Can Decades of Military Overspending be Fixed?

Costs tend to rise in all organizations unless managers and their staffs have the motivation and skill to control them. Professor emeritus J. Ronald Fox analyzes this phenomenon during 50 years of US military overspending. Key concepts include:
  • Costs tend to rise in all organizations unless managers and their staffs are skilled in industrial management and strongly motivated to control and reduce costs.
  • In the US military, weapon programs can take 10 or more years to design, develop, produce, and deploy, with cost increases of 20 to 40 percent occurring frequently.
  • More than 20 reform initiatives have been offered over the decades, but cultural barriers to change have worked against change.
by J. Ronald Fox

Editor's note: Even with recent disclosures about out-of-control spending on corporate perks and government agency parties, the US military is frequently held up as the exemplar of organizational largesse run wild.

In the new book Defense Acquisition Reform 1960-2009: An Elusive Goal, J. Ronald Fox, the Tiampo Professor of Business Administration, Emeritus, analyzes efforts since the Kennedy administration to reform defense spending on aircraft, ships, submarines, tanks, missiles, satellites and other major weapons systems. The text is also available as a working paper.

In short, he observes, little progress has been made in reducing cost overruns even though more than 20 reform proposals were launched during this time.

"Despite the focus and effort dedicated towards reform in the past fifty years, important systemic issues remain unchanged, implying strongly that the acquisition process has a number of built-in, even cultural, aspects that resist change," Fox writes. "These include an irregular and erratic flow of weapons systems appropriations; the very nature of cutting-edge, highly risky research and development; an ill-informed requirements process that virtually mandates changes to contracts as requirements are added or changed; and financial incentives that reward lowball contractor bids and provide negative sanctions for failing to spend all the allocated funds."

It doesn't help that these built-in features hold value to key participants in the process including military services, industry, and Congress, hardening them against change, Fox says.

The book excerpt below looks at how previous reform studies have fallen significantly short of correcting significant problems in weapons procurement programs. Case in point: the F-22 jet fighter.

Excerpt from Defense Acquisition Reform 1960-2009: An Elusive Goal.

Major Weapon Systems

Defense Acquisition Reform 1960-2009: An Elusive GoalSince World War II military research and development (R&D) has constituted a large share of the total federal R&D effort. In 1960, for example, the Defense Department's R&D budget was $5.6 billion, out of a total federal R&D budget of $8.7 billion, or 64.4 percent. By 2007, the defense R&D budget had risen to $69.3 billion, accounting for 50 percent of the total federal R&D budget of $137.2 billion.

In pursuit of its mission to direct and oversee the research, development, and production of weapon systems and equipment, DoD engages tens of thousands of prime contractors—including most of the major firms in the United States—and tens of thousands of suppliers and subcontractors. The importance of the DoD's huge acquisition projects over the years cannot be overstressed. The United States has often turned to cutting-edge technology solutions to solve strategic and operational challenges.

“Costs tend to rise in all organizations unless managers and their staffs are skilled in industrial management and strongly motivated to control and reduce costs.”

Military aircraft illustrate the complexity of modern weapon systems. The Air Force F-22 is an advanced fighter aircraft that replaces the F-15 as America's front-line, air superiority fighter. Thirty-nine percent of the F-22 aircraft is fabricated with titanium and 24 percent from composite materials. More than 240 firms in 37 states participate in the development and production program. The empty weight of the aircraft is 31,670 pounds and the wing area is 840 square feet. The aircraft has two engines generating 35,000 pounds of thrust, enabling the F-22 to travel at a speed of Mach 1.8 and perform tactical maneuvers at an altitude of 12 miles, twice the altitude at which other jets can perform tactical maneuvers. The F-22 was originally expected to cost $88 billion in 2009 dollars for 648 aircraft. In March 2009, the program was estimated to cost $73.7 billion for the much smaller quantity of 184 aircraft, more than doubling the unit cost of the aircraft.

The amount of electronics equipment in a modern fighter aircraft is astounding. An Air Force general captured the essential change: "In the past, the Air Force used to buy airplanes and add electronics. Today the Air Force buys computers and puts wings on them." Forty percent or more of the funds for DoD aircraft are spent on electronics equipment.

