Affordability



A program that is not fully funded in the FYDP at program initiation may be
considered affordable if the component head agrees to add sufficient
resources to fully fund the program in the next FYDP update.
Program affordability should be assessed at every milestone beginning with
program initiation by the MDA
Affordability is the degree to which the program's life-cycle cost fits into
DoD's Long-term investment and force structure plans.
CAIV

Cost, schedule, and performance may be traded within the "trade space"
between the objective and the threshold without obtaining MDA approval. If
proposed trades require changes to threshold values in the APB or
Capabilities Document, the PM shall notify the OSD Overarching IPT leader
and quickly bring such proposals to the appropriate approval authorities for
decision.
Cost Estimating Documents


An Analysis of Alternatives (AoA) is a study of the operational
effectiveness, life-cycle costs, concepts of operations, and overall risk
associated with each of the various alternatives that may be able to meet a
mission area need. It answers the question, "What is the most cost-effective
way to meet this mission need?" The user responsible for the affected
mission area is responsible for determining the independent activity that will
perform the AoA. For weapon systems, this determination is made by the
DoD Component Head; for ACAT IA automated information system programs,
it is made by the OSD Principal Staff Assistant (PSA) for the affected
functional area.
The Cost Analysis Requirements Description (CARD) provides a
complete description of the system whose costs are to be estimated. This
document helps ensure that all major acquisition program cost estimates are
based on common and accurate information and provide the amount of detail
required by decision-makers. DoD 5000.4-M provides guidance regarding
CARD preparation. Enclosure 4 to DoD Instruction 5000.02 specifies that
ACAT I programs must prepare or update the CARD in support of Milestone
B, Milestone C, and the Full Rate Production Decision Review. DoD
Instruction 5000.02 also specifies that ACAT IA programs must prepare or
update the CARD whenever an initial or updated Economic Analysis is
required
Cost Estimating Review Process


CAPE ICE is required at MS’s B and C. It is considered at FRP at the
discretion of the MDA
POE’s and CCA’s are required at MS’s A,B,C, and FRP.
Cost Estimating Methods




In the analogy method, the cost of a new item is estimated by starting with
the cost of one or more similar existing items, then adjusting this cost to
take into account the differences between the existing item and the new
item.
The parametric, or statistical, method uses regression analysis of a
database of several similar systems to develop a mathematical equation
describing a line or curve that fits as closely as possible to the data. The
resulting equation, known as a cost estimating relationship (CER), estimates
cost based on the value(s) of one or more system performance or design
characteristics (for example, speed, weight, number of parts, etc.). Typically
4 is the minimum number of data points acceptable for use in a CER.
The engineering method builds an estimate from the "bottom up" by
analyzing the individual elements of the work breakdown structure (WBS) for
the direct costs of accomplishing the work then adding appropriate amounts
for indirect costs (for example, plant overhead, company overhead, etc.).
The technique of using actual cost data (or extrapolating future costs from
actual costs) is based on data from earlier/previous units, prototypes, or
production lots of the same system (not a similar system, as in the analogy
method).
Learning Curve Theory

Learning curve theory is most straightforwardly applied in situations where
the following conditions exist:
1. Uninterrupted serial production (for example, no production breaks)
2. Consistent product design
3. Management emphasis on productivity improvement



More automation normally means less learning
More complex items tend to have steeper curves
Workforce turnover and production breaks lead to less learning
Appropriations
 Budget Authority - Allows federal agencies to obligate the government to pay
for goods and services required.
 Expenses (</= $250K) – costs incurred to operate and maintain the
organization, such as personal services, supplies, and utilities.

Investments (> $250K) - Are the costs that result in the acquisition of, or an
addition to, end items.

