Costing in the Department of Defense

1
Costing in the Department of Defense CAIG
Perspectives
Business Managers Conference May 20, 2009
2
Outline

• A time of continuing change
• A perfect storm
• Enacted changes in lawSection 2366
  certifications (2006-08)
• Changes in DoDI 5000.2Acquisition (December
  2008)
• Implementation of ChangesPolicies on Cost
  Estimates
• Upcoming changes in lawAcquisition Reform Bill
  (2009)
• Senate McCain-Levin Bill (S. 454)
• House Skelton-Hughes Bill (HR 2101)
• Current Status
• Strengthening Cost AnalysisInitiatives

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A Perfect Storm

• Two ongoing DoD operations 5 yearswartime
  optempo continues
• Annual GAO assessments of acquisition cost
  increases
• Cost increases of 300 Billion in DoD
  acquisition program portfolio
• Presidential candidate announces desire to change
  DoD procurement system
• Secretary of Defense publishes A Balanced
  Strategy
• New Administration endorses reform of government
  procurement
• Congress undertakes DoD Acquisition Reform
  legislation

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Enacted ChangesSections 2366(a) and (b)

• In 2006 Congress passed legislation requiring a
  Certification for Major Defense Acquisition
  Programs (MDAPs) at Milestone B
• First part of the certification focuses on cost
  estimation, affordability, and consistency with
  the DoD budget
• Second part of the certification addresses
  requirements, analysis of alternatives,
  technology readiness and the likelihood of
  program success
• Certification is to be made by the decision
  authority for all MDAPs at MS B (or at MS C if
  Initiation)
• The Certification must be submitted to Congress
  with the first Selected Acquisition Report

5
Enacted Changes in Law

• Congressional Perception
• Nunn McCurdy law in place since 1982, but
• Not that many consequences over time
• Cost growth continues
• Perception of lack of DoD discipline--Rubber
  Baselines
• Reaction
• FY06 NDAA
• Tightened Nunn McCurdy rules and measurements
• Section 2366 required USD(ATL) certify MDAPS at
  MS B
• FY07 NDAA
• Added three more criteria for MS B certification
• FY08 NDAA
• Required USD(ATL) certification at MS A (costs
  understood, non-duplicative, valid requirement)

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MDA Certification Prior to Milestone A Approval

• Certification Required by 10 USC 2366a
• The program fulfills an approved initial
  capabilities document
• The program is being executed by an entity with a
  relevant core competency as identified by the
  Secretary of Defense under section 118b of title
  10, United States Code
• A cost estimate for the program has been
  submitted and the level of resources required to
  develop and procure the program is consistent
  with the priority level assigned by the JROC
• and if the program duplicates an existing
  capability already provided by an system
• The duplication of capability provided by this
  program and the existing system is necessary and
  appropriate

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Cost Estimate at Milestone A

• The Milestone A cost estimate must be signed by
  the DoD Component Cost Centera program office
  estimate alone is insufficient
• The cost estimate, in accordance with 10 USC
  2366a as amended, must include both development
  and procurement costs.
• A Technology Development Phase cost estimate is
  necessary but insufficient.
• The 2366a Milestone Decision Authority
  Certification at Milestone A will be based on the
  DoD Component estimate
• The Program Managers reporting of cost growth
  will be measured against the approved cost
  estimate

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2366a Cost Estimate Certification Why it
Matters

• If, at anytime prior to MS-B approval, the
  projected cost of the program exceeds the
  estimate submitted at the MS-A certification by
  25
• The PM must notify the Milestone Decision
  Authority (MDA)
• The MDA, in conjunction with the JROC, shall
  determine if the current estimated cost is
  consistent with the priority of the program
  assigned by the JROC
• Based on the above determination, the MDA may
  rescind MS-A approval

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MDA Certification Prior to Milestone B Approval

• Certification Required by 10 USC 2366b
• MDA received the program business case analysis
  and certifies that
• Affordable when considering alternative systems
• Affordable when considering the per unit cost and
  the total acquisition cost in the context of the
  future-years defense program
• Reasonable cost and schedule estimates have been
  developed and
• Funding is available to execute the product
  development and production plan.
• Further
• Completed market research
• Completed an analysis of alternatives
• The Joint Requirements Oversight Council has
  accomplished its duties
• Technology has been demonstrated in a relevant
  environment
• A high likelihood of accomplishing the mission
  and
• Compliance with all relevant policies,
  regulations, and directives of the Department of
  Defense.

