Affordability

  • A program that is not fully funded in the FYDP at program initiation may be considered affordable if the component head agrees to add sufficient resources to fully fund the program in the next FYDP update.
  • Program affordability should be assessed at every milestone beginning with program initiation by the MDA
  • Affordability is the degree to which the program's life-cycle cost fits into DoD's Long-term investment and force structure plans.

CAIV

  • Cost, schedule, and performance may be traded within the "trade space" between the objective and the threshold without obtaining MDA approval. If proposed trades require changes to threshold values in the APB or Capabilities Document, the PM shall notify the OSD Overarching IPT leader and quickly bring such proposals to the appropriate approval authorities for decision.

Cost Estimating Documents

  • An Analysis of Alternatives (AoA) is a study of the operational effectiveness, life-cycle costs, concepts of operations, and overall risk associated with each of the various alternatives that may be able to meet a mission area need. It answers the question, "What is the most cost-effective way to meet this mission need?" The user responsible for the affected mission area is responsible for determining the independent activity that will perform the AoA. For weapon systems, this determination is made by the DoD Component Head; for ACAT IA automated information system programs, it is made by the OSD Principal Staff Assistant (PSA) for the affected functional area.
  • The Cost Analysis Requirements Description (CARD) provides a complete description of the system whose costs are to be estimated. This document helps ensure that all major acquisition program cost estimates are based on common and accurate information and provide the amount of detail required by decision-makers. DoD 5000.4-M provides guidance regarding CARD preparation. Enclosure4 to DoD Instruction 5000.02 specifies that ACAT I programs must prepare or update the CARD in support of Milestone B, Milestone C, and the Full Rate Production Decision Review. DoD Instruction 5000.02 also specifies that ACAT IA programs must prepare or update the CARD whenever an initial or updated Economic Analysis is required

Cost Estimating Review Process

  • CAPE ICE is required at MS’s B and C. It is considered at FRP at the discretion of the MDA
  • POE’s and CCA’s are required at MS’s A,B,C, and FRP.

Cost Estimating Methods

  • In the analogy method, the cost of a new item is estimated by starting with the cost of one or more similar existing items, then adjusting this cost to take into account the differences between the existing item and the new item.
  • The parametric, or statistical, method uses regression analysis of a database of several similar systems to develop a mathematical equation describing a line or curve that fits as closely as possible to the data.The resulting equation, known as a cost estimating relationship (CER), estimates cost based on the value(s) of one or more system performance or design characteristics (for example, speed, weight, number of parts, etc.).Typically 4 is the minimum number of data points acceptable for use in a CER.
  • The engineering method builds an estimate from the "bottom up" by analyzing the individual elements of the work breakdown structure (WBS) for the direct costs of accomplishing the work then adding appropriate amounts for indirect costs (for example, plant overhead, company overhead, etc.).
  • The technique of using actual cost data (or extrapolating future costs from actual costs) is based on data from earlier/previous units, prototypes, or production lots of the same system (not a similar system, as in the analogy method).

Learning Curve Theory

  • Learning curve theory is most straightforwardly applied in situations where the following conditions exist:
  1. Uninterrupted serial production (for example, no production breaks)
  2. Consistent product design
  3. Management emphasis on productivity improvement
  • More automation normally means less learning
  • More complex items tend to have steeper curves
  • Workforce turnover and production breaks lead to less learning

Appropriations

  • Budget Authority - Allows federal agencies to obligate the government to pay for goods and services required.
  • Expenses (</= $250K) – costs incurred to operate and maintain the organization, such as personal services, supplies, and utilities.
  • Investments (> $250K) -Are the costs that result in the acquisition of, or an addition to, end items.
  • RDT&E – Budget Activities
  • BA-1 Basic Research
  • BA-2 Applied Research
  • BA-3 Advanced Technology Development
  • BA-4 Advanced Component Development and Prototypes (ACD&P)
  • BA-5 System Development and Demonstration (SDD)
  • BA-6 RDT&E Management Support
  • BA-7 Operational System Development
  • O&M – Budget Activities
  • BA-1: Operating Forces
  • BA-2: Mobilization
  • BA-3: Training And Recruiting
  • BA-4: Administrative & Servicewide Activities