RDT&E – Budget Activities
o
o
o
o
o
o
o

BA-1
BA-2
BA-3
BA-4
BA-5
BA-6
BA-7
Basic Research
Applied Research
Advanced Technology Development
Advanced Component Development and Prototypes (ACD&P)
System Development and Demonstration (SDD)
RDT&E Management Support
Operational System Development
O&M – Budget Activities
o
o
o
o
BA-1:
BA-2:
BA-3:
BA-4:
Operating Forces
Mobilization
Training And Recruiting
Administrative & Service wide Activities
Annual Funding Policy (MILPERS/O&M)

Regarding DoD financing of service contracts whose period of performance
crosses fiscal years: if the contract period is 12 months or less in duration, or
if the contract produces a single outcome, product or report (that is, is nonseverable), DoD may finance the entire period of performance with budget
authority available for obligation at the time of the contract award.
Incremental Funding Policy (RDT&E)



Forward Financing - Budgeting for more RDT&E funds than the costs
expected to be incurred in a given fiscal year
The incremental funding policy requires that an RDT&E budget request be
based on the costs expected to be incurred during a fiscal year.
Exceptions to this policy include the funding of contracts over 12 months, but
less than 18 months in which there is no logical way to divide the work, it is
clearly infeasible to limit the contract to a shorter period, or the planned
technical effort is such that no responsible contractor can be found who will
accept a contract for less than the full period of performance.
Full Funding Policy (MILCON/Procurement)

Applicable to the Procurement and Military Construction appropriations, is the
practice of budgeting for the total cost of major procurement and
construction projects in the fiscal year in which they will be initiated (that is,
placed on contract).

For military construction projects, the structure(s) that comprise a project
are considered to be the end item(s), so a MILCON budget request for a
particular fiscal year should contain sufficient funding to ensure the
completion of all structures that will be initiated during that fiscal year

To restrict programs from tying up excessive amounts of procurement budget
authority, the DoD Financial Management Regulation limits the size of the
budget year's "lot" of end items to only the quantity that can be delivered in
a 12-month funded delivery period.

The advance procurement exception to the full funding policy permits
budgeting for less than complete end items to:
o Ensure that long-lead items do not disrupt the production schedule, or
o Maintain critical workforce skills that would otherwise be lost in a
production line break

Multiyear procurement (MYP) is a strategy under which the government may
contract to buy multiple years worth (that is, multiple production lots) of
usable end items, usually limited to five years. This enables the contractor to
reduce costs in two ways:
o Using price breaks for bulk (economic order quantity (EOQ)) purchases
of materials and components to reduce materials costs, and
o Investing in productivity enhancements to reduce labor costs that
might not be attractive under normal year-to-year procurement.

DoD must ensure that certain statutory requirements are met prior to
approving use of MYP:
o
o
o
o
o
o
Substantial savings in total anticipated costs compared to carrying out
the program through annual contracts.
Stable requirements for the item during the contemplated contract
period in terms of production rate, procurement rate, and total
quantities.
Stable funding means funding for the contract will be requested at the
level required to avoid contract cancellation. It assumes agreement by
the Component, OSD, and Congress to maintain adequate funding.
Stable design for the item without excessive technical risks. This
usually implies that the system has been in production for one or more
lots, proving out the design, before MYP is approved.
Realistic cost estimates of the MYP contract cost and its anticipated
savings.
The system being procured on the MYP contract enhances national
security.
Escalation Factors



A "Constant" dollar is one that reflects the purchasing power of a dollar in a
specific year.
The raw (or compound) index accounts for all the inflation that occurred or is
expected to occur between any two years. If the price of an item in a base
year is known, the price of that item in some future or past year can be
estimated by
A "Then-Year" or "Current" dollar is a Constant dollar that has been escalated
using an appropriate Weighted (or Composite) Index that accounts for
inflation based on the spending pattern of the particular appropriation being
budgeted
Fixed Price Contracts

In a fixed-price contract, the government agrees to pay an agreed-upon
price for goods or services. This price may be truly fixed or may be subject to
a limited amount of adjustment based on the provisions of the contract. The
fixed price encompasses both the contractor's expected cost to produce the
goods or services as well as the contractor's expected profit.

Firm Fixed-Price (FFP) Contract. A contract where the buyer pays a set
amount to the seller regardless of that seller's cost to complete the work.
o The program manager should budget to the anticipated final
negotiated price of the FFP contract.

