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Document created: 14 October 2003
Air University Review,
November-December 1973
The cost of growth of military hardware is increasingly the subject of national debate. Critics of the Department of Defense cite massive cost overruns on major weapons programs, usually aircraft, as evidence of mismanagement and waste. Regardless of why military weapons costs have gone up, the result is that we are faced with buying increasingly expensive weapons with a defense budget that is actually declining in relation to the gross national product and total federal budget.
It is important to understand how much military aircraft costs have risen
when examining this subject. Obviously, one cannot compare the cost of a
50,000-pound F-111 to that of a 10,000-pound World War II fighter-bomber on any
meaningful basis. The current airplane is larger and heavier, and for
those reasons alone it should cost more. Also, the cost of factory labor during
World War II was about one-fourth the cost of labor today. To get an accurate
view of cost change, we should compare cost per pound in constant-value dollars
based on factory labor pay rates. The cost per pound should be based on empty
weight, since this is a truer reflection of the materials and labor that went
into the airplane. Cost per pound is also a good measure of the price of other
manufactured products, such as automobiles, civil aircraft, and appliances.l
Therefore, instead of comparing the $60,000 cost of the World War II P-51 to the $7,500,000 cost of the new F-15, we should compare them on the basis of cost per pound in constant-value dollars. The comparison then becomes approximately $36 per pound for the P-51 to about $290 per pound for the F-15. Even these numbers are not precise, since there are other variables like production rate, amount of government-furnished equipment, labor productivity, extent of avionics, etc. Granted the imprecision of any set of cost numbers, the essential fact remains: aircraft cost growth is impressively large. We are currently paying eight times the cost per pound for fighter aircraft that we did in the 1940s. We are paying four or five times as much as we did in the 1950s and just under twice what we paid in the 1960s. These are production costs. Development costs have grown even more.
The cost growth has some important but subtle effects that can be likened to a circle. As costs increase, we can afford to develop fewer new airplanes. This means that those we now have must stay in the inventory longer. When we eventually do have to buy a new airplane, it represents a greater technological change. This change is made by design teams that have had less opportunity to gain experience in developing airplanes since fewer airplanes are being developed. The result is more development problems causing higher costs, and the circle continues.
Evidence that the circle effect exists can be seen in the reduced number of airplane types being developed (Figure 1), the increasing cost of airplanes (Figure 2), the increasing length of time aircraft remain operational (B-52, F-100, F-4, etc.), and the well-publicized technical problems in some of the airplane development programs in the recent past.
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But costs for other things have increased in recent years, too, so perhaps military airplane cost growth is no greater than that of other products. Unfortunately, it is much greater. Automobiles have actually declined in cost per pound in constant-value dollars. Commercial transport aircraft costs have increased only one-sixth as much as fighter aircraft, as indicated in Figure 2. Some consumer items, such as appliances and electronic devices, have declined in unit cost in spite of inflation.
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The cost growth of military airplanes is most often attributed to the advanced technology required to produce them. Although advanced technology is a major factor in cost growth, it tends to be used as an only excuse for increases in cost. Overall, technology has driven costs down instead of up. This is reflected in our increased personal buying power, which is keeping ahead of inflation. Nearly every product is superior to its equivalent of ten years ago and requires fewer man-hours of work to purchase because technological advances are applied both to the products themselves and to the means of developing and producing them. We have every right to expect that a new airplane developed today will be superior in nearly every way to one produced a few years ago. It will be made on better machines, made of better materials, have better facilities to test its components, and have a larger base of scientific knowledge available to its designers. These factors should tend to drive the costs down.
On the other hand we insist on additional capabilities or accessories that earlier airplanes did not have, and they obviously affect cost. But there is another, less obvious factor that has an even greater impact. We know from recent experience that we are going to have to keep a new airplane in the inventory for a long time, since new airplane programs are increasingly infrequent. In order to delay the point during its life when it becomes obsolete, there is a tendency to push the state of the art to its limits. It has been estimated by experts in the industry that, when pushing the state of the art, the last two to five percent of performance doubles the cost. Not only does the cost go up but reliability tends to deteriorate, which raises total ownership cost. And such developments are often made by design groups that have little experience as a team because of the infrequency of development programs. This inexperience may lead to costly mistakes. Technology—or rather the application of technology too much toward end-item performance and not enough toward cost reduction—does have an important effect on cost increases. However, there are other important causes.
When a manufacturer plans for production, he normally establishes facilities, machines, and tooling to produce at a given rate at the lowest possible cost. Often the government plans for this optimum rate but buys at a different rate. It seems that to increase the rate beyond the optimum has little adverse effect on unit cost. This is because the fixed overhead does not increase in proportion to production rate, thus offsetting the increased costs of factory overtime or of adding more shifts.2 However, when programs are in financial difficulty, production rates are often reduced in order to reduce the rate of spending. Invariably a sharp unit cost increase results, since fixed overhead continues over a longer period of time.
