Some More Thoughts on Weapons Systems Costs and Their Uses

The other day, I published an article describing the 8 distinct (and different) costs DoD defines for weapons systems under development.  While I touched on the utility of some of them briefly, I didn’t really say much regarding how each of those costs can be used.

They’re not meaningless bookkeeping exercises.  Each is useful – even if some are more useful than others.

Today, I’ll discuss the uses of those 8 costs.  For ease of following along, I’ll follow the order used in my first article.  You can find that prior article here.

Development Cost.

It might seem as if examining development costs would be rather pointless.  And in truth, they are in general “sunk costs”.  Once they’re incurred, there’s no way to recover them.  Even if they program is cancelled, that money is gone. So why would we care about it?

However, other than the obvious fact that the US taxpayer foots that bill, knowing a system’s development cost is useful in other ways.  The amount of development cost can be (and often is) an indicator of two things.  First, a high development cost in anything but a space system generally indicates one of three things:  (a) a program that is using “bleeding edge” technology, or is developing new technology altogether; (b) a program that is having difficulty and is having to “re-do” things, or (c) both.  Second, it often indicates that the system being produced may be a bit problematic – at least initially.

A case in point is the B2.  It had a huge development cost – $29+B out of a total program cost of around $45B, though in fairness it’s production was curtailed by political action.  It indeed developed serious new technology (curved surface stealth) and made use of other highly advanced (for the day) technologies.   It also had a somewhat extended and troubled development, and is also reputedly somewhat difficult and expensive to maintain.  Draw your own conclusions regarding whether the those are related.

Flyaway Cost.

The flyaway cost (or sailaway or rollaway cost, if instead you’re talking about ships or ground systems) is actually a quite useful cost.  However, it’s not useful in perhaps quite the way you might think.

For starters:  the flyaway cost does not give you the full cost to DoD of the system.  It doesn’t include development costs essential equipment that is required but not part of the system itself; initial spares; or a few other things.  So the flyaway cost isn’t the answer to the question, “How much did (or will) that (whatever) cost Uncle Sam?”

Further, flyaway cost changes over time.  This is because as more of an item are produced production line efficiency improves.  The workforce gets more efficient; procedures get streamlined and improved, with “kinks” getting worked out; the management team gets more experience at managing the process; and the same all occurs with suppliers of components.  It’s not unusual to see the last of a particular weapon system produced have a far lower flyaway cost than the first.

So, how is it useful?  It’s useful for projections.  Since the flyaway cost is the cost of producing one item, for systems near end of production the current flyaway cost is effectively the marginal cost of producing one more item than originally planned – or the savings associated with producing one less.  It can be used to answer such questions as, “How much would another 50 (whatevers) cost?” or “How much would cutting production by 25 save Uncle Sam?”  Decision-makers sometimes need to know this.

Weapon System Cost and Procurement Cost.

Weapons System Cost is simply Flyaway Cost plus the cost of other items (e.g., prime movers, system-unique test equipment and special tools, associated radios) that were not developed as part of the system under development, but which are nonetheless needed for its normal operation.  Procurement Cost adds to that initial spares and a couple of other things.  As such, the uses of these two costs – and the pitfalls associated with each – are effectively the same as for the Flyaway Cost.  Indeed, the Procurement Cost is actually what you want if you’re going to do accurate “what if” drills regarding changing numbers produced.

Program Acquisition Cost.

The Program Acquisition Cost is probably the most useful cost for answering the question, “How much will (or did) that (whatever) cost Uncle Sam to develop and field?”  This cost is the sum of Development Cost and Procurement Cost.  As such, it represents virtually everything DoD actually spends to develop a system and deploy it to the field.  So if that’s what someone wants to know the total cost to field a particular system – or wants to know how much each copy cost Uncle Sam to buy – that number is essential.

What it does NOT include is the cost of actually operating the system.  So while it tells you how much $$$ is needed (or was spent) to buy it, it doesn’t tell you squat about how much you’ll spend to use the system for 10 or 20 or 30 (or more) years.

For anything but a space system, Total Program Cost is generally only somewhere between 20% and 40% of the total cost of owning and operating the system.  So while you hear a lot about it for weapons being developed, it’s not even really the “biggie” in terms of overall $$$.

Operations and Support Cost.

Operations and Support Cost is what it costs to actually use the system after it’s fielded – e.g., fuel, maintenance, spare parts (other than initial spares), operator salaries, etc . . . .  While system developers determine these costs, their programs aren’t the one to pay for them – units operating the systems do.  So “Big Army”/HQAF/DoNavy/HQ USMC and their subordinate HQs are the ones who care about these.

You have to know these costs in order to calculate future budget requests.  And as the bureaucrat from DC put it to the test pilots in the movie The Right Stuff:  “Funding. That’s what makes your ships go up . . . . No bucks, no Buck Rodgers.”

Disposal Cost.

Since this is the cost of demilitarizing and disposing of a system being retired, anyone involved in that activity needs to know this cost.  And while it’s usually a relatively small cost with respect to the overall system’s Life-Cycle Cost (next), it can still be substantial in absolute terms.

It’s also an area that you really don’t want to neglect if you’re responsible for same.  Ask the folks who formerly worked at Edgewood Arsenal how not having enough funding to properly dispose of stuff worked out for them.

Life-Cycle Cost.

This is the total cost of ownership of the system – including buying, selling, and disposing of it when it’s no longer needed.  This is of keen interest to high-level policy makers in DoD who manage DoD’s budget and requests for funding.

. . .

That’s all for today.  In the next few days, I’ll take a bit more of an in-depth look at what we know about the F-35’s program costs  and production.  I’ll also do a bit of “what if” to project what might happen if (as is virtually certain to occur based on recent past history) the number currently planned to be produced is reduced due to lack of funding.

Category: Military issues