Fixed-Price- Economic Price Adjustment (FP-EPA) Contract. A fixed-price
contract with economic price adjustment provides for upward and downward
revision of the stated contract price upon the occurrence of specified
contingencies.
o The program manager should budget to the anticipated final
negotiated price of the FP-EPA contract, which does not include any
economic price adjustments

Fixed-Price Incentive, Firm Target (FPIF) Contract. A fixed-price contract that
provides for adjusting profit and establishing the final contract price by a
formula based on the relationship of final negotiated total cost to total target
cost.
o The program manager should budget to the anticipated target price of
the FPIF contract, which should represent the best estimate of
combined contract cost and profit.
Cost-Reimbursement Contracts

In cost-reimbursement contracts, the government promises to pay all
allowable, allocable, and reasonable costs incurred in performing the contract
work, as well as a fee that constitutes the contractor's profit

A Cost Plus Fixed Fee (CPFF) contract is a cost-reimbursement contract that
contains no incentives. The contractor is reimbursed for all allowable costs
and is paid a set fee regardless of how well or poorly it performs.
o The most likely cost of a CPFF contract is the sum of the cost expected
to be incurred and the fixed fee, so this is the amount that should be
budgeted for

A Cost Plus Award Fee (CPAF) contract is a cost-reimbursement contract that
provides for a fee consisting of a base fee and an award fee. The base fee is
paid under all circumstances regardless of performance. The award fee
portion may be earned in whole or in part based on the government's
subjective evaluation of the contractor's performance relative to criteria
established at the beginning of each award fee period.
o CPAF contracts should be budgeted to their most likely cost, which is
the sum of the cost expected to be incurred plus the base fee plus the
entire award fee which can be earned (or paid) during the budget
period

Under a Cost Plus Incentive Fee (CPIF) contract, a target price is negotiated,
consisting of a target cost and a target fee. The target cost is the
government and contractor's agreed-upon best estimate of the cost to be
incurred in performing the contract requirements. The target fee is the
amount of fee that the government and contractor have agreed should be
earned by the contractor if it incurs costs exactly equal to the target cost.
o Budget Cost Plus Incentive Fee (CPIF) contracts to the anticipated
target price of the contract, which should represent the best estimate
of contract cost plus the associated fee
Earned Value Management



Relates the scope of the work to its associated budgets and schedule.
Measures the work progress in objective terms.
States the value of the work completed in dollars, or other measurable units.

Contract Performance Report (CPR) -CPR reporting is usually reserved for
work efforts considered to be relatively high-risk. CPR and IMS reporting is
required for cost or incentive contracts (i.e., non-Firm-Fixed Price),
subcontracts, intra-government work agreements, and other agreements
valued at or greater than $20 million in then-year dollars.

The budgeted value of the work planned is the cumulative amount budgeted
for the work scheduled by a given date. It is also known as the Budgeted
Cost of Work Scheduled (BCWS).

The budgeted value of the work accomplished is Earned Value. The Earned
Value is the sum of the amount budgeted for the tasks accomplished so far,
or the Budgeted Cost of Work Performed (BCWP).

The actual costs incurred in accomplishing the tasks so far is known as the
Actual Cost of Work Performed (ACWP).

The total budgeted value of the work planned through the end of the project
or contract is known as the Budget at Completion (BAC).

The Program Manager (PM) can use EV information to estimate contract
schedule performance by examining the difference between the earned value
of the work performed to date (BCWP) and the planned value of work that
should have been completed by now (BCWS). This difference is known as the
Schedule Variance (SV) (BCWP - BCWS). The SV value falls into one of three
categories:
o
o
o

SV equals 0. This MAY mean that the project is on schedule.
SV greater than 0 (+SV). This means that more value has been earned
than originally planned, so the project MAY be ahead of schedule =
Favorable.
SV less than 0 (-SV). This means that less value has been earned than
originally planned, so the project MAY be behind schedule =
Unfavorable.
The Program Manager (PM) can use EV information to evaluate contract cost
performance by examining the difference between the earned value of the
work performed (BCWP) to date and the actual cost of the work performed
(ACWP) to date. This difference is known as the Cost Variance (CV) (BCWP ACWP). The CV value falls into one of three categories:
o
o
o
CV equals 0. This usually means that the project is on budget.
CV greater than 0 (+CV). This means that the cost of the work
performed was less than originally estimated, so the project is under
budget.
CV less than 0 (-CV). This means that the cost of the work performed
was more than originally estimated, so the project is over budget.

