Cost Overruns
A gracious and concerned reader directed me to this story from National Defense Magazine (at the National Defense Industrial Association).
It gently addresses an issue that my contracting teacher took on in a far more blunt way: Contracts routinely exceed their estimated value. He warned correctly that contracts, especially more open-ended indefinite-delivery deals, could cost three or four times as much.
He also suggested that both contractors and government procurement officials knew about and downplayed the likely increases in order to launch their projects. We'll leave that for another day, except to say that I have seen and documented such cases myself.
At any rate, the National Defense magazine piece addresses the Nunn-McCurdy amendment to the Defense Appropriations Authorization legislation for 1982, which called for the shutdown of weapons programs that expanded by more than 25 percent over initial investments.
But rarely are programs actually shut down as intended.
"Congress normally regards the explanations from the secretary of defense as acceptable. Nonetheless, the prospect of a Nunn-McCurdy breach is greatly feared at the Pentagon," the article says.
Cost overruns are so common that many people seem to take them for granted. Here are some examples cited in the piece:
"A case in point is the Joint Strike Fighter. It was supposed to cost $200 billion for 2,900 aircraft. The revised estimate is $225 billion for 2,500 aircraft. The Army had said its Future Combat Systems would cost $86 billion for 15 brigades, but later upped the price tag to $130 billion.
"The Air Force space-based infrared missile-warning satellites were expected to cost $4 billion for five spacecraft, but ballooned to $10 billion for just three satellites. The Marines had budgeted $8.7 billion to buy 1,025 new amphibious assault vehicles, but the latest plan calls for $13.5 billion to buy only half that number. The Navy's littoral combat ship, which was hailed as a trailblazer for affordable ships, rose from $1.4 billion for six vessels to $1.8 billion for just four ships."
By Robert O'Harrow |
January 31, 2008; 7:00 AM ET
cost overruns
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Posted by: JIMMYG | January 31, 2008 11:18 AM
We need a President and Congress to start enforceing the rules and regulations that are in the law. If a couple of these projects were stopped cold then maybe the bids would be more realistic. If Nun-Mccurdy is inforced the government should also get the money spent returned in full.
Posted by: James Vance | January 31, 2008 11:25 AM
Gee, I wonder if it is not uncommon for defense officials not to report a Nunn-McCurdy breach. Hmm, now why would they not? What we need is a "for-real" investigative agency to go into the acquisition world and investigate the use of the taxpayers' dollars in purchasing systems. GAO just doesn't get it done and they have no enforcement powers. They only "recommend". When "forced" to find a guilty party, they only hit the tip of the iceberg. They don't get the ones below that conspired along with the others. That is not going to get the crooks to come out of their rat holes. All should be held accountable. Maybe then we can have a half-way straight acquisition system. Put the fear of a Federal Court into them and have a thorough investigative agency review each major weapon system program before it goes into full rate production.
Posted by: nicholjo@knology.net | January 31, 2008 11:42 AM
This overrun problem is as you describe. The UCC does not apply to Federal procurement. Adjust the FAR to minimize overruns by cancelling the contract and refusing future delivery.
In war time or other national emergency, the offending contractor would work under government receivership until the contract items are delivered.
Both contractor and Federal Procurement official involved in the cost overrun should receive a tick mark, so future bids from that contractor are written to address the reasons for the overrun.
The federal procurement official in lieu of firing would be required to sign a contract that he/she may not work for Overrunning Corporation in any position, nor may any member of his nuclear family for ten years including children's spouses.
The percentage of the overrun must be deducted from the "profit" margin paid to the contractor.
Two overruns within any 5 year period should invoke ineligibility to bid for a specified time on any government procurement. The federal contracting officer should receive instant demotion with a 3-strikes-you-are-out rule.
One overrun, if the rules were enforced, would dramatically reduce the practice of "ripping off" the Government AKA Taxpayers and encourage a dramatic reduction of single-sourcing.
Federal procurement officials (including military) must be forbidden to "retire" into a jobs with government contractors in their area of service, i.e. weapons, ship-building. FFRDCs, non-profits, educational institutions would be exempt from the rule.
All Americans pay for this greed and deceit. We cannot allow it to continue.
Posted by: Elizabeth | January 31, 2008 12:15 PM
Ripping off the government is not the problem. I believe the American taxpayer funds the government. Corruption, not under estimating is the problem, and it is at ALL levels.