Changes in requirements normally have an adverse effect on costs, too. The seemingly simple addition of a cockpit instrument can cause a major rearrangement of the instrument panel, cooling ducts, electromagnetic interference protection, etc. Tests that were once completed may need to be rerun to verify the compatibility of the new device with other installed equipment. Many of the financial difficulties of recent programs can be traced to government-imposed changes. There seems to be little sympathy from Congress or the public for this kind of cost increase.
The way we procure aircraft has evolved into a very complex,
institutionalized process. It takes more than 500 government people in several
commands to buy a major weapon system; there are hundreds of specifications3
that the contractor must comply with, and these people see to it that he does.
They must know the status of the program every step of the way. They provide
incremental approval for many of the contractor’s actions. They impose
management systems on the contractor, often more to improve their own
visibility than to improve the efficiency of the contractor’s operations. The
result of this government involvement in the development process is that much
of the contractor’s effort is spent in satisfying government people. This takes
the form of meetings, reports, briefings, movies, demonstrations, tests, etc.
While some of this is necessary, most of it does not contribute to the success
of the final product.4
It is an unfortunate characteristic of large bureaucracies that a great deal of effort is spent by some parts of the organization in answering investigations conducted by other parts. For example, the TFX hearings conducted by the Senate required thousands of Department of Defense man-hours to support. The threat of other such hearings, or of General Accounting Office or Inspector General investigations, causes protective reactions on the part of government agencies directly responsible for development and procurement of weapon systems. Protective measures ultimately result in documents, many of which are prepared by the contractor. Consequently, when an investigative agency inquires into why costs are going up, that agency is itself one of the causes.
In the last two or three years some important developments have been introduced to reverse the trends toward ever increasing costs by attacking their causes. The F-15 program is on schedule and meeting its cost objectives. Increased authority was given to the System Program Director, and streamlined lines of authority were established to eliminate at least partially the need for “defensive” documentation. In addition, the competition for selecting the prime contractor stressed technical and management approaches above other considerations, insuring that the most capable contractor would be chosen. At the subsystem level there were important hardware competitions before selecting subcontractors. Lastly, the method of contracting provides the contractor with profit incentives for keeping costs down rather than rewarding him for cost increases, as often occurred under the old “cost plus fixed fee” contracts.
The F-15 in all probability will not suffer cost overruns that have characterized recent airplane programs such as the C-5, F-111, and F-14. This is a significant accomplishment. However, the F-15 is still going to be an expensive airplane. To attempt to reverse the trend to even higher costs, the Air Force has embraced the “prototyping” concept advocated by former Deputy Secretary of Defense David Packard. The A-X, lightweight fighter, and the STOL transport programs are being conducted under the prototyping concept. Actually, this concept is not new but a return to the time prior to the 1960s when airplanes rather than paper proposals competed for production contracts. In the case of the A-X, two prototypes competed in a fly-off. The winning A-10 was selected on the basis of actual performance comparison with the A-9. The A-10 has now entered into a full-scale development program aimed at production. The costs of the A-X development program will be under $400 million, compared to the nearly one billion dollars it takes under conventional procedures to develop one airplane. The cost is substantially lower since the technical risks have been reduced by the fly-off. To date, prototyping is successful. The A-9 and A-10 in the A-X program have performed excellently, and the very low level of funding has forced the contractors to consider costs as important as any hardware performance goal.
“Design to cost” is now evolving as a philosophy that is shaping programs of all the services. Simply stated, “Cost is a design goal just like reliability, weight or performance.” Where trade-offs are required, cost is one of the key considerations. For example, if a part can be made for one-half the cost at a weight increase of ten percent, serious consideration will be given to accepting the weight increase.
Hopefully, these are steps in a new direction toward lower-cost weapons, not merely a pause during the climb toward ever increasing costs. It is interesting that the government and weapons industry appear to be rediscovering what the civilian sector of our economy has known all along: i.e., competition and the resulting cost control are necessary for success. Perhaps we can further approach the characteristics of free enterprise in the civilian market and thus begin to approach the absolutely outstanding success it has had in providing more and better goods for less relative cost.
Some of the characteristics of civilian product developments are as follows:
a. With high technology products, the producer more than the customer determines what the customer wants and needs. Based on his perception of customer wants and needs, he develops his product.
b. Products are usually evolutionary in nature. They are ordinarily developed by a design team that is experienced with the product type and in working together as a team.
c. The producer recognizes that if his costs are not kept as low as possible he will lose sales and profit.
d. The producer is unencumbered by customer requirements in determining how he will design and build his product.
e. His “reward” for failing to meet the customer’s need is loss of sales, which, if continued, results in failure of the business.
The above are some characteristics of a free enterprise, free market system. No system yet devised has matched its performance. In recent years it has been widely accepted that military weapon systems cannot possibly be procured in a free market way. The most obvious reason is that there is a single customer, the government, and this customer is very unpredictable in his needs and desire to buy. In addition, the cost of development of a weapon system is prohibitive for private risk capital.