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2366b Certification at MS B

• The Business Case Analysis is a compilation of
• An Analysis of Alternatives done by the lead
  service with a Sufficiency Review by OSD PAE
• The Requirements Document (i.e., the Capabilities
  Development Document) Approved by the JROC
• The Approved Program Acquisition Strategy
• A Service Cost Estimate and an Independent Cost
  Estimate (ICE)
• ICE done by the OSD Cost Analysis Improvement
  Group for ACAT ID Programs
• ICE done by the Service Cost Center for ACAT IC
  Programs
• An Extract from the Presidents Budget Future
  Years Defense Program (FYDP) Showing Full
  Funding and Program Affordability

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2366b Certification

• Together, the two parts of the 2366b
  Certification force greater rigor on the Services
  and DoD
• Valid Requirement
• No Better Alternatives
• Technically Achievable
• Good Cost Estimate
• Program is Affordable, Fully funded
• High Probability of Success
• This provides increased confidence that programs
  will be completed on-time and within budget
• Cost estimate approved at Milestone B becomes the
  baseline for the remaining program lifetime
• Basis for Nunn-McCurdy cost growth calculations

12
DoDI 5000.2 Revised in December 2008
Since the last DoDI 5000.2 was published there
were

• Six years of appropriations and authorization
  acts
• Studies and associated recommendations
• The Quadrennial Defense Review
• Defense Acquisition Performance Assessment (DAPA)
• The Defense Science Board (DSB) Summer Study on
  Transformation
• The Beyond Goldwater-Nichols Studies by the
  Center for Strategic and International Studies
  (CSIS)
• Numerous assessments by the Government
  Accountability Office
• Resulting pilot actions and experimentation
• A series of functional policy memos

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DoDI 5000.2Key Provisions

• Materiel Development Decision becomes Mandatory
• Renewed emphasis on Analyses of Alternatives
  (AoAs)
• Focus on Prototyping and Competition
• Encourages Preliminary Design Review (PDR) prior
  to Milestone B approval
• Cost and Software Data Reporting (CSDR)
  Requirements updated

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Defense Acquisition Business Process Issues

• Process entry at Milestone A, B, or C
• Entrance criteria met before entering phase
• Evolutionary Acquisition or Single Step to Full
  Capability

User Needs Technology Opportunities
(ProgramInitiation)
FOC
IOC
Production Deployment
System Development Demonstration
Technology Development
Concept Refinement
Operations Support
Design Readiness Review
FRP Decision Review
LRIP/IOTE
ConceptDecision
Systems Acquisition
Sustainment
Pre-Systems Acquisition

• Most potential programs proceed to Milestone B
  without a predecessor review to assess the
  capability need and direct analysis of
  alternatives
• Technical maturity is not adequately demonstrated
  prior to program initiation
• Program cost, schedule, and performance
  inadequately informed by design considerations
• Requirements creep continues to de-stabilize
  programs
• No formal and effective opportunity between
  Milestone B and Milestone C for MDA to assess
  progress, adjust / defer requirements, or,
  consistent with statute, re-structure the program

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Mandatory Materiel Development Decision

• Materiel Development Decision precedes entry into
  any phase of the defense acquisition management
  system
• Entrance criteria met before entering phase
• Evolutionary Acquisition or Single Step to Full
  Capability

Technology Opportunities Resources
User Needs
Full Rate Production DR
MS C
MS B
MS A
Materiel Solution Analysis
Capability Based Assessment
Engineering Manufacturing Development
Strategic Guidance
ICD
Joint Concepts
CDD
CPD
TechDev
MDD
AoA
Incremental Development
FCB
COCOM
OSD/JCS

• JROC recommends that the MDA consider potential
  materiel solutions
• MDA ensures necessary information is available to
  support the decision
• Materiel Solution Analysis Phase begins with the
  MDDthe formal entry point into the acquisition
  process, mandatory for all programs
• At the MDD, the Joint Staff presents the JROC
  recommendations the DoD Component presents the
  ICD and a preliminary concept of operations, a
  description of the needed capability and
  operational risk, and the basis for determining
  that non-materiel approaches will not
  sufficiently mitigate the capability gap
• D,PAE (or DoD Component equivalent) proposes AoA
  study guidance
• MDA approves the AoA study guidance determines
  the acquisition phase of entry identifies the
  initial review milestone and designates the lead
  DoD Component(s)
• Decisions documented in an Acquisition Decision
  Memorandum

