offices and on boards. Trim a lot of those GS and DoD civilians and consolidate the offices. The lawyers should be the first to go. Officers and NCO’s in procurement should be combat veterans. Those who sat out OIF and OEF need not apply.

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