The Schedule Performance Index (SPI) is a measure of the contractor's
schedule efficiency to date, and can be used to project future performance.
SPI is calculated as the ratio of earned value (BCWP) to the plan (BCWS), or
SPI = BCWP/BCWS.
o
o
o

The Cost Performance Index (CPI) is a measure of the contractor's cost
efficiency, and can be used to project future performance. CPI is calculated
as the ratio of earned value (BCWP) to actual costs (ACWP), or CPI = BCWP
divided by ACWP.
o
o
o

SPI equals 1. This means that the contractor is working at the
originally planned efficiency (BCWP = BCWS).
SPI greater than 1. This means that the contractor has been more
efficient than originally planned (BCWP > BCWS). If performance
continues at this SPI, the project may finish ahead of schedule,
depending on the critical path.
SPI less than 1. This means that the contractor has been less efficient
than originally planned (BCWP < BCWS). If performance continues at
this SPI, the project may finish behind schedule, depending on the
critical path.
CPI equals 1. This usually means that the contractor is working at the
originally planned efficiency (BCWP = ACWP).
CPI greater than 1. This means that the contractor has been more
efficient than originally planned (BCWP > ACWP). If performance
continues at this CPI, the project will finish under budget.
CPI less than 1. This means that the contractor has been less efficient
than originally planned (BCWP < ACWP). If performance continues at
this CPI, the project will finish over budget.
To determine whether a contract has sufficient funding to complete its
desired scope, the PM must estimate what the total cost of the contract will
be upon completion of all work. This is an Estimate at Completion (EAC).
PPBE

DoD's primary resource allocation system, having the ultimate objective of
providing warfighters with the best mix of equipment, personnel, and support
attainable within established fiscal constraints.

The Future Years Defense Program (FYDP) is a database containing the DoD
resource program approved by SECDEF for a particular PPBE cycle. Includes
six years of information regarding force levels (for example, aircraft
inventories), personnel requirements, and funding requirements information
(two budget years plus four "out-years").

The primary inputs to the PPBE Planning Phase are:
o
o
o
o
o
o
o
National Security Strategy of the United States (NSS) - is usually
prepared in the first year of a new administration. It provides the basis
for the National Military Strategy (NMS).
National Defense Strategy (NDS) - The NDS is the Secretary of
Defense’s strategic guidance on the priority of defense missions and
associated strategic goals in support of the NSS
National Military Strategy (NMS) - The Chairman of the Joint Chiefs of
Staff (CJCS) recommends a National Military Strategy (NMS) and
fiscally constrained force structure that supports the attainment of
national security objectives during the period to be covered by the
JPG.
Quadrennial Defense Review (QDR) - normally completed in the
second year of each four-year presidential administration and is
published in the third year. Therefore it is part of the PPBE Planning
phase every four years
Chairman's Program Recommendation (CPR) - The CPR provides the
CJCS’s program recommendations and are intended to enhance joint
readiness, promote joint doctrine and training, and satisfy warfighting
requirements.
Guidance for the Development of the Force (GDF) - Developed by the
OSD staff with input from the Joint Staff, The GDF considers a longterm view of the security environment and helps shape the investment
blueprint for the six Future Years Defense Program (FYDP) years
Joint Programming Guidance (JPG) is prepared by the Undersecretary
of Defense for Policy (USD(P)) organization, assisted by the office of
the Director, Cost Assessment and Program Evaluation (CAPE)
RDT&E Budget Exhibits

Budget Activities –
1. BA 1 – Basic Research
2. BA 2 – Applied Research
3. BA 3 – Advanced Tech Development
4. BA 4 – Advanced Component Dev and Prototypes
5. BA 5 – SDD
6. BA 6 – RDT&E Management Support
7. BA 7 - Operational System Development

The R-1 exhibit is the basic document for presenting DoD's RDT&E
requirements. The R-1 is prepared at the Component headquarters level,
with one exhibit for each separate RDT&E appropriation account
o The R-1 shows budget information for three or four years: the budget
year(s) and the two years that precede the budget year(s).