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Analytic Support to the Defense Acquisition
Management System
AoAStudyGuidance
AoAStudyPlan
AoAStudyGuidance
AoAStudyPlan
AoA
AoA
(updated as necessary)
MS B
MS A
Materiel Solution Analysis
MDD
Technology Development
ICD
CDD
CBA Capabilities-Based Assessment ICD Initial
Capabilities Document MDD Materiel Development
Decision AoA Analysis of Alternatives CDD Capabili
ty Development Document
CBA
AoAs often involve substantial cost estimating
efforts
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Prototyping and Competition
MS B
MS C
MS A
Operations Support
Production Deployment
Engineering Manufacturing Development
Materiel Solution Analysis
Technology Development
MDD
FRP DR

• The TDS and associated funding shall provide for
  two or more competing teams producing prototypes
  of the system and/or key system elements prior
  to, or through, Milestone B. Prototype systems
  or appropriate component-level prototyping shall
  be employed to reduce technical risk, validate
  designs and cost estimates, evaluate
  manufacturing processes, and refine requirements.
  . . .

Opportunity to collect actual cost data on
prototypes during TD
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Preliminary Design Review (PDR)
MS B
MS C
MS A
Production Deployment
Operations Support
Engineering Manufacturing Development
Materiel Solution Analysis
Technology Development
MDD
P-PDR A
PDR
PDR
or
FRP DR
CPD
CDD
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Notional View of PDR and CARD-to-ICE ProcessIn
Technology Development Phase
When PDR precedes Milestone B . . .
SEP Acquisition Strategy
SEPTDS
A
B
Technology Development
Preliminary Design Review
System Requirements Review
Prelim ICE
Final ICE
ICE Report
SEP Systems Engineering Plan TDS Technology
Development Strategy PDR Preliminary Design
Review ICE Independent Cost Estimate CARD Cost
Analysis Requirements Description
Draft CARD
PDR Report
Final CARD
6 months ICE Development
20
Cost and Software Data Reporting

• General Cost and Software Data Reporting (CSDR)
  Changes
• Changed reporting thresholds to then year dollars
  (vice 2002 constant dollars)
• Extended reporting requirements to ACAT IA
  programs and pre-MDAP and pre-MAIS programs after
  Milestone A approval
• Added notes to explain for CSDR purposes
• Contract or Subcontract
• Contract value
• Contractor Cost Data Report (CCDR) Changes
• Floor on optional reporting on high-risk or
  high-technical interest raised from 7M to 20M
• Added requirement to obtain approval for a
  reporting waiver from the CAIG Chair on
  competitively awarded Firm Fixed-Price contracts
• Software Resources Data Report (SRDR) Changes
• Reduced required reporting to software effort
  greater than 20M (vice 25M)
• Provided optional reporting below 20M for
  high-risk or high technical interest at PM
  discretion with CAIG Chair approval
• Deleted specific reporting frequency requirements
  (already called out in Data Item Descriptions)

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Implementation of Statutory and Regulatory
ChangesPolicies on Cost Estimates

• Milestone A Defense Acquisition Board (DAB)
  review
• Submission of a cost estimating plan to USD(ATL)
  for approval 6 months prior to Milestone review
• Plans for preparation of AoA, POE, SCP in
  certain cases, ICE
• Execution of plan enables 2366(a) certification
  with Milestone approval
• Milestone A, B, and C approvals
• Must have a Service Cost Position (SCP)
• Must be documented, signed by Deputy Assistant
  Secretary of Service (Cost Economics)
• Must have documented, signed commitment to fully
  fund SCP in FYDP
• Must be signed by Service Acquisition Executive
  and Assistant Secretary of Service (Financial
  Management and Comptroller)
• Documents form legal basis for 2366
  certifications
• Data plans required for reporting of actual costs
  (e.g., prototypes)

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Upcoming changes Acquisition Reform Bills (2009)

• Senate McCain-Levin Bill (S. 454)
• House Skelton-Hughes Bill (HR 2101)
• Current Status

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Key ProvisionsSenate McCain-Levin Bill (S. 454)

• Establishes new Director, Independent Cost
  Analysis (Section 104)
• Other provisionsacquisition process
• Establishes Director, Developmental Test and
  Evaluation
• Modifies the requirements process, role of JROC,
  USD(ATL)
• Modifies Nunn-McCurdy law to directly terminate
  program if critical breach occurs, unless by
  exception
• Tightens Conflict of Interest provisions in
  acquisition
• Mandates PDR prior to Milestone B

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Senate BillDirector, Independent Cost Assessment
(ICA)

