DOD Needs To Provide More Credible Weapon Systems Cost Estimates to the Congress

NSIAD-84-70: Published: May 24, 1984. Publicly Released: May 24, 1984.

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In response to a congressional request, GAO reviewed the Department of Defense's (DOD) cost estimating process on seven selected weapon systems. GAO noted that, while its sample does not permit a projection of the results servicewide or DOD-wide, the cases do illustrate the types of problems that have hampered effective cost estimating for weapon systems.

GAO found that, while DOD has initiated efforts to improve cost estimating and reporting, the estimating process could be further improved with better guidance, assumptions, and methodologies. In particular, GAO noted that some guidance provided in DOD and service instructions is vague and conflicting and that guidance is not always strictly implemented to ensure that estimates are properly structured, documented, and developed. In addition, while DOD instructions call for the use of realistic factors and assumptions, management's efforts to keep cost estimates as low as possible sometimes lead to optimistic estimates. GAO also believes that the recommendations of independent estimators should be thoroughly considered and that the reasons for not accepting such estimates should be documented. Finally, GAO stated that DOD reports to Congress on the cost, schedule, and performance of major weapon systems could be improved by expeditiously recognizing total anticipated program costs and reflecting them in the reports.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: DOD believes that certification would be redundant and unnecessary.

    Matter: Congress may wish to require DOD to certify that the cost estimates it reports are prepared according to sound cost estimating guidelines and represent the total cost for the weapon systems program. Programs in danger of breaching these estimates should undergo a rigorous evaluation by DOD and Congress.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD stated that DOD Directive 5000.4 provides guidance to ensure that all estimates are fully documented. The Office of the Secretary of Defense (OSD) will review this directive to make any needed changes.

    Recommendation: The Secretary of Defense should ensure that all estimates are fully documented.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD stated that DOD Directive 5000.4 provides guidance to the military services to ensure that appropriate methodologies are used to develop estimates. OSD will review this directive and will revise it, if necessary.

    Recommendation: The Secretary of Defense should ensure that appropriate methodologies are used to develop the estimate.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD stated that DOD Directive 5000.4 provides guidance to the services to ensure that estimates are updated when significant changes occur in the program. OSD will review this directive and revise it, if necessary.

    Recommendation: The Secretary of Defense should ensure that the estimate is updated when significant changes occur in the program.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred with the intent of this recommendation and believes that it has been doing this for years. DOD stated that the review process imposed by OSD and military departments continues to require that uncertainty and risks be considered and quantified. GAO believes that the evidence shows that the existing procedures are inadequate.

    Recommendation: The Secretary of Defense should ensure that program risks and uncertainties are fully identified in DOD cost estimates. Cost estimators should be directed to structure their estimating assumptions to consider proven historical cost growth drivers, such as technical changes due to engineering problems and added requirements, schedule changes, and funding instability.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD partially concurred with this recommendation. Its policy requires the use of uniform inflation rates. DOD disagreed that inflation is used as a vehicle to hide other cost increases. GAO believes that the examples cited in the report are still valid and clearly indicate that DOD policy is not being followed.

    Recommendation: The Secretary of Defense should ensure that inflation is calculated consistently and in accordance with DOD procedures.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD concurred with the intent of this recommendation. DOD stated that current directives include such requirements. OSD has directed the services to use independent cost estimates in developing their POM submissions. DOD also stated that the current administration has taken steps to make cost estimates based on realistic assumptions part of the budgetary process.

    Recommendation: The Secretary of Defense should ensure that cost estimates are based on realistic assumptions rather than optimistic assumptions.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: DOD stated that establishing not-to-exceed thresholds at milestone III is too late. Such thresholds should be established at the final commitment to the full-scale development contract or milestone II, whichever is earlier. The primary GAO concern is that the threshold estimates be realistic and act to constrain program costs. Examples in the report show that they do not.

    Recommendation: The Secretary of Defense should ensure that cost discipline is enforced by establishing the total program acquisition cost estimate developed for the production milestone as a not-to-exceed threshold. A program in danger of breaching the threshold should be assessed to determine whether it should be restructured, discontinued, or permitted to proceed as planned.

    Agency Affected: Department of Defense

  8. Status: Closed - Implemented

    Comments: DOD does not concur with this recommendation and stated it is already using independent estimates. DOD stated that it will continue to use independent estimates to reduce costs when such opportunities arise.

    Recommendation: The Secretary of Defense should ensure that DOD management make fuller use of independent estimates. The independent estimates should not be arbitrarily accepted, but the recommendations of the independent estimators should be considered and decisions not to accept them should be fully explained and documented.

    Agency Affected: Department of Defense

  9. Status: Closed - Implemented

    Comments: The latest SAR approved program estimates. Program office proposals are not included in the SAR until approved by OSD. GAO reported instances where this procedure resulted in delays in reporting data which Congress seems to need, as well as omissions of relevant operations and support costs. DOD is now required to include operations and support costs in the SAR.

    Recommendation: To provide more realistic cost reports to Congress, the Secretary of Defense should ensure that the selected acquisition reports (SAR): (1) report all relevant program costs, such as operation and support; (2) use the most current data; and (3) report costs in a consistent manner. In an exceptional situation where costs are excluded from the estimate, those costs should be clearly identified and the rationale for their exclusion explained.

    Agency Affected: Department of Defense

  10. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation, which it stated is already being implemented. DOD stated that DOD Directive 5000.4 and DOD Instruction 5000.2 provide criteria on costs to be included in estimates and DOD reviews ensure that all cost elements are included. The GAO report provided clear evidence that the existing procedure is inadequate.

    Recommendation: To provide more realistic cost reports to Congress, the Secretary of Defense should ensure that clear criteria are established regarding the costs to be included in the officially approved program for a weapon system.

    Agency Affected: Department of Defense

  11. Status: Closed - Implemented

    Comments: DOD does not concur with this recommendation. Only OSD-approved quantities are reported in the SAR. DOD stated that providing footnoted total numbers of units under consideration, but not yet approved, would be misleading and confusing. This recommendation is to provide Congress with current and accurate information, which existing procedures do not allow.

    Recommendation: To provide more realistic cost reports to Congress, the Secretary of Defense should ensure that DOD discloses the total number of units it is considering for a program by providing an SAR footnote when that number is different from the approved program reported in the body of the SAR.

    Agency Affected: Department of Defense

  12. Status: Closed - Implemented

    Comments: DOD believes that it is reporting accurately and correctly within the requirements of unit cost exception reports. It only reports what has been officially approved. GAO stated that this delays the process whereby Congress is informed of upcoming unit costs breaches. GAO believes that Congress intended this to be prospective in nature so that it could react if necessary.

    Recommendation: To provide more realistic cost reports to Congress, the Secretary of Defense should ensure that unit cost exception reports disclose any anticipated cost growth that has not been included in the latest officially approved estimate.

    Agency Affected: Department of Defense

  13. Status: Closed - Implemented

    Comments: DOD partially concurred and agreed that, at times, OSD and service guidance may be inconsistent. DOD stated that, to ensure clarity and consistency in all cost estimating guidance, DOD Directive 5000.4 and military department documents will be reviewed and revised, if necessary, to ensure that this objective is accomplished.

    Recommendation: The Secretary of Defense should revise OSD and service cost estimating guidance to ensure that it is clear and consistent.

    Agency Affected: Department of Defense

 

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