Air Force claims $2 billion in acquisition savings from ‘should-cost’ management

The concept of “should-cost” management was a key component of the first version of the Defense Department’s Better Buying Power program when it was first rolled out almost five years ago.

But the Air Force’s top acquisition official said the idea hasn’t been forgotten: his service has used it to cut programs’ actual costs by an estimated $2 billion over the last several years, with more potential savings to come.

Should-cost is not strictly a new idea in government procurement. It’s been codified in the Federal Acquisition Regulation for decades, but it wasn’t until 2010 that the Pentagon ordered the military services to use it in all of their major acquisitions. In a nutshell, it requires program managers to set-aside the historically-based independent cost estimates that are developed for all big programs and that DoD is required to base its budgets on, and instead, manage their programs according to what they ought to cost.

“The industry and our program offices go and attack the costs in the independent estimates and try to beat them,” said Dr. Bill LaPlante, the assistant secretary of the Air Force for acquisition. “And when they’re validated and achieved, the money that was in the budget is available then to be taken back — we have a set of governance rules — and it can be put back into the acquisition portfolio or turned back into the Air Force corporate budget.”

Speaking to an Air Force Association conference in Orlando, Florida, LaPlante offered several major categories of weapons systems in which managers have wrung out savings by using should-cost management.

The service’s program executive officer for weapons, for example, cut $567 million in projected spending for contracts scheduled to deliver between 2013 and 2020. Of that money cut, $350 million went back into the Air Force’s broader acquisition budget, but the Air Force allowed the PEO to use to rest to buy larger quantities of systems it already had on contract, including thousands of missiles, bombs and targets that hadn’t previously fit in the budget.

“They did a series of best practices across various programs, including increasing competition, data driven decisions — which means using actuals — and bundling contracts into larger buys,” he said. “This is real money that was turned back to the Air Force and to the warfighter in terms of capabilities. It’s a lot of hard work going on that’s really not being noticed, and it’s mitigating the really tough budget situation we’re in.”

In its space portfolio, the Air Force is tracking should-cost practices that could reduce it programs’ previously-budgeted costs by up to $6 billion.

“A lot of this was because the independent cost estimates were done based upon history when things were quite expensive in space, so in some ways you could argue we had a low bar,” LaPlante said. “But remember, we had to fund to those cost estimates, so this is real money. The types of things they did were increased competition, efficiencies and streamlining deliverables.”

Likewise, the Air Force PEO for battle management has already banked $467 million in cost reductions and is tracking a potential $489 million more for its programs in fiscal 2015 through 2020. In that case, the PEO kept most of the savings, and put $427 million toward weather and mission planning systems, the Airborne Warning and Control System and long-range ground radar.

As one of its cost-cutting tools, the battle management PEO became an early adopter of a new idea the Air Force announced last month called cost- capability analysis. Fundamentally, officials said, CCA aims to give industry much more information about which capabilities end-users value most, and do it much sooner in the acquisition process so that the Air Force can trade-off less valuable capabilities before they become cost drivers.

“Often times in industry, you tell us, ‘Set the requirements, give us a couple years, let us understand what you’re going to value in the source selection,'” LaPlante said. “But it’s not enough for us to say, ‘Here’s the objective requirement and here’s the threshold requirement.’ We have to know more. We have to know which capabilities mean more to the warfighter and which is more valuable. Cost capability analysis is a way to determine that. We’ve started to pilot these for the past couple years, but what we’re going to do now is we’re going to be transparent with these and work with industry on them. We’re going to pilot these on four projects, starting with the T-X [training jet].”

To achieve that, LaPlante said the Air Force will match up the costs of each individual capability within a set of requirements and ask end users whether the mission benefit is worth the price. Their answers will determine how the Air Force approaches its source selection decisions.

“The warfighter can point us to the knee in the curve and say, ‘You know what? I’m not willing to pay more for this capability than that capability.’ Therefore, those are unaffordable. On the other hand, they can say, ‘I know that’s a lot cheaper, but it’s below what I want,'” he said. “So think about this. Now we can put together a cost capability RFP that shows exactly where we’re willing to pay extra to get a capability. We can roll it in and give credit for that. If we do this with industry, there will be a much better understanding of what we’re willing to pay for, and how much.”

The T-X — the Air Force’s planned replacement for its T-38 fighter jet — would be the Air Force’s first experiment with cost capability analysis on a large acquisition program. The program is just a few weeks away from locking down its final requirements, according to Deborah Lee James, the Air Force secretary.

“Our goal is to share these requirements with industry by the end of the month,” she said. “We will then continue the dialogue right up to the release of the RFP, which we project will be in late fiscal 2016. Cost capability analysis will let us make well-informed judgments about whether various incremental increases in capability are worth it, and industry will know what we value when the time comes. So please stay tuned. We really are using the T- X program as a test case.”

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