DoD report shows big savings from ‘should cost’ policy

The Defense Department claims it’s seeing major benefits from one of the flagship tenets of its Better Buying Power acquisition reforms.

A recent report to Congress ties lower contract costs, reduced cost overruns and arrested cost growth on major programs with Better Buying Power’s “should cost” initiative.

DoD added should cost to its arsenal of reforms more than five years ago when the department rolled out Better Buying Power.

The policy asks managers to set program cost targets below independent cost estimates. It then asks the heads of programs to manage with the intent to achieve those cost goals.

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Should cost “effects are necessarily idiosyncratic to individual program, commodity classes and services,” the Nov. 3, 2016 report from Defense Undersecretary for Acquisition, Technology and Logistics Frank Kendall states. Should cost “management tasks each acquisition program manager to analyze, question and justify each element of program cost, showing how it might improve year-by-year through specific tangible cost reduction approaches.”

Those approaches include engineering, manufacturing processes and business practices.

Now entering its fifth year of implementation, DoD stated 87 percent of its major acquisition programs developed should cost initiatives.

The report pointed to an increase in major programs projecting funding reductions as one way the policy is saving the Pentagon money.

Almost half of major programs project reductions in development prices in 2015, that’s compared to 27 percent in 2009.

Programs with procurement reductions also increased. Only 39 percent of programs projected reductions in 2009; that number rose to 77 percent in 2015.

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“These results are tied to successful implementation of the Better Buying Power initiatives in which should cost management has played a major role,” the report stated.

The Pentagon saw benefits in its average incremental cost growth on major programs. Median biennial cost growth since 2011 on major programs ran below 1 percent and development and production compared to highs near 6 percent in the early 2000s.

Median total production cost growth on the programs ran under 10 percent since 2010 and below 5 percent in 2015. Those numbers reached as high as 30 percent in the early 2000s.

The report stated contract cost growth is at a new 30-year low of 3.5 percent.

Should cost “techniques are driving significant efficiencies into the acquisition system from the bottom up by enabling individuals to creative identify new ways to save money,” the report stated.

Should cost has come a long way since its early days.

Shay Assad, the DoD’s director of defense pricing, said in 2012 that instilling the idea of should-cost was the Pentagon’s biggest struggle.

“We’re still stuck on ‘does cost,’ and that’s a problem,” he told a Coalition for Government Procurement conference Friday. “It’s not just within the contracting officer community, it’s the program management community, the auditors’ community and the (Defense Contract Management Agency) price analyst community. We’ve got to get people’s mindsets into what things should cost. Now, once we’ve established what they should cost, the next question is whether or not industry can get there. Is there a reasonable path from what things presently do cost to what they should cost?”

The Air Force saw some of the biggest benefits from should cost. In 2015, the service said it used should cost to cut programs’ actual cost by an estimated $2 billion.

The service’s program executive officer for weapons 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 the 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,” said Bill LaPlante, then-assistant secretary of the Air Force for acquisition. “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.”