• Appointed by the President, with the advice and
  consent of the Senate
• Transfers the personnel and functions of the Cost
  Analysis Improvement Group of DoD to the D, ICA
• Director, ICA and staff cannot report to
  USD(ATL) or USD(C)
• Prepares annual report for Congress with a
  summary of all cost estimation activities in
  year, submitted in February
• Report must be posted on the Internet, on a
  publicly available DoD website
• Prepares a report on monitoring of OS costs for
  MDAPs within one year of enactment
• GAO will also provide a report card report on
  OS costs in one year
• Prescribes policies and procedures for the
  conduct of cost estimation for MDAPs and MAIS
  programs
• Comments on and requests changes in cost analyses
  done by MILDEPS

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Senate Bill (continued)Director, Independent
Cost Assessment (ICA)

• Conducts Independent Cost Estimates and Cost
  Analyses for MDAPs and MAIS programs where
  USD(ATL) maintains Milestone Decision Authority
• In support of
• Milestone A approvals/certifications (new)
• Milestone B approvals/certifications
• Milestone C approvals
• To support Nunn-McCurdy certifications for both
  MDAP MAIS programs (MAIS programs added)
• All reports for MAIS programs
• As necessary to ensure cost analysis is unbiased,
  fair, reliable
• Establishes guidance on confidence levels for
  cost estimates for MDAPs
• Provides views directly to DEPSECDEF or SECDEF
• Has access to all records of the Department
  including each military department

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Key ProvisionsHouse Skelton-Hughes Bill (HR
2101)

• Generally less prescriptive on organization than
  Senate version
• Requires designation of oversight officials for
  the following acquisition functions, all
  reporting to SECDEF
• cost estimation
• systems engineering
• performance assessment
• The same official may serve in more than one
  functionofficials must be free of undue
  political influence, conflict of interest
• Officials are not (required to be) political
  appointees
• Other provisionsacquisition process
• Does not establish D,ICA or DDTE
• Modifies the requirements process, role of JROC,
  ATL
• Modifies Nunn-McCurdy law, but not as severe as
  Senate version
• Conflict of Interest provisions not as
  restrictiveawait panel recommendations
• Requires a one-time review of all MDAPs for
  certificationMilestones A, B
• Requires an annual report of with review of each
  program with a Milestone B waiver
• Requires annual reviews of all programs
  restructured after critical Nunn-McCurdy breach
• Does not mandate PDR prior to Milestone B

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House BillCost Estimation Official

• Responsible for management and oversight of the
  Cost Analysis Improvement Group
• Must be independent of USD(ATL)
• Prepares annual report for Congress with a
  summary of all cost estimation activities in
  year, submitted in March
• Prescribes policies and procedures for the
  conduct of cost estimation for MDAPs and MAIS
  programs (MAIS programs added)
• Comments on cost analyses done by MILDEPS
• Participates in all discussions on cost
  estimation and resource levels for MDAPs and MAIS
  programs

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House Bill (continued) Cost Estimation Official

• Conducts Independent Cost Estimates and Cost
  Analyses for MDAPs and MAIS programs where
  USD(ATL) maintains Milestone Decision Authority
• In support of
• Milestone A approvals/certifications (new)
• Milestone B approvals/certifications
• Milestone C decisions
• To support Nunn-McCurdy certifications for both
  MDAPs MAIS programs (MAIS programs added)
• All reports for MAIS programs
• As necessary to ensure cost analysis is unbiased,
  fair, reliable
• Establishes guidance on confidence levels for
  cost estimates for MDAPs
• Reports directly to SECDEF
• Has access to all records of the Department
  including each military department

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Current Status

• Senate Bill Voted on Floor May 6--Passed 93-0
• 11 Amendments accepted and included
• House Bill Voted on Floor on May 13Passed 428-0
• Amendments included in markup
• Now in conference vote on floor expected soon

On Presidents Desk by Memorial Day?
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Strengthening Cost Analysis - Initiatives

• Emphasize reliance upon independent cost analyses
  to provide realistic cost estimates for
  acquisition and logistics programs
• Fully fund acquisition programs consistent with
  cost estimates in Presidents Budget requests and
  Future Years Defense Program
• Right-size government cost analysis work force
  modernize cost education program and training
  opportunities
• Improve contractor data reporting of actual
  costs, earned value management, and pricing use
  information to monitor program execution, improve
  cost estimates, contracting, and requirements
• Improve transparency of cost estimates and
  provide annual reports to Congress establish
  rigorous quality assurance program

Focus on fundamentals to improve outcomes