2. REQUIREMENT FOR O&S COST ESTIMATES

2.1    INTRODUCTION

    The decision to field a new system requires a commitment to support that system for years into the future. Decisions to develop, procure, and support new systems are based on many factors, one of which is the projected cost of the systems over their operational lifetime. Operating and support costs normally constitute a major portion of system life- cycle costs and, therefore, are critical to the evaluation of acquisition alternatives. The foundations from which O&S costs are derived are initial design-to-cost efforts and trade-off studies conducted by the system design team. Trade-off studies that affect O&S costs are reviewed by the DAB committees and are part of the major system acquisition review process within DoD. (Note 1) This chapter presents a brief overview of the life-cycle cost phases of weapons programs, describes the DAB decision process, and discusses the uses of O&S cost estimates in acquisition decisions.

2.2    OVERVIEW OF LIFE-CYCLE COSTS

    Since decisions to commit funding are made throughout the acquisition process, it is important to understand the decision milestones and how they relate to the life-cycle cost of a weapon system.

    The life cycle of a weapon system begins with the determination of a mission requirement and continues through the engineering and manufacturing development, production and deployment, and operations and support phases to the eventual disposal or demilitarization of the system by the government. For purposes of cost estimating, life-cycle costs typically are divided into four components: research and development, investment, operating and support, and disposal. Exhibit 2-1 illustrates the program life cycle and shows how its various phases relate to the phases of a system's life-cycle cost. The figure is intended for illustrative purposes only; actual programs may deviate from the pattern shown.

    Depending on the system, costs or spending rates can peak at any phase in the program life cycle. Likewise, spending for a program phase may fall and then rise again, rather than attain a single peak or plateau as shown in the exhibit. Program phases also may overlap considerably. For example, research and development costs in the Engineering and Manufacturing Development (EMD) phase often extend into the Production and Deployment Phase, overlapping with investment costs. Likewise, the Operating and Support phase overlaps the Production and Deployment phase as systems are deployed. Finally, a program may be so closely related to one or more other programs that these external relationships will influence the amount and phasing of the program's costs. To show how the cost distribution can vary from one program to the next, Exhibit 2-2 provides a breakout of the costs incurred during the key acquisition phases for two different weapon systems.

    The following paragraphs summarize the primary cost categories associated with each life-cycle phase.

• Research and Development. Consists of costs incurred from program initiation at Concept Demonstration and Approval (Milestone I) through the Engineering and Manufacturing Development phase. Includes costs of feasibility studies; modeling; trade-off analyses; engineering design; development, fabrication, assembly, and test of prototype hardware and software; system tests and evaluation; system- specific support equipment; and documentation.
• Investment. Consists of costs incurred during the Production and Deployment phase (from Milestone III though completion of deployment). Encompasses costs associated with producing, procuring, and deploying the primary hardware and directly associated hardware and activities, such as system-specific support equipment, training, data, initial spares, and military construction.
• Operations and Support. Includes all costs of operating, maintaining, and supporting a fielded system. Encompasses costs for personnel; consumable and repairable materials; organizational, intermediate and depot maintenance; facilities; and sustaining investment. The O&S phase overlaps with the Production and Deployment phase. O&S costs are incurred in preparation for and after a system's fielding and continue through the end of the system's useful life.
• Disposal. Captures costs associated with deactivating or disposing of a military system at the end of its useful life. These costs typically represent only a small fraction of a system's life-cycle cost and are excluded from most analyses. The main exceptions (for which estimates must be provided) are disposal of nuclear waste, missile propellants, and other materials requiring detoxification or special handling.

    DoDI 5000.2 requires the DoD component or Joint Program Office responsible for an acquisition program to prepare life-cycle cost estimates in support of decision milestones and other reviews. Each estimate and supporting documentation is provided to the CAIG for its review.

2.3    O&S ROLE IN DAB DECISIONS

    The DoD acquisition system is "a uniform system whereby all equipment, facilities, and services are planned, designed, developed, acquired, maintained and disposed of within the Department of Defense. . . . The DAB is the senior advisory body to the Under Secretary of Defense for Acquisition (USD(A)) to advise the USD(A) in enforcing policies and procedures governing the operations of the DoD Acquisition System." (Note 2) The DAB also makes recommendations on milestone decisions for DAB-designated programs. The DAB process is supported by three committees that review the documentation for cost analyses prior to DAB meetings and raise issues for DAB consideration. The CAIG is one of several bodies that support the DAB and the DAB committees.

    Five major milestone decision points and five acquisition phases (beginning with Milestone 0) provide the basis for management and program decisionmaking by the DAB. Exhibit 2-3 shows the milestone decisions associated with the various acquisition phases.

