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Historical Cost Growth of
Completed Weapon
System Programs
Mark V. Arena, Robert S. Leonard,
Sheila E. Murray, Obaid Younossi
Prepared for the United States Air Force
Approved for public release; distribution unlimited
The research reported here was sponsored by the United States Air Force under Contract
F49642-01-C-0003. Further information may be obtained from the Strategic Planning
Division, Directorate of Plans, Hq USAF.
Library of Congress Cataloging-in-Publication Data
Historical cost growth of completed weapon system programs / Mark V. Arena ... [et al.].
p. cm.
“TR-343.”
Includes bibliographical references.
ISBN 0-8330-3925-3 (pbk. : alk. paper)
1. United States—Armed Forces—Procurement—Costs. 2. United States—Armed Forces—Weapons
systems—Costs. I. Arena, Mark V.
UF503.H57 2006
355.6'212—dc22
2006013512
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Summary
Review of Cost Growth Literature
Overall, most of the studies we reviewed reported that actual costs were greater than estimates of baseline costs. The most common metric used to measure cost growth is the cost
growth factor (CGF), which is defined as the ratio of the actual cost to the estimated costs. A
CGF of less than 1.0 indicates that the estimate was higher than the actual cost—an underrun. When the CGF exceeds 1.0, the actual costs were higher than the estimate—an overrun.
Studies of the weapon system cost growth have mainly relied on data from Selected
Acquisition Reports (SARs). These reports are prepared annually by all major defense acquisition program (MDAP) offices within the military services to provide the U.S. Congress
with cost, schedule, and performance status. The comparison baseline (estimate) typically
corresponds to a major acquisition decision milestone (e.g., Milestone II).
Prior studies have reported Milestone (MS) II CGFs for development costs ranging
from 1.16 to 2.26; estimates of procurement CGFs ranging from 1.16 to 1.65; and total
program CGFs ranging from 1.20 to 1.54. Regarding the differences among cost growth due
to service, weapon, and time period, prior studies tended to find the following:
• Army weapon systems had higher cost growth than did weapon systems for the Air
Force or Navy.
• Cost growth differs by equipment type. Several reasons are given for the differences
including technical difficulty, degree of management attention, and protection from
schedule stretch.
• Cost growth has declined from the 1960s and 1970s, after it was recognized as an
important problem. However, improvement with recent acquisition initiatives has
been mixed.
The literature describes several factors that affect cost growth. The most common
ones included acquisition strategies, schedule, and others, such as increased capabilities, unrealistic estimates, and funding availability.
Analysis of Historical Acquisition Cost Growth in the Department of Defense
Our analysis also shows that, by and large, the Department of Defense (DoD) and the military departments have underestimated the cost of buying new weapon systems. (See
pp. 21–24.) For our analysis, we used a very specific sample of SAR data, namely only proxi
xii
Historical Cost Growth of Completed Weapon System Programs
grams that are complete or are nearly so. 1 We deliberately chose to analyze completed programs so that we could have an accurate view of the total cost growth. It typically takes many
years before the complete cost growth emerges for a program. Development costs continue to
grow well past the beginning of production. Previous studies have mixed both complete and
ongoing programs—potentially biasing their cost growth downward. While this sample selection reduces our sample size, we think that we have a better measure of final cost growth.
Figure S.1 shows the cost growth of programs that dealt with systems that were
similar to those procured by the Air Force (e.g., aircraft, missiles, electronics upgrades).2 The
metric (total CGF) displayed in the figure is the ratio of the final cost to that estimated at
MS II (or its equivalent). The figure shows that the majority of programs had cost overruns.
The analysis indicates a systematic bias toward underestimating the costs and substantial uncertainty in estimating the final cost of a weapon system. Our analysis of the data
indicates that the average adjusted total cost growth for a completed program was 46 percent
from MS II and 16 percent from MS III. The bias toward cost growth does not disappear
until about three-quarters of the way through system design, development, and production.
In contrast to the previous literature, we observed very few correlations with cost
growth. (See pp. 27–38.) We observed that programs with longer duration had greater cost
growth. Electronics programs tended to have lower cost growth. Although there were some
Figure S.1
Distribution of Total Cost Growth from MS II Adjusted for Procurement Quantity Changes
16
14
Frequency
12
10
8
6
4
2
0
0.75–1.00
1.00–1.25
1.25–1.50
1.50–1.75
1.75–2.00
2.00–2.25
2.25–2.50
CGF range
RAND TR343-S.1
____________
1
We defined the program as complete if that program had delivered 90 percent or more of its procurement quantity or if
the final SAR has been submitted.
2 The
data have been modified to mitigate the effects of inflation and changes in the number of units procured.
Summary
xiii
differences in the mean total CGF among the military departments, the differences were not
statistically significant. While newer programs appear to have lower cost growth, this trend
appears to be due to factors other than acquisition policies.