12.8.2 Cost Factors and Guidelines
12.8.2 Cost Factors and
To this point, cost and budgeting has been alluded to without
providing any detailed guidance. This section will present information on
controlling costs and planning options that are available to support cost
control throughout the entire life cycle of the system.
Most military equipment/system acquisition managers and their
counterparts in the commercial world must cope with four basic, usually
conflicting, criteria, which are:
The goal is to balance these criteria so as to obtain the "best"
system. With the increasingly high costs of buying, operating, and maintaining
weapon systems, further exacerbated by the reduction in defense spending over
recent years, the term "best" has come to mean developing a system with
minimum life cycle costs (LCC) consistent with required performance. This
balanced design approach is shown in Figure 12.8-3 in which design engineers
and acquisition managers must balance performance, reliability, and unit
production costs equally against the overall objective of minimizing the cost
of ownership or LCC.
An important fact that the manager must keep in mind is that
early design decisions lock-in a major portion of the life cycle costs. This
is shown graphically in Figures 12.8-4 and 12.8-5 (Ref.
These figures relate dollar expenditures and percent of
locked-in life cycle costs to the life cycle of a project. These figures are
held as being representative for the US Department of Defense. Figure 12.8-4
shows that the design and development phase of a project consumed only 15% of
the cost of a typical project, as opposed to 35% for the production phase and
50% for the inservice phase. Although only 15% of the expenditures were made
prior to production, Figure 12.8-5 shows that about 90-95% of the life cycle
costs were determined. The design specifications that were approved prior to
production determined how it would proceed and, therefore, determined the
costs to be incurred in that phase. Similarly, the detailed specifications
were produced based upon a certain operational, maintenance and supply support
policy. These policies and the design dictate such in-service variables as
manpower, consumables and spares levels.
The significance of these figures should be kept in mind by the
acquisition manager. Prior to the conceptual design review, 100% of the design
can be altered and 100% of the life cycle cost can be affected. Completion of
the conceptual design review gives approval for the basic framework of the
design. The concepts approved, although not a written set of specifications,
place constraints on the design team, narrow their decision horizon and fix a
certain level of the life cycle cost on the project. As time progresses, the
decision horizon narrows and a greater percentage of life cycle costs become
determined. It has been estimated that by the time 15% of a typical system's
life cycle has expired, 90% of the life cycle costs have been determined.
Thus, a manager needs to be familiar with the available tools to enable him to
make timely decisions to minimize LCC.
Reliability as well as maintainability decisions have a great
impact on LCC. The frequency of failures and the time to repair them determine
the resources, manpower, and materials needed to maintain the system in the
field. The principal difficulty which confronts the acquisition manager in
making R&M decisions is the complexity of the problem. The equipment
R&M requirements defined in the development specification establish the
objectives of the design. However, these must be considered in conjunction
with numerous other requirements and constraints, all of which influence
operations and support costs.