Annual Funding Policy (MILPERS/O&M)

  • Regarding DoD financing of service contracts whose period of performance crosses fiscal years: if the contract period is 12 months or less in duration, or if the contract produces a single outcome, product or report (that is, is non-severable), DoD may finance the entire period of performance with budget authority available for obligation at the time of the contract award.

Incremental Funding Policy (RDT&E)

  • Forward Financing - Budgeting for more RDT&E funds than the costs expected to be incurred in a given fiscal year
  • The incremental funding policy requires that an RDT&E budget request be based on the costs expected to be incurred during a fiscal year.
  • Exceptions to this policy include the funding of contracts over 12 months, but less than 18 months in which there is no logical way to divide the work, it is clearly infeasible to limit the contract to a shorter period, or the planned technical effort is such that no responsible contractor can be found who will accept a contract for less than the full period of performance.

Full Funding Policy (MILCON/Procurement)

  • Applicable to the Procurement and Military Construction appropriations, is the practice of budgeting for the total cost of major procurement and construction projects in the fiscal year in which they will be initiated (that is, placed on contract).
  • For military construction projects, the structure(s) that comprise a project are considered to be the end item(s), so a MILCON budget request for a particular fiscal year should contain sufficient funding to ensure the completion of all structures that will be initiated during that fiscal year
  • To restrict programs from tying up excessive amounts of procurement budget authority, the DoD Financial Management Regulation limits the size of the budget year's "lot" of end items to only the quantity that can be delivered in a 12-month funded delivery period.
  • The advance procurement exception to the full funding policy permits budgeting for less than complete end items to:
  • Ensure that long-lead items do not disrupt the production schedule, or
  • Maintain critical workforce skills that would otherwise be lost in a production line break
  • Multiyear procurement (MYP) is a strategy under which the government may contract to buy multiple years worth (that is, multiple production lots) of usable end items, usually limited to five years. This enables the contractor to reduce costs in two ways:
  • Using price breaks for bulk (economic order quantity (EOQ)) purchases of materials and components to reduce materials costs, and
  • Investing in productivity enhancements to reduce labor costs that might not be attractive under normal year-to-year procurement.
  • DoD must ensure that certain statutory requirements are met prior to approving use of MYP:
  • Substantial savings in total anticipated costs compared to carrying out the program through annual contracts.
  • Stable requirements for the item during the contemplated contract period in terms of production rate, procurement rate, and total quantities.
  • Stable funding means funding for the contract will be requested at the level required to avoid contract cancellation. It assumes agreement by the Component, OSD, and Congress to maintain adequate funding.
  • Stable design for the item without excessive technical risks. This usually implies that the system has been in production for one or more lots, proving out the design, before MYP is approved.
  • Realistic cost estimates of the MYP contract cost and its anticipated savings.
  • The system being procured on the MYP contract enhances national security.

Escalation Factors

  • A "Constant" dollar is one that reflects the purchasing power of a dollar in a specific year.
  • The raw (or compound) index accounts for all the inflation that occurred or is expected to occur between any two years. If the price of an item in a base year is known, the price of that item in some future or past year can be estimated by
  • A "Then-Year" or "Current" dollar is a Constant dollar that has been escalated using an appropriate Weighted (or Composite) Index that accounts for inflation based on the spending pattern of the particular appropriation being budgeted

