When the Army, Navy, Air Force or Marine Corps find savings in their acquisition programs that bring their price tags below their original cost estimates, they will generally be able to keep those dollars to fund their own priorities.
The Pentagon announced the policy Friday in a joint memorandum signed by Ashton Carter, the Under Secretary of Defense for Acquisition, Technology & Logistics and Robert Hale, DoD’s comptroller and chief financial officer. The Defense Department made the memo public Wednesday.
Acquisition program managers will first have to prove to the satisfaction of their service’s comptroller that they truly achieved savings in their respective programs. Once that certification is made, the service’s civilian leadership will be free to allocate the money to their own highest priorities, Carter and Hale wrote.
An exception would be made, however, if the Secretary of Defense determines the money is needed for “high-priority departmentwide needs.” Carter issued a separate memo the same day to DoD acquisition professionals, filling in some of the details surrounding a concept the department has been referring to as “will-cost and should-cost management,” which he and Defense Secretary Robert Gates first announced last fall.
Beginning this year, each military service is required to submit to Carter a report detailing its progress in managing programs to what they should cost, rather than what independent cost estimates have predicted they will cost. The services will develop will-cost estimates by using historical extrapolations from similar programs. Carter said these predicted cost-estimates too often create a self-fulfilling prophecy when acquisition officials manage a program based on those figures rather than trying to achieve savings as they go.
“Will-cost is what the cost estimators tell you that you are destined to pay if you keep doing things they way you’re doing them,” Carter told a missile defense conference in March. “They are, in general, credible, but they are also, in general, depressing. They tell you that you want to spend more money than you want to, and these days, more than you can afford.”
Managers in all programs in acquisition categories I, II and III must now develop their own should-cost estimates, continually analyze those costs and provide updates at major milestone decisions.
“You go through in detail the cost of each one of your programs and understand what it is you should be paying,” Carter said. “Why has that item on the bill increased year upon year? What can you do to bring that ramp down? What can you do about overhead and indirect [costs] ? Working with your industry partner and incentivizing them appropriately, work those costs down so that the life you lead is not the life projected for you.”
Carter wrote in Friday’s memo that both government managers and industry would have incentives to apply should-cost management to acquisition programs. On the government side, managers will have additional resources to enhance their programs. He added should-cost management also will be part of how every program manager and program executive officer’s overall performance is evaluated.
“For industry, this means sharing in savings realized in the form of increased profit and enhanced corporate recognitions for delivering value to the government,” Carter wrote.