    The paragraphs below, taken from DoDI 5000.2, explain the focus of each acquisition phase and describe the activities leading up to and resulting from the various decision points: (Note 3)

• Milestone 0, Concept Studies Approval . The decision authority must determine if a validated mission need warrants the initiation of a study of alternative concepts. This milestone marks the initial interface between the requirements generation process and the acquisition management system. A favorable decision authorizes a minimum set of alternative concepts to be studied.
  • Phase 0, Concept Exploration and Definition. The purpose of this phase is to explore materiel alternatives that could satisfy a documented mission need. Cost and operational effectiveness analyses (COEAs) are prepared for review at Milestone I. A proposed acquisition strategy is developed for the most promising system concept(s), and initial cost, schedule, and performance objectives are established.
• Milestone I, Concept Demonstration Approval. At this milestone, the decision authority assesses the results of Phase 0 and evaluates the affordability of a proposed new program. A favorable decision establishes a new acquisition program, which is authorized to enter Phase I. A "concept baseline" identifying initial cost, schedule, and performance objectives is established.
  • Phase I, Demonstration and Validation. The objective of this phase is to ensure that critical technologies and design approaches are understood and are attainable. Cost, schedule, and performance trade-offs are made within affordability and design-to-cost constraints. A "development baseline" is proposed, and the analyses and information needed to support a Milestone II decision are developed.
• Milestone II, Development Approval. The purpose of this review is to determine if the results of Phase I warrant a program's continuation. The decision authority must assess the program's affordability and establish a development baseline containing refined cost, schedule, and performance objectives.
  • Phase II, Engineering and Manufacturing Development. The objective of this phase is to translate the preferred design approach developed in Phase I into a stable system. Configuration controls are established, and demonstration testing is conducted. The acquisition strategy, system performance requirements, and system cost estimates are refined. Resources are committed commensurate with the control and reduction of risk.
• Milestone III, Production Approval. The purpose of this review is to determine whether the results of Phase II warrant continuation of a program. The decision authority must assess the program's affordability, ensure that the system design is stable and producible, and establish a "production baseline" containing refined cost, schedule, and performance objectives.
  • Phase III, Production and Deployment. The objective of this phase is to establish a stable, efficient production and support base. The ability of the system to satisfy the validated mission need is assessed. Performance and quality are monitored in follow-on operational support and testing. Needs for major upgrades or modifications requiring Milestone IV approval are identified.
• Milestone IV, Major Modification Approval. This review is conducted "as required" to determine if new procurement or major upgrades to a system currently in production are warranted. The need for a new system or major modifications may arise from a change in the threat or a revision in the Defense Planning Guidance, from a deficiency identified during Phase III testing, or from an opportunity to reduce the cost of ownership (O&S costs). Prior to committing to a major modification, the decision authority may ask for a review of other alternatives, thus reentering the process at Phase 0.
  • Phase IV, Operations and Support. This phase overlaps with Phase III, Production and Deployment. The beginning of this phase is marked by the declaration of an initial operational capability or the transfer of management responsibility from the developer to the maintainer. Fielded systems are monitored until the time of their disposal in order to assess their capabilities and the effects of aging. Where appropriate, modifications are undertaken to extend service life.

    As noted earlier, life-cycle costs are considered at each decision milestone in the acquisition process. Although the recurring portions of O&S costs are not actually incurred until after a system is deployed, the major decisions that ultimately determine O&S costs are made long before a system is fielded. Beginning with Milestone I, the CAIG must review the program office and independent cost estimates prepared by the sponsoring DoD component to ensure that an independent projection of system costs is available to the relevant DAB committee and to the DAB. Life-cycle cost estimates figure heavily into the evaluation of system alternatives. To compare alternatives over the long term, O&S costs must be estimated and evaluated, particularly in those areas subject to possible change or uncertainty. Since the O&S cost of a weapon system often exceeds both the development and production costs, a thorough analysis of O&S costs is required at each acquisition milestone. For each milestone review by the DAB, the CAIG prepares a report summarizing its evaluation of the cost projections submitted by the program office and by an independent cost-estimating team. The CAIG provides any additional estimates that may be required to remedy deficiencies in the cost estimates under review and, if serious problems are found, it may suggest that the DAB committee defer its meeting on the program.

    The CAIG also assists the OSD components in their reviews of program costs. The goal here is to determine whether:

• The O&S costs of all alternatives have been considered in the selection of the preferred alternative;
• Cost drivers have been identified and positive action has been taken in the design and development stages to reduce support costs; and
• The new system will be affordable to operate and support.