Posted by: John Kinder | January 31, 2008 1:38 PM
properly monitored and held accountable, any program will run according to or under budget.
providing incentives or disincentives for timely delivery of products or services ordered should be a mainstay of how government is allowed to do business.
our representatives accept lobbying monies from these businesses, dole out access to contractual labor and watch as costs spiral way beyond lobbying monies advanced
why should taxpayers pay their representatives to be paid by big businesses to double, triple or quadruple costs for which budgets and contracts are already in place.
offer incentives (more $)to properly fulfill the contracts or disincentives (less money)when any aspect of contract is not obtained.
put it in writing from the beginning. no more cost overruns, maybe someone will come in under budget.
Posted by: mssalaam@juno.com | January 31, 2008 2:44 PM
Its nice to point blame on the contractors and accuse them of being greedy, but far too many of the program overruns are caused by technology changes and changing specifications that cause development to take too long. The Nunn-McCurdy amendment was to get more realistic estimates. However, it was passed at a time when the computer revolution had just begun and the government was at the leading edge of such technology. Now the government is a follower in new technology. The problem with current estimated cost for programs is that the estimates are based on known technology and future technology is unquantifiable. Most programs are in a constant state of technology changes that adds additional costs at every step of the program. While I think that the concept under Nunn McCurdy is good, changes need to occur in the way the government procures to minimize changing specifications and to accelerate the development phase, before committing to a cost estimate.
Posted by: Charles | January 31, 2008 3:16 PM
It shouldn't be a surprise that an old-boy network, running for almost three generations now, that does not operate under usual market mechanisms in particular where suppliers COMPETE for the customer's business, devolves into a national disease. I think the problem is really deeper and larger than how the govt. runs its procurements or even the connections between the defense industry and people in government. The Cold War is over; do we really NEED all this military stuff? Almost half a $trillion per year now, not including Iraq and Afghanistan.
Posted by: Henry Browne | January 31, 2008 9:24 PM
It's easier, and oh would I love to, blame the government for this; but a large portion must fall on American business' attitudes towards government contracts.
Let's face it - when a company gets a government contract, federal, state, county makes no difference - they treat it like the gravy train. They "pad" it and milk it for all its worth. The attitude seems to be it's the government's money, not ours. This course of action is so lucrative hundreds of companies have sprouted up that do nothing but specialize in getting/padding/milking government contracts.
Although it didn't start with the Bush regime, outsourcing/contracting has greatly expanded during the "CEO president's" terms; but no CEO worth his/her golden parachute would allow this gravy train attitude in the private sector.
I propose more government work be brought back into the government to be performed by government workers AND give them bonuses for reporting waste/fraud that saves us money.
Posted by: LALA | January 31, 2008 11:53 PM
This is the military industrial complex attempting to perpetuate war on planet earth. Without responsible leadership we could be the next nation to attempt global domination. We should be feeding the hungry and educating the poor but than who would enlist to fight unjust wars?
Posted by: william in wyoming | February 1, 2008 1:18 PM
Why do we need all these new arms, anyway? We already outspend and out gun the world so many times over-plus-we don't train our troops in the basic combat skills, which is a lot more effective way to deal with dirtbags-
ASSYMETRICAL WARFARE- means "We out gun them so bad, we can't ever win!"
So let's out gun them some more-a $28 RPG 7 grenade can take out a $2.5 million Bradley-we can't win that, even if we did!
Posted by: clyde2 | February 1, 2008 3:37 PM
The innocence of these posts. Taxpayers no longer fund this government. Borrowed money carries this burden. Taxpayers fund the interest payments on these loans. The so called economy that we have going is entirely funded by loans. It will take an entire term of office for the next president to get a grip on this mess. Overruns are not the problem spending money we don't have is. Spending money that we don't take in enough tax money to ever repay. Get real and do whats right or we will be another sad story in the history books.
Posted by: so sorry | February 4, 2008 1:50 PM
Mr. O'Harrow-
Please invest in a procurement intern who can help you be more accurate in the nuances of federal procurement. To those not periperally involved with the process, you are likely seen as an expert and relied upon to know your stuff.
As I read your piece, I questioned the legitimacy of your contracting education as you incorrectly characterize indefinite-delivery contracts as being open-ended. In fact, they are implemented by task/delivery orders that provide more definitization or "close-ended".
More importantly, I seriously doubt that weapons systems are even procured using IDIQ contracts. I "think" you meant to say "cost type" contracts since they tend to shift the risk from the contractor and only require a reasonsble level of effort from the contract. I suggest you run your thoughts by an expert in the field so your facts are straight!!
Posted by: Ken | February 6, 2008 11:46 AM
A strong defense is the best offence, no matter what game is played. The issus today is do we have a strong government.
Our political structure operats under theroies of President Jacksons perspective! The same battle,with a question. Can government operate on thirty cents of every dollar. The other seventy sents, recycled by the rich and famous.
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