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.
|M-2 Bradley Fighting Vehicle|
The following paragraphs summarize the primary cost categories associated with each life-cycle phase.
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
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)
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:
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:
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.
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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