Carter spells out product spending conflicts

A top defense acquisition official has attempted to clear up confusion on how to assess costs early on in developing a product. The clarification, in a memo, was needed because two key factors to foreseeing future spending seem to conflict.

The process has two stages, wrote Ashton Carter, undersecretary of defense for acquisition, technology, and logistics, in an Aug. 24 memo.

First, defense officials first must figure out how much the Defense Department would have to pay to design a product and then keep it throughout its life cycle. It’s called the “affordability as a requirement” analysis. Based on it, officials then must make decisions on designs and various choices to keep the product affordable.

“This is also the time when spending money on efforts to reduce future costs can have the biggest payoff,” Carter wrote.

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After officials have decided to go ahead with the product, they make their “should-cost” assessment. The should-cost factor is about lowering all of DOD’s costs, wherever it makes sense and at whichever point in the process applies, Carter wrote. Officials can apply their should-cost rationale to anything they do and to any source of costs, including the costs of related services and internal government costs.

“Should-cost is focused on controlling the cost of the actual work that we are doing and expect to do,” he wrote. Those estimates also inform officials as they begin negotiations with companies.

The affordability analysis and the should-cost assumptions may seem in conflict early in the design stage of a product, he wrote, but the initial focus should be on the affordability aspect: What can DOD afford? Officials need to know if DOD’s future budgets can maintain the cost of the product. The should-cost analysis becomes central after the design phase.

“The two are compatible, but they must be balanced differently across the product life cycle,” Carter wrote.

In his memo, Carter was clearing up confusion about the two ideas that he introduced into the defense acquisition process in 2010. The two ideas have become important to defense officials as DOD’s budget tightens.