Fixed Price Contracts

  • In a fixed-price contract, the government agrees to pay an agreed-upon price for goods or services. This price may be truly fixed or may be subject to a limited amount of adjustment based on the provisions of the contract. The fixed price encompasses both the contractor's expected cost to produce the goods or services as well as the contractor's expected profit.
  • Firm Fixed-Price (FFP) Contract. A contract where the buyer pays a set amount to the seller regardless of that seller's cost to complete the work.
  • The program manager should budget to the anticipated final negotiated price of the FFP contract.
  • Fixed-Price- Economic Price Adjustment (FP-EPA) Contract. A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies.
  • The program manager should budget to the anticipated final negotiated price of the FP-EPA contract, which does not include any economic price adjustments
  • Fixed-Price Incentive, Firm Target (FPIF) Contract. A fixed-price contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to total target cost.
  • The program manager should budget to the anticipated target price of the FPIF contract, which should represent the best estimate of combined contract cost and profit.

Cost-Reimbursement Contracts

  • In cost-reimbursement contracts, the government promises to pay all allowable, allocable, and reasonable costs incurred in performing the contract work, as well as a fee that constitutes the contractor's profit
  • A Cost Plus Fixed Fee (CPFF) contract is a cost-reimbursement contract that contains no incentives. The contractor is reimbursed for all allowable costs and is paid a set fee regardless of how well or poorly it performs.
  • The most likely cost of a CPFF contract is the sum of the cost expected to be incurred and the fixed fee, so this is the amount that should be budgeted for
  • A Cost Plus Award Fee (CPAF) contract is a cost-reimbursement contract that provides for a fee consisting of a base fee and an award fee. The base fee is paid under all circumstances regardless of performance. The award fee portion may be earned in whole or in part based on the government's subjective evaluation of the contractor's performance relative to criteria established at the beginning of each award fee period.
  • CPAF contracts should be budgeted to their most likely cost, which is the sum of the cost expected to be incurred plus the base fee plus the entire award fee which can be earned (or paid) during the budget period
  • Under a Cost Plus Incentive Fee (CPIF) contract, a target price is negotiated, consisting of a target cost and a target fee. The target cost is the government and contractor's agreed-upon best estimate of the cost to be incurred in performing the contract requirements. The target fee is the amount of fee that the government and contractor have agreed should be earned by the contractor if it incurs costs exactly equal to the target cost.
  • Budget Cost Plus Incentive Fee (CPIF) contracts to the anticipated target price of the contract, which should represent the best estimate of contract cost plus the associated fee

