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.