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II. Decreased use of military specifications ($ billions)

O Elimination of requirement for con-
tractors to comply with MILSPECS.
Estimated l percent saving, based on -
conservative OSD Task Force estimate. $0. 7010

O Increased use of commercial hardware
and equipment, and industry standards
rather than MILSPEC requirements.
Estimated .5 percent saving, based on
research by the Aerospace Industries

Association. - $0.3505 TOTAL - $l. 0515 ToTAL (1 + II) - 3.3648

We estimate that it may cost as much as $100 million annually to provide for joint service development of military hardware or software having potential applicability to multiple weapons systems.

Assuming that savings in the first year would be 33.3 percent and 66.7 percent in the second year before the entire $3,364.8 million in possible savings is reached, the savings (with a lo percent inflation factor) would be:

($ millions)

Savings Implementation Cost Total First year $l, l.20.5 ($l.00.0) $1,020. 5 Second year 2,468.8 (ll.0.0) 2,358. 8 Third year 4,071.4 (l2l. 0) 3,950. 4

Three-year total $7,660.7 ($331,0] $7.329.7

Implementation

The Secretary of Defense should direct the increased use of common components and the decreased use of special military standards and specifications as discussed above. He should also ask Congress to appropriate the funds to provide seed money for joint service projects.

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The Department of Defense (DOD) should install selfdisciplinary limits on the number of new weapons programs started each year. Before a new start is approved, an estimate should be made of the projected cost of that new Weapons system through production. DOD should then consider the impact of that incremental cost on the overall acquisition process, in view of the limited funds that would be available for that new system and other major systems already being developed or produced. Limits on new starts would ensure that there are sufficient funds to carry out all weapons programs economically and efficiently.

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$l.ll45 billion Potential Savings: Limiting the number (annually after of development programs should result full implemen- in annual research, development, test tation) and evaluation (RDT&E) savings of at

least $l.ll15 billion (in then-year
dollars) after full implementation
over a five-year period.

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Background

DOD acquisition of defense systems has repeatedly come under intense scrutiny and criticism for cost overruns, program stretch-outs and the resulting reduction in unit volumes. Adding several new start programs to an already clogged system provides overwhelming pressure on the acquisition process and results in inefficiencies as the services attempt to fund all their programs within the constraints of a fixed budget. They can accommodate the added programs only by stretching out production schedules and reducing unit volumes for existing programs.

Methodology .

Senior officials in the Office of the Secretary of Defense (OSD) responsible for the acquisition process were interviewed,.as were knowledgeable officials in the Office of Management and Budget (OMB) and the General Accounting Office. Interviews were also conducted with former DOD officials and other knowledgeable sources in the public and private sectors. A review was made of the most recent Selected Acquisition Reports (SARS) and DOD directives concerning program approval and funding. Relevant GAO reports and other literature pertinent to the subject were also reviewed.

findings

SARs, prepared quarterly, summarize status and cost data for major defense systems which have been approved for full-scale development. Major systems are designated by th Secretary of Defense and presently include those requiring $200 million or more in RDT&E funding (fiscal year 1980 dollars) or $1 billion or more in production funding (FY 1980 dollars), or both. Programs of this size usually number no more than 50. The June 30, 1982, SAR reported on 39 programs with projected total acquisition costs of $450 billion.

The list of programs on the way to review and approval for full-scale development and production is lengthy. In the last two years, the Defense Resources Board (DRB) recom mended approval of 27 major systems new starts, and the Deputy Secretary of Defense approved 28, one more than requested. This is only a portion, perhaps as low as 30 percent to 40 percent, of the total number of new programs in the pipeline working their way toward approval for entry into full-scale development and eventually into production.

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The problem is that there are too many programs already in the production cycle to permit funding at efficient rates, i.e., that rate which provides the lowest possible total program cost consistent with the need and capability of the service to deploy the system.

DOD Directive 5000. l, Major System Acquisitions, and DOD Instruction 5000. 2, Major System Acquisition Procedures, set out the process that major programs must go through to be approved and funded as new starts. The data required for each subsequent milestone decision are also specified.

The Under Secretary of Defense for Research and Engineering, as the designated Defense Acquisition Executive, is responsible for managing the overall acquisition system and for ensuring compliance with the directives. The Secretary of Defense has the ultimate approval authority for the decision to start a new major weapon system into the concept exploration phase and for subsequent milestone decisions, to proceed to Demonstration and Validation (Milestone I), Full-Scale Development (Milestone II), and Production and Deployment (Milestone III). At these major decision points, the programs are initially reviewed by the Defense Resources Board - new starts or the Defense Sciences Acquisition Review Council - Milestones. The present Secretary has delegated his authority in this regard to the Deputy Secretary.

Assuming that the need for a new system has been demonstrated within the service and to OSD, then the principal issue facing DOD management is affordability. DOD policy defines proof of affordability at the time of approval of a new start as follows:

System planning shall be based on adequate funding
of program cost. A program normally shall not
proceed into concept exploration or demonstration
and validation unless sufficient resources are or
can be programmed for those phases (emphasis
added).

The point is that DOD policy does not require that a major system be demonstrated to be affordable through the full-scale development and production phases in order to obtain approval as a new start. It need only be shown to be affordable through the early development phases.

The problem is that the early development phases have the lowest financial requirements and are easily funded. Therefore, far more programs are started each year than can be carried through the full-scale development and production phases. Because it is almost impossible to terminate these

programs after they are started, the result is that too many programs end up competing for limited production funding. This, in turn, is what leads to inefficient production quantities, program stretchouts, and cost overruns.

In reality, the focus in approving new starts is on the next budget year. At the time new starts are approved, the DRB is only presented the limited funding information contained in the Five-Year Defense Plan. However, much of this information is incomplete and no. out-year data are made available . .

While these difficulties are recognized, it is noted that the Extended Planning Annex, prepared as part of the planning process, extends cost projections out five years beyond the Five-Year Defense Plan. Although these out-year projections are only rough estimates, they could be used to project the cumulative financial impact on the DOD budget of approving far more programs than can ever be funded at economic production rates. In any event, the use of such estimates in early affordability reviews would be far better than the current practice of making no attempts at long range affordability analysis.

The pressures to start new programs are enormous. Prior to DRB approval, the program represents a potential "market", for all contractors who may aspire to compete for the program. As such, it also represents to Senators and Representatives a potential source of jobs and investment for their s :ates and districts. For the sponsoring service and cognizant development command, it represents a response to a projected threat and a means to assure continuity of the development center. To those in the development centers, it means job security and career challenge. This represents a large, albeit unorganized, constituency pressing for the approval of new starts and their continuity thereafter.

These pressures do not moderate once a program has passed through the concept exploration phase and the demonstration and validation phase, and has moved to full-scale development. When a contractor has been awarded a major program and the subcontractor network is established, resistance to program cancellations and cutbacks stiffens. Senators and Representatives must aggressively support their affected constituents. The services become committed to their programs and are naturally resistant to cutbacks and cancellations. In fact, it is well known that the system will accept substantial program stretchouts and cutbacks to keep a program alive, even though the production rates become inefficient, volumes become marginal in terms

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