Earned Value Management

  • Relates the scope of the work to its associated budgets and schedule.
  • Measures the work progress in objective terms.
  • States the value of the work completed in dollars, or other measurable units.
  • Contract Performance Report (CPR) -CPR reporting is usually reserved for work efforts considered to be relatively high-risk. CPR and IMS reporting is required for cost or incentive contracts (i.e., non-Firm-Fixed Price), subcontracts, intra-government work agreements, and other agreements valued at or greater than $20 million in then-year dollars.
  • The budgeted value of the work planned is the cumulative amount budgeted for the work scheduled by a given date. It is also known as the Budgeted Cost of Work Scheduled (BCWS).
  • The budgeted value of the work accomplished is Earned Value. The Earned Value is the sum of the amount budgeted for the tasks accomplished so far, or the Budgeted Cost of Work Performed (BCWP).
  • The actual costs incurred in accomplishing the tasks so far is known as the Actual Cost of Work Performed (ACWP).
  • The total budgeted value of the work planned through the end of the project or contract is known as the Budget at Completion (BAC).
  • The Program Manager (PM) can use EV information to estimate contract schedule performance by examining the difference between the earned value of the work performed to date (BCWP) and the planned value of work that should have been completed by now (BCWS). This difference is known as the Schedule Variance (SV) (BCWP - BCWS). The SV value falls into one of three categories:
  • SV equals 0. This MAY mean that the project is on schedule.
  • SV greater than 0 (+SV). This means that more value has been earned than originally planned, so the project MAY be ahead of schedule = Favorable.
  • SV less than 0 (-SV). This means that less value has been earned than originally planned, so the project MAY be behind schedule = Unfavorable.
  • The Program Manager (PM) can use EV information to evaluate contract cost performance by examining the difference between the earned value of the work performed (BCWP) to date and the actual cost of the work performed (ACWP) to date. This difference is known as the Cost Variance (CV) (BCWP - ACWP). The CV value falls into one of three categories:
  • CV equals 0. This usually means that the project is on budget.
  • CV greater than 0 (+CV). This means that the cost of the work performed was less than originally estimated, so the project is under budget.
  • CV less than 0 (-CV). This means that the cost of the work performed was more than originally estimated, so the project is over budget.
  • The Schedule Performance Index (SPI) is a measure of the contractor's schedule efficiency to date, and can be used to project future performance. SPI is calculated as the ratio of earned value (BCWP) to the plan (BCWS), or SPI = BCWP/BCWS.
  • SPI equals 1. This means that the contractor is working at the originally planned efficiency (BCWP = BCWS).
  • SPI greater than 1. This means that the contractor has been more efficient than originally planned (BCWP > BCWS). If performance continues at this SPI, the project may finish ahead of schedule, depending on the critical path.
  • SPI less than 1. This means that the contractor has been less efficient than originally planned (BCWP < BCWS). If performance continues at this SPI, the project may finish behind schedule, depending on the critical path.
  • The Cost Performance Index (CPI) is a measure of the contractor's cost efficiency, and can be used to project future performance. CPI is calculated as the ratio of earned value (BCWP) to actual costs (ACWP), or CPI = BCWP divided by ACWP.
  • CPI equals 1. This usually means that the contractor is working at the originally planned efficiency (BCWP = ACWP).
  • CPI greater than 1. This means that the contractor has been more efficient than originally planned (BCWP > ACWP). If performance continues at this CPI, the project will finish under budget.
  • CPI less than 1. This means that the contractor has been less efficient than originally planned (BCWP < ACWP). If performance continues at this CPI, the project will finish over budget.
  • To determine whether a contract has sufficient funding to complete its desired scope, the PM must estimate what the total cost of the contract will be upon completion of all work. This is an Estimate at Completion (EAC).

PPBE

  • DoD's primary resource allocation system, having the ultimate objective of providing warfighters with the best mix of equipment, personnel, and support attainable within established fiscal constraints.
  • The Future Years Defense Program (FYDP) is a database containing the DoD resource program approved by SECDEF for a particular PPBE cycle.Includes six years of information regarding force levels (for example, aircraft inventories), personnel requirements, and funding requirements information (two budget years plus four "out-years").
  • The primary inputs to the PPBE Planning Phase are:
  • National Security Strategy of the United States (NSS)- is usually prepared in the first year of a new administration. It provides the basis for the National Military Strategy (NMS).
  • National Defense Strategy (NDS) - The NDS is the Secretary of Defense’s strategic guidance on the priority of defense missions and associated strategic goals in support of the NSS
  • National Military Strategy (NMS)- The Chairman of the Joint Chiefs of Staff (CJCS) recommends a National Military Strategy (NMS) and fiscally constrained force structure that supports the attainment of national security objectives during the period to be covered by the JPG.
  • Quadrennial Defense Review (QDR)- normally completed in the second year of each four-year presidential administration and is published in the third year. Therefore it is part of the PPBE Planning phase every four years
  • Chairman's Program Recommendation (CPR) - The CPR provides the CJCS’s program recommendations and are intended to enhance joint readiness, promote joint doctrine and training, and satisfy warfighting requirements.
  • Guidance for the Development of the Force (GDF) - Developed by the OSD staff with input from the Joint Staff, The GDF considers a long-term view of the security environment and helps shape the investment blueprint for the six Future Years Defense Program (FYDP) years
  • Joint Programming Guidance (JPG) is prepared by the Undersecretary of Defense for Policy (USD(P)) organization, assisted by the office of the Director, Cost Assessment and Program Evaluation (CAPE)

RDT&E Budget Exhibits