2.4    NEED FOR O&S COST INFORMATION

    The cost of operating and maintaining a system over its useful life is driven primarily by policy, system design, operating rate (optempo), and reliability and maintainability decisions, which typically are made prior to entering production. O&S cost information is used for a variety of purposes in the acquisition process, including to:

• Support the current design-to-cost (DTC) program. All new Acquisition Category One (ACAT I) programs are required under DoDI 5000.2 to have rigorous but attainable DTC goals. These goals are established at Milestone I (Concept Demonstration Approval). The objective is to identify cost drivers and high-risk areas that provide the greatest opportunity for design trade-offs and to determine which options offer the lowest life-cycle cost consistent with performance and schedule requirements. To attain this goal, O&S estimates help both designers and managers focus on those aspects of design or program strategy that drive costs. DTC parameters for O&S are normally expressed in terms of dollars, personnel, or reliability and maintainability requirements. By preparing O&S cost estimates for competing alternatives, effective trade-offs can be made.
• Support management reviews. These reviews may occur at major milestones at which program decisions are made, or they may be held for informational purposes only. Whatever their objective, such reviews are the primary impetus for development of complete system O&S estimates.
• Discriminate between competing systems. Often in management reviews, O&S costs are addressed in comparative analyses that assess the costs of a new system relative to those of the most comparable existing system (called the reference system). Such comparisons help in determining whether a new system will require more or fewer resources to support than an existing system if operated in a similar manner. In preparation for Milestone I, COEAs are conducted to compare the various alternatives. It is possible for two or more competing systems to have comparable performance and production costs and yet have significantly different O&S costs.
• Support budget estimates. While development and production estimates play a major role in decisions on the Future Years Defense Program (FYDP) and the President's Budget, O&S costs have an important, if less visible, role. This is because the support segments of the budget are organized by functional area rather than by weapon system. The functional areas are characterized by personnel, unit-level consumption, various levels of maintenance, sustaining support, and indirect support costs. These areas are identified in the cost element structure established for weapon systems; however, cost shares must often be calculated in order to develop a cost estimate for each element. Although the costs of certain elements (such as personnel) can often be identified explicitly, other elements may be common to more than one weapon system. The cost of these latter elements must be allocated among the respective systems. The functional approach to budgeting tends to mask the contribution of each specific weapon system; however, it can be useful in checking the cost-allocation process.

    The nature of cost estimates and cost comparisons depends on the acquisition program phase and the specific issues involved. At Milestone I, very little may be known about the design of a proposed system. It is also generally difficult to obtain accurate organizational and operational cost projections for a Milestone I analysis, but rough estimates are expected. The affordability of the program must be judged, alternatives must be compared, and DTC goals must be established at this formative stage. The most significant impact on O&S costs can be achieved at Milestone I. As designs become firm, the opportunity to influence O&S costs diminishes.

    In preparation for Milestone II, O&S cost estimates and cost comparisons ought to show increased accuracy, consistent with more fully developed configurations and support concepts. By Milestone II, the subsystem cost drivers most likely to influence O&S costs should be identified. (Cost drivers are characteristics of a system or subsystem that have a large or major effect on the system's cost.) An understanding of the system's configuration is necessary in order to identify the cost drivers. Although the specific determinants of cost may vary by system, they can generally be grouped into three categories: physical characteristics (weight, volume, density); policy parameters (optempo, maintenance concept, crew ratio); and performance characteristics (power, speed, range, reliability). Alternative approaches, design trade-offs, and the sensitivity of O&S costs to changes in these cost drivers should be evaluated in the cost and operational effectiveness analysis.

    The O&S cost estimates prepared for Milestone III should be based on the current design characteristics of the weapon system, the deployment schedule, and the operation and maintenance concept. Critical subsystems and any DTC goals established for them must be validated. Operating experience obtained during system tests and evaluation should be used to verify progress in meeting logistics goals or to identify problem areas.

    O&S estimates prepared for Milestone IV decisions should be based on costs associated with an upgrade or modification to a system currently in production. The need for a major modification or upgrade may arise from a change in the threat, a deficiency identified in the system, or an opportunity to reduce ownership costs. The O&S cost analysis should consider the costs and consequences of all alternatives, including maintaining the status quo.

NOTES:

1. DoDI 5000.2, "Defense Acquisition Management Policies," dated February 23, 1991, Part 13, Section A, paragraphs 3.c(3) and 4.n(1)(g) 3, and DoDD 5000.1, "Defense Acquisition," dated February 23, 1991, Part 1, paragraph B.3.b.

2. DoDD 5000.49, "Defense Acquisition Board," date September 11,1989, paragraphs B.2 and C.

3. DoDI 5000.2, "Defense Acquisition Management Policies and Procedures," dated February 23, 1991, Part 3, paragraphs 3.a-3.j.

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