For the past two years, Frank Kendall, the undersecretary of Defense for acquisition, technology and logistics, has been publishing a detailed report called Performance of the Defense Acquisition System. And while it’s been praised by students of acquisition reform as a rich data source, it’s not yet achieved Kendall’s ultimate objective: Explaining which policies tend to lead to cost and schedule growth and which ones keep programs on track.

But Kendall says the next volume, due out in a few months, may finally provide some convincing answers. And it might not be about policy at all. The strongest correlations he’s found so far are between cost growth in programs and whether DoD’s budget is growing or shrinking at any given time.

“It is by far the greatest factor. It explains, statistically, about 70 percent of the cost growth in production,” Kendall told a meeting of the National Defense Industrial Association last week. “When budgets are tight, the programs that get approved in that environment have about 30 percent cost growth. The programs that get approved when budgets are not tight have 10 percent cost growth. It’s a factor-of-three difference. It’s not about program manager tenure, it’s not about our regulations, it’s not about the types of contracts we write. So what happens when budgets are tight that makes such a huge difference in the cost of our programs?”

Kendall says he has a team working to analyze the data further in hopes of answering that question in the next annual report. But in the meantime, he has some theories, many of which are based on the notion that people in both government and industry become unrealistic optimists when budgets get squeezed.

“Part of it is that people don’t want to let go of their programs,” Kendall said. “So they talk themselves into taking more risk. They fund more aggressively in the budget: instead of taking things out and killing programs, they keep them in and convince themselves they can do them cheaper, which they can’t. And instead of killing R&D programs, you stretch them out — a lot — and when you do that, you’re carrying a lot of overhead, your team is not as stable, your requirements are probably not stable, and there are a lot of bad things that can come from that.”

Similarly, Kendall says, with defense firms chasing fewer contract dollars, companies tend to bid more aggressively and make proposals that they can’t always execute for the agreed-upon price.

“I’ve sat in rooms with CEOs and looked at bids, and there’s always a point in the process where the CEO says, ‘I think we can do a little bit better here. Let’s bring our bid down by another 5 percent.’ When money’s tight, things become must-wins. You have to win bids if you’re going to stay in business.”

The genesis for the new look at budget climate was a study conducted last year by David McNicol of the Center for Defense Analyses. He examined five different “regimes” of acquisition policy changes between 1970 and 2007, looking for correlations between policy and cost growth. Instead, he found budget correlations. Some of the more recent numbers are the most striking: in the spending drawdown from 1997-2001, large programs outspent their original estimates by an average of 51 percent. When budgets bounced back between 2001 and 2007, cost growth fell to 10 percent.

If Kendall’s team does reach some convincing conclusions about why budgets drive cost growth — and that there’s causation here, not just correlation — the next obvious question is what to do about it, other than to simply add money to procurement and R&D budgets. It will be interesting to see if the next report offers some suggestions.

Copyright © 2024 Federal News Network. All rights reserved. This website is not intended for users located within the European Economic Area.