If the risk of dollar loss from developing weapon systems that are not purchased is removed, it is likely that many companies would welcome the chance to compete in a more or less free market atmosphere. It is possible to devise a way to do this and spend no more, and perhaps less, than we now spend.
In all likelihood there is going to be a continuing need for airplanes, ships, tanks, guns, and vehicles. These items, like most serially produced, manufactured items, benefit enormously from evolutionary development. Let’s take fighter airplanes as an example of how free market characteristics might be introduced into development and procurement. Suppose five aircraft companies were competitively selected and each was provided with $50 million annually to develop prototype fighters. Each company would be required to provide the Air Force with two prototypes of a design for evaluation every two years. This is very generous funding in light of the YF-16 and YF-17 prototype programs, each of which has a prime contract cost of under $50 million for two prototypes.5 The determination of what makes a good fighter would be left primarily to the contractors. If they guessed wrong about Air Force needs, they would not get a production contract.
The prototypes would be in competition with each other and with aircraft already in the inventory. It would be the responsibility and desire of a contractor to prove that buying his airplane was more cost effective than keeping existing inventory aircraft or purchasing aircraft from his competitors. Failure to sell a new airplane would not result in financial disaster, and the unsuccessful design teams could remain intact, correct their weaknesses, and try to develop a more salable prototype.
The advantages to the Air Force would be substantial. At anyone time there would be an inventory of prototypes of differing capabilities from which to choose. Should operational needs change, there would be a strong probability that one of the prototypes would come close to meeting the new need, since the contractor’s perception of what the Air Force needs may be better than our own. (There are such examples in other high technology markets.) The contractors, if left relatively free from detailed specifications, would be more able to innovate. The successful innovations would be of great benefit to the Air Force while unsuccessful innovations would not cause cost and schedule problems experienced on recent programs.
But most important, we would develop a national resource, teams of designers with experience in developing actual flying military aircraft, as opposed to the current temporary teams characterized by massive hiring and layoffs depending upon the winning or losing of contracts.
David Packard stated recently to industry representatives, “I am convinced,
after spending three years in the Pentagon, that the [aerospace] industry is
grossly overstaffed and very inefficient by any sound management standards.” He
went on to say, “I cannot in fairness place all the blame on the industry, for
in many cases you have simply responded to what was asked for by some of the
so-called ‘experts’ in the Pentagon.”6
In the past couple of years some management innovations have been instituted in an attempt to slow or reverse the trend toward ever increasing costs. Hopefully, they will work, but they have a certain familiar “ring” to them reminiscent of cure-all systems of the recent past—concurrency, disengagement, Total Package Procurement, PERT. However, there is one important difference: competition of hardware. Only time will tell whether this is a step toward the efficiency of a more competitive, free market way of buying weapons or a timid hesitation in the march deeper into the bureaucratic mire that characterizes our present weapons acquisition process. If it is only a hesitation, the day may not be far off when Calvin Coolidge’s question, “Why not just buy one airplane and let the aviators take turns?” will be applicable.
McDonnell Douglas Corporation
Notes
1. There are exceptions where extremely high quality or light weight is an important consideration. For example, a $500 watch costs about fifty times as much per pound as a $10 watch. Spacecraft, satellites, and ICBM payload cost is much greater per pound than that of aircraft due to the premium paid for light weight. However, for normal operational aircraft, cost per pound is a good measurement tool and is used by some manufacturers as a basis for pricing.
2. Fixed overhead in this context includes housekeeping costs, such as utilities, taxes, guards, and building maintenance plus the salaries of certain personnel who are necessary as long as the items are in production but whose work is not dependent on production rate.
3. The number of Military Specifications and Standards has grown to over 60,000. In some instances the specifications have become obsolete as a result of rapid technological change; in others the specifications are excessively detailed. Sophisticated procedures are sometimes established to allow a contractor the freedom not to comply with obsolete or overly restrictive specification requirements.
4. A study by E. Gerloff, referred to in an article by Professor Albert Shapero, “Complex Defense Systems Require Good Design Teams,” Defense Management Journal July, 1972, indicates that there is little correlation between the success of a program and the specifications required by the government.
5. The total cost of each prototype program will he approximately $100 million when government-furnished engines and equipment and one year of flight testing are added to the prime contract cost.
6. From an address by David Packard at an Aerospace Industry conference the week of 4 December 1972.
Major Frederick T. Stark (M.S., Rensselaer Polytechnic Institute) is Chief of F-15 Engineering, Air Force Plant Representative Office, McDonnell Douglas Corporation, St. Louis. Most of his service has been in major weapon system R&D programs. He was in financial management and flight test in the Minuteman System Program Office (SPO) and has served as Flight Control System Project Manager and as a Configuration Control Board Chairman in the F-111 SPO. Major Stark was with the initial deployment of F-111s to Thailand in 1968.
Disclaimer
The conclusions and opinions expressed in this
document are those of the author cultivated in the freedom of expression,
academic environment of Air University. They do not reflect the official
position of the U.S. Government, Department of Defense, the United States Air
Force or the Air University.
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