It has not been uncommon for weapon programs to take ten or more years to design, develop, produce, and deploy initial operationally capable units. Reported cost increases of 20 to 40 percent occur frequently on major weapon programs, with a significant number of programs delivering less capability than planned, often at two to three times the planned cost.

The acquisition of large defense development and production programs poses one of the most challenging business and technical management problems in the world. Controlling and reducing costs is difficult in any industry, but even more so in larger and more complex engineering development and production programs.

Costs tend to rise in all organizations unless managers and their staffs are skilled in industrial management and strongly motivated to control and reduce costs. Yet the Army, the Navy, and, to a lesser extent, the Air Force provide limited industrial management training for military officers whom they assign to key managerial positions in major acquisition programs. Outstanding military officers assigned to manage these programs often have years of combat arms training and experience (for example, as pilots, ship captains, armor commanders).

For decades, many have observed that government program managers and their staffs are intelligent and hardworking. They genuinely want to acquire advanced weapon systems that meet performance standards at reasonable costs. But in practice, too few government managers are skilled in understanding and using industry financial incentives or the process of controlling costs, schedules, and technical performance on large research, development, and production programs.

Defense Acquisition Reform Studies

Since 1960, more than twenty-seven major reform studies of defense acquisition programs (totaling more than $200 billion in 2011) were commissioned by presidents, Congress, secretaries of defense, government agencies, studies and analyses organizations, and universities. The reform studies arrived at most of the same findings and made similar recommendations to prevent or minimize future cost overruns and schedule slippages. But lack of political will, insufficient numbers of government personnel trained and skilled to make the desired changes, and few rewards for implementing the changes, have produced only limited improvements. The problems of schedule slippages, cost growth, and technical performance shortfalls on defense acquisition programs have remained much the same for the past 50 years.

The F-22 fighter jetMilitary officers are often generalists, who rotate their assignments as frequently as every two or three years, performing a variety of jobs in military operations activities. While these short-term job assignments are satisfactory for many DoD activities, assignments to large acquisition programs frequently experiencing several changes a month often require substantial industrial management skills and more than a year for a skilled military officer or other government manager simply to become familiar with an acquisition program, the contractors involved, the technical and financial challenges, problems, and possible remedies.

Most of the proposed solutions to defense management problems in the past have been undermined in one of two ways. The first is lack of continuity. When a Pentagon official introduces specific acquisition reforms, there is often a flurry of activity, and for a year or two progress is made. Then one or more sponsoring military or civilian officials are transferred to another assignment or leave the government. New officials take over and shift the focus to other activities, and the old problems begin to resurface.

Were there a more attractive government career in DoD acquisition management, it might then be possible to minimize the conflicts associated with frequent turnover of military personnel and widespread military retirements to industry, while preserving the rights of individuals to careers in acquisition management. The basic goal of any remedy must be achieving and maintaining outstanding competence and integrity to the defense acquisition system.

With respect to contractors, the Defense Department customarily does business with an inverted system of rewards and penalties. Contractors are often rewarded for higher than planned program costs with increased sales, higher contributions to overhead, and higher profits. The system also encourages government and industry managers to place higher priority on gaining congressional approval to begin new acquisition weapon programs or obtain additional funding for ongoing programs than it does on controlling cost. The U.S. Government Accountability Office as well as other defense analysts have observed that the acquisition cost overruns of the 1980s, 1990s, and 2000s are not aberrations; they are the result of many government and industry participants reacting in perfect accord with the distorted rewards and penalties inherent in the acquisition process.

Reluctance to establish more appropriate incentives has been a serious deficiency in most DoD improvement programs during the past five decades. Contractors should be rewarded with higher profits for complying with schedules, satisfying promised technical performance standards, and delivering goods and services at or below contracted costs. Prospects for obtaining future contracts should be closely linked to performance on existing contracts. New contract forms; better planning, control, and reporting systems; and improved cost estimating and change control systems are unlikely to be effective unless government managers are skilled in the implementation and use of these techniques and are rewarded, along with contractors, for effective results.

