Defense Bill Provision Would Mandate Life-Cycle Cost Estimates

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By Sam Skolnik

Aug. 18 — The cost of operating and maintaining major weapon systems after they’ve been purchased has been notoriously difficult for the Defense Department (DOD) to predict.

Project to project, estimations of “operating and support costs” sometimes play out roughly as predicted — but they also can be wildly out of line, such as the price tag associated with the B-52 bomber, originally flight tested in the early 1950s but still in operation today.

A provision in the Senate version of the fiscal 2017 National Defense Authorization Act (NDAA) may help fix the issue. The provision would mandate that before major defense acquisitions can be approved, full life-cycle cost estimates need to be conducted or approved by the director of an influential DOD unit that’s little known outside the Pentagon: the Cost Assessment and Program Evaluation (CAPE) office.

Given the increased attention Congress has been paying to operating and support costs over the last several years, the time is right for such a provision, CAPE Director Jamie Morin told Bloomberg BNA.

Members of Congress, high-ranking DOD officials and others have been moving toward a full life-cycle provision since the enactment of the 2009 law that created CAPE, Morin said. “This year, we’ve taken more steps down that path,” he said.

If the full life-cycle provision becomes law, “it will help us do a better job of laying this stuff out,” Morin said. “It seems reasonable.”

Rigorous and Unbiased

Morin and his 160-person office are responsible for ensuring that DOD’s cost estimation and analysis process is rigorous, data-driven and unbiased.

CAPE was created by the Weapon Systems Acquisition Reform Act of 2009 (WSARA). The office, which replaced an existing DOD program analysis and evaluation office, is intended to provide an independent cost estimation reality check to a system in which “quite a number of spending expectations had grown out of control,” Morin said. Under WSARA, he reports directly to Defense Secretary Ashton Carter and Deputy Defense Secretary Robert Work.

The costs associated with the first two steps in the acquisition of any major weapon system — research and development, and the actual procurement of the item — are typically easier to gauge than the operating and support (O&S) costs. But O&S costs, plus the price involved in disposing the item, typically make up more than half — sometimes up to 70 percent or more — of the overall cost of the system, DOD officials have said.

According to CAPE’s Operating and Support Cost-Estimating Guide from March 2014, O&S “consists of the costs (organic and contractor) of personnel, equipment, supplies, software, and services associated with operating, modifying, maintaining, supplying, and otherwise supporting a system in the DoD inventory.”

Constrained Budgets

Defense analysts said the timing makes sense for a full life-cycle provision, which initially appeared in the Senate Armed Services Committee (SASC) version of the NDAA but not in the House bill.

“This is likely to become more the norm in an era with constrained budgets,” Tom Mahnken, president and CEO of the Center for Strategic and Budgetary Assessments in Washington, told Bloomberg BNA. “It is laudable, but can be a challenging thing to do.”

Mahnken noted two instances in which it would have been nearly impossible to predict the O&S costs of a particular system: the B-52 and B-1 bombers. The B-52, originally designed as a high-altitude nuclear bomber, “is doing things today that were never anticipated,” he said, including during the Vietnam War, when the planes were used for carpet bombing runs, and during the Gulf War, when they flew long-distance combat missions.

“One can’t be accurate, but one can at least challenge the basis of claims by the service that fancy new weapons will cost less to maintain — a frequent claim that is rarely correct,” Michael O’Hanlon, co-director of the Center for 21st Century Security and Intelligence with the Brookings Institution, told Bloomberg BNA.

‘Risk-Reduction Measures.'

Sen. John McCain (R-Ariz.), chairman of the Senate Armed Services Committee, is backing the full life-cycle provision because of the necessity of including “cost-saving and risk-reduction measures” in this year’s NDAA, a committee aide told Bloomberg BNA in an e-mail.

“Senator McCain supported the inclusion of this provision in the Senate NDAA,” the aide said. “Others have supported this idea in the past, including (former DOD comptroller) Bob Hale in testimony before the House Armed Services Committee (HASC) arguing for a Nunn-McCurdy-like process for life cycle costs,” the aide said, referring to the law that requires DOD to report to Congress whenever major weapons programs exceed certain cost thresholds.

“The aim of this provision is to better inform the Secretary of Defense in the process of approving major defense acquisition programs by identifying cost-saving and risk-reduction measures earlier in such programs,” the committee aide said.