The R-2 exhibit provides summary funding information, program description, and
budget justification for each RDT&E program element.
o
Funding information for 7 or 8 specific years: the past year, current
year, one or two budget years as appropriate, and four years beyond
the budget year(s) (the out-years).
o
Funding information broken out by individual projects under the
program element (if there is more than one project).
Summarized funding for all years required to complete the program
beyond the last out-year shown and total program cost.
Mission description and budget item justification written in easily
understandable language, articulating the need for the RDT&E effort
and summarizing tasks performed with funds appropriated for the past
year (PY) and tasks to be performed with the funding appropriated for
the current year (CY) and funds requested for BY1 and BY2. At least
three tasks for each year should be addressed to justify the funding
requested.
Summary of program changes (funding, schedule, technical) since the
last budget request.
Summary of other funding related to the RDT&E program element,
including amounts of procurement, military construction, and other
appropriations that follow after the RDT&E effort. Other RDT&E
program elements whose funding is dependent on this program
element should be listed as well
o
o
o
o
o

The R-3 exhibit provides detailed cost information for each project under a
program element in budget activities 4, 5 and 7, with funding of $1 million or
more in any budget year covered by the budget request.
o

A brief explanation of acquisition, management, and contracting strategies for
each project. Required only for Budget Activities 4, 5, and 7 (Advanced
Component Development and Prototypes, System Development and
Demonstration (SDD), and Operational System Development respectively).
Within each cost category, for each effort over $1M:
 Identification of the performing organization (contractor or
government office name)
 Type of contract/work order used
 Contract award or funds obligation date
 Total cost for all years before the past year (prior years); cost
for the past year, current year, BY1 and BY2; cost to complete
after BY2; and total cost
 Target value of contract
 R-3s are reconciled with the R-2a exhibits at the project level
and with the R-2 at the program element level.
The R-4 exhibit provides a schematic display of major program milestones.
This exhibit is required for each project in budget activities 4, 5 and 7, with
funding of $1 million or more in any budget year covered by the budget
request.
o
o
Timing of engineering milestones, acquisition approvals, test and
evaluation events, and other key program milestones. Types of events
shown should be tailored to the program.
Schedule information for 7 or 8 specific years: the past year, current
year, one or two budget years as appropriate, and four years beyond
the budget year(s) (the out-years). The number of years covered
depends on whether the exhibit supports a two-year budget
submission that begins with an even year (for example FY 12-13) or a
one-year budget submission that begins with an odd year (for example
FY 13).
Procurement Budget Exhibits

The P-1 is prepared at the Component headquarters level, with one exhibit
for each separate procurement appropriation. It lists, by line item, the
procurement requirements included in the President’s Budget request, in
millions of dollars. The P-1 shows information for three or four years: the
budget year(s) and the two years that precede the budget year(s)

The P-40 provides overall narrative justification and total procurement costs
for a line item in the procurement budget request. A P-40 is submitted for
each line item on the P-1 budget exhibit with funding of $5 million or more in
any of the years shown on the P-1. Funding information for 7 or 8 specific
years: the past year, current year, one or two budget years as appropriate,
and four years beyond the budget year(s) (the out-years).
o Summarized funding for all years prior to the past year and for all
years required to complete the program beyond the last out-year
shown, unless the item is a continuing requirement, such as
ammunition.
o Specific quantities of end items funded each year, when applicable.
o Advance procurement funds requested/received in a prior year related
to each particular fiscal year’s lot of end items.
o Though not shown in the sample, advance procurement funds can also
be requested in a particular fiscal year to support a future year’s lot of
end items.
o Initial spares cost (if applicable). Note that initial spares funding is
actually requested in a separate P-1 line item (and therefore justified
on a separate P-40), but this information is also included on the
weapon system P-40 to provide visibility of the system's total
procurement cost.
o Flyaway and Weapon System Unit Cost.
o Narrative description of the line item covering the nature, purpose,
and intended use of the item and a narrative justification of the
funding request.
o
The P-3a provides a narrative justification and total procurement costs
for each individual weapon system modification with costs greater than
o
o
o
o
o
o
o