This book identifies important long-term trends, insights, and observations that provide perspective and context to assist current defense decision makers, acquisition officials, and trainers of acquisition personnel. The concluding chapter presents an analysis of why the defense acquisition system has been able to resist improvements frequently proposed during the past five decades. It also includes a description of much needed effective reforms of the acquisition process.

High federal deficits at the end of the first decade of the twenty-first century, the continuing need for a strong defense, and a growing awareness of the need to deal more effectively with the high cost of defense acquisition can provide the stimulus to bring about much needed improvements in the control of schedules and costs for large defense engineering development and production programs. This study suggests that correcting the shortcomings in defense acquisition management deserves urgent and concerted actions by the secretary of defense in conjunction with his key assistants. The goal should be to create and implement incentives throughout DoD acquisition organizations to ensure that the desired changes are made and endure.

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    • Anonymous
    It's a shame congress has used DoD, Intelligence, and even IT spending as a WELFARE program. It's all "insurance", how much insurance (life, auto, health, dental, malpractice, homeowner, etc) can an individual support? The same applies for a nation. Furthermore, defense, intel and, IT spending -- is a form of welfare for some of the most capable and highly educated; however, the costs are borne by the majority of Americans in that 80 percentile, those with FAMILY incomes below $100,000 -- which pushes wealth up the socioeconomic ladder (which is extremely self-destructive to the economy). The goal is to push wealth, education, and unburden individuals DOWN the socioeconomic ladder. In the past 10 or more years, congress has shifted the entire nation's economy making the Federal Government the CUSTOMER of choice instead of focusing on Business to business and business to consumer transactions.
    • Will Wilkin
    • Co-Owner Operator, Made In USA Solar LLC
    Excellent technocratic advice but the problem is MUCH bigger. America's global military empire of over 800 bases on foreign soiul and deployments in 150+ countries simultaneously....there is more than "lack of use of industry incentives and cost-cutting methods." The next 15 natiuons combined don't seem to have expanded into global empires of military bases and permanent war economy. That is a POLITICAL problem rooted in the divorce between the interests of ordinary Americans and the imperial ambitions of the national elite. Keynes' last stand is being made at the Pentagon, which is a gravy train for military contractors that have become America's strongest industrial sector while "free trade" has exported much of our civilian production. The combination is bankrupting our nation as it siphons more and more wealth to the top and the peoples' wages stagnate for decades.
    • Paulo Wilson Rodrigues
    • Material Engeneer, Escola de Engenharia de Lorena - EEL USP
    Dear Sir:

    Perhaps the true R & D should focuses in material cost reduction not the budget reduction. There is something interesting new materials that could do this task, reducting costs without compromising defense.
    • Anonymous
    From the excerpt provided I find it interesting that certain realities that were centers of gravity for spending were not mentioned. The time span of this analysis is from the peak of the Cold War to fairly recently. One of the strategies was to out spend the Soviets. This was not so much a business strategy but a policy one. The excerpt also fails to address the true competition... foreign defense industries that can draw from a command economy. Analysis shows how the Soviets and later the Russians as well as the PRC was and is able to throw money into defense programs to develop weapons systems. The cold hard truth is that the US has to maintain an advantage or we will be at a strategic disadvantage. This may not be apparent now and that is mainly because there is that tech advantage in place. The issue of personnel is also miss leading. Yes the DoD rotates their people, but they also have SME's that go through extensive
    education and training to specialize in managing such portfolios. There is also a civilian workforce in the DoD that does not rotate and they have the institutional knowledge to manage these programs. Unfortunately, from the except provided it appears that this book is polemic and not a real example of analysis.
    • Pete Burke
    • Army
    The quote (follows) "With respect to contractors, the Defense Department customarily does business with an inverted system of rewards and penalties. Contractors are often rewarded for higher than planned program costs with increased sales, higher contributions to overhead, and higher profits. The system also encourages government and industry managers to place higher priority on gaining congressional approval to begin new acquisition weapon programs or obtain additional funding for ongoing programs than it does on controlling cost." does not make sense. In my sector, industry can not be rewarded for over-runs or increasedv overhead. I can not imagine any DoD organization who would ever do so. In the second part of the quote, yes, congressional approval is required for a new start program, but the department's periodic review of costs is an effective management tool for the program manager.