At a Feb. 3 HASC hearing, Hale said O&S costs should be the “next frontier” of acquisition reform efforts, according to a Bloomberg BNA account.

“It is difficult to predict future O&S costs, especially early in the life of a program when major trade-offs can be considered,” Hale said, “but difficult doesn't mean impossible.”

Consistent Data

When determining O&S costs, Morin said, CAPE relies on the same thing that’s needed when settling cost disputes between his office and the services: “clear and consistent data streams.”

That means finding data that can best help his team determine how many units will need to be built over the long haul, for example. Other questions CAPE tries to answer: How often will the weapons be used? And how expensive will they be to maintain?

Take Lockheed Martin Corp.’s F-35 jet, the most expensive weapons system to date, which has been purchased by the Air Force, Navy and Marine Corps. In March, the Pentagon’s annual report on major weapons systems costs noted that CAPE had estimated it would cost $1.12 trillion in inflation-adjusted dollars to operate and support the F-35 — up from the estimated cost of $900 million in 2009.

The upward adjustment was made because of revised predictions regarding how many more hours the F-35 would see in flying time than earlier believed — 1.6 million — and how long the plane will remain operational.

CAPE’s revised O&S estimate differed from the figure reached by the F-35 Joint Program Office — the operational hub of the massive, multiservice program — by a full $100 billion.

CAPE's Fingerprints

Developing cost estimates for the F-35 wasn’t the first time CAPE has found itself at odds with the military services. It’s almost always the case that the estimates from CAPE are higher than those from the services.

CAPE’s conflicts with the four military branches sometimes also involve larger acquisition priorities.

In one such instance, Carter issued a memo Dec. 14, 2015, to Navy Secretary Ray Mabus, in which Carter wrote that the Navy should contract to build 40 Littoral Combat Ships instead of the 52 the Navy wanted, so that the savings could be spent on other war-fighting priorities.

“These decisions will modernize surface, subsurface, and aviation platforms and address many of the capability shortfalls that the Navy identified at the beginning of the budget process, even after accounting for the budget reductions in FY17,” Carter’s memo said.

Defense analysts said the memo had CAPE’s fingerprints on it. At a panel discussion in March of last year, Morin confirmed that his thinking was in line with Carter’s, according to a press report. “A fleet of 40 of those is going to be fully capable of providing more presence than the fleet it replaces,” he was quoted as saying. He said the Pentagon believed that the freed-up money could instead be spent on advanced munitions and naval aviation.

“When you read the memo, it was clearly written by CAPE,” Mark Cancian, senior adviser to the International Security Program of the Center for Strategic and International Studies, told Bloomberg BNA. “It has a very analytic and programmatic tone.”

Signs of Agreement

Observers say it appears likely that the full life-cycle provision in the NDAA, and the other parts of the bills that affect CAPE, will find their way out of conference committee. Unlike other acquisition-related parts of the bills, Senate and House committee leaders have given signs that they’re on the same page regarding CAPE.

“Even if we get right how much it costs to build them, how much it costs to support and maintain and operate them is not something we have done well,” HASC Chairman Mac Thornberry (R-Texas) told reporters after his Feb. 3 hearing.

Although a full life-cycle provision could add to CAPE’s workload, Morin said it’s unlikely he’ll be asking for an increased office budget any time soon. CAPE started a new O&S cost division about five years ago, he said, which will help manage any new cost estimation work to come.

Morin noted that the NDAA bills also give CAPE an out. If the unit agrees with the O&S estimation from a service for a particular program, CAPE need not conduct a separate analysis.

And the better news, he said, is that weapons cost estimates issued by CAPE and the services are generally more in sync now than any time in recent memory, in part because of increased communication between CAPE and project cost estimators within the services to help make sure they’re all using the same data when drawing their conclusions.

The differences between the Office of the Secretary of Defense, said Morin — primarily meaning CAPE — and the services in weapons cost estimates ranged from 6 percent to 7 percent before 2009. Now, on average, that number hovers between 2 percent and 2.5 percent, he said.

The estimates issued in 2015 by CAPE and the Air Force for the B-21 bomber under development by Northrop Grumman, for example, were “very, very close,” Morin said.

To contact the reporter on this story: Sam Skolnik in Washington at

To contact the editor responsible for this story: Seth Stern at

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