$5 million in any one of the following years: Past year, Current year,
Budget year 1, Budget year 2
Narrative description of the modification, including what additional
capability is added to the system by this modification, and why the
modification is necessary.
Status of development and testing of the modification, including major
milestone accomplishments or scheduled milestone dates.
Funding information for 8 or 9 specific years: the past year minus 1,
past year, current year, one or two budget years as appropriate, and
four years beyond the budget year(s) (the out-years).
Summarized funding for all years prior to the past year minus 1 and
for all years to complete the program beyond the last out-year.
Specific quantities of items funded each year, when applicable.
Earliest contract date associated with the production of modification
kits.
Installation schedule and who will perform the installation.
The P-10 provides detail regarding the items to be financed by each Advance
Procurement line item on the P-1. Funding information for 8 or 9 specific years:
the past year minus 1, past year, current year, one or two budget years as
appropriate, and four years beyond the budget year(s) (the out-years).
o Listing of all items that will be financed by the advance procurement
funds. This includes items that must be purchased in advance of the
end item due to leadtime considerations, items that should be
purchased in advance to realize cost savings, and termination liability.
o On what date each advance procurement-funded item is required so
that it can be incorporated into the end item during manufacture
o Production lead-time for the end item and each item to be financed by
advance procurement.
o Item quantities required for each end item assembly.
o Forecasted contract award dates for each item.
o Description of how termination liability is calculated

The P-21 provides detailed information regarding the monthly production of all
applicable items. It is required for all ACAT I programs and any other programs
requiring specific quantity authorization by Congress.
o
o
Manufacturer's name and location for each year's production.
Delivery schedules (by Service) for all prior years with undelivered
assets, current year, and the budget year(s). ACAT I programs and
programs requesting advance procurement funding are also required
to show schedules for the four years beyond the budget year(s).
o
Information regarding annual production rates, including the minimum
quantity to keep the line open (minimum sustaining rate); the quantity that
can be produced with existing or planned plant capacity and tooling with one
shift working 8 hours per day, 5 days per week (1-8-5, or economical
production rate); the maximum quantity that can be produced with existing
or planned tooling (maximum production rate); and the number of months
required to reach the maximum rate.
o
o
o
Time required to complete administrative actions prior to contract
award (administrative leadtime).
Time required by contractor to produce an item once a contract is
awarded (production leadtime or manufacturing time)
If multiple Services are involved, each having its own procurement line
item for this main item, each Service must submit a P-21 showing the
delivery schedule for the entire program.

The P-5 provides detailed cost information for each P-1 line item (excluding
Advance Procurement, modification programs, and aggregated line items),
breaking down cost by program Work Breakdown Structure (WBS) elements.
It is often viewed as the most important budget exhibit submitted for
procurement programs since both OSD and Congress use it as the framework
for line item review.
o Profile of quantities, total costs and unit costs (for flyaway cost
elements only) by WBS element for the Past Year (PY), Current Year
(CY), Budget Year 1 (BY1) and Budget Year 2 (BY2), as well as the
totals for years prior to the Past Year.
o Flyaway cost for each year's planned lot purchase. These costs are the
source of the P-5a.
o Advance procurement funding requested (also shown on weapon
system's P-40 exhibit and justified on separate P-40 and P-10
exhibits).
o Initial Spares funding requested (also shown on weapon system's P-40
exhibit and on P-40/P-40a exhibits supporting an aggregated spares
line item).
o The P-5 Budget Exhibit provides detailed cost information in support of
the P-40 Budget Item Justification Sheet.
o A P-5 exhibit is prepared in support of a P-40 exhibit, unless a P-40a is
used to display items included in an aggregated line item, a P-3a
Individual Modification exhibit has been prepared for a modification
line item, or a P-10 Advance Procurement Requirements Analysis
exhibit has been prepared for an advance procurement line item.

The P-5a provides detailed contract award and pricing information on the P-5
entries. The P-5a covers all prior years having contracts with undelivered
assets and gives estimated contract award dates and prices for the Current
Year and Budget Years 1 and 2.

The P-3a Individual Modification Program exhibit contains information about
a modification kit that is to be installed on an end item.
