Contract Management Lessons From the Performance of the Defense Acquisition System 2015 Report Summary

By Concord Editorial   Mar 4, 2016
Accelerate Deals with Contacts Guide

The 2015 “Performance of Defense Acquisition System” report compiled by the Department of Defense provides a summary of The Department of Defense’s Major Defense Acquisition Programs and their growth between 1997 and 2014.  As one analyzes the data compiled, however, it is important to remember that the data displayed does not represent the effectiveness of subsequent oversight or major program changes that may occur during execution of oversight.  This being said, the exact percentage of growth of the DoDs specific programs may be discussed, but will not be categorically listed in this article.  Also, due to the extensiveness of the original document, this summary will be split into multiple articles, with this article focusing specifically on cost and schedule performance of these programs and their effect on Contract Management.

Cost and Schedule Performance:

The more recent data compiled in this document indicates that Major Defense Acquisition Programs (MDAPs) have shown great improvements on the program and contract level.  While the many external influences that affect these programs raise some serious concerns, funding, price, cost, and schedule control all seem to indicate steady improvement.

One significant area in which improvement seems to be made is the number of Nunn-McCurdy breaches over the years.  The general trend has been of a decrease in these breaches:  2005 had 16 breaches, 2010 had eight breaches, and 2013 and 2014 had a combined total of six breaches (four in 2013 and two in 2014).  These Nunn-McCurdy breaches represent an increase in unit-cost beyond what was originally predicted.  This allows congress to formally reevaluate the various programs, which will force the programs to undergo re-certification.

While the trend is less breaches, there still are certain problems that need to be addressed.  One area that greatly increased the cost of MDAPs was working with vendors.  The introduction of multiple vendors caused a spike integration costs that in turn reduced quantity. As a result, the DoD has enacted initiatives in order to raise the cost consciousness of all branches of the DoD.  These initiatives include extensive training for DoD staff and increased requirements for hopeful recruits.

The DoD also cites one of the most frequent causes of breaches as being poor management. This umbrella statement “poor management” is broken down into four subcategories: system engineering, inadequate incentives, limited situational awareness, and failure to act on pertinent information.  The various solutions used to correct the problems created by these subcategories are not discussed in detail and likewise will be summarized in limited detail here.

In order to combat problems with system engineering, the DoD has put into place policy that will improve their system management practices. The specific policies can be viewed at DoDI 5000.02.  Workforce training and the use of metrics were also used. When studying the effects of incentives, contracts were pointed to as a solution. Formulaic incentives contract types were seen to motivate cost control almost effectively as FFPs are able to ensure that the government gets a low price in negotiations.  In order to address the concerns about both limited knowledge and managers not acting on the knowledge they do possess, the DoD has enacted the same solution: to make more readily available data and their analysis.  The analysis in particular proves effective for helping managers to act in cost-effective ways.

Contractual Spending:

Contractual spending is an important aspect of this report because contract-level measures often provide the first signs of how DoD contracts with industry partners will perform. These contract-level matters are almost always seen at aggregate program levels. It is also easy to remember the importance of contracts when one remembers that it is through contracts that must of the execution of DoD’s MDAP’s are run. With this in mind, we will move onto specific details of how DoD’s contracts have been working over the past few years.

One of the first statistics to know is that 2016 base President’s Budget (PB) requested budget totals $209.8 billion for Operations and Maintenance (O&M). This is important in a discussion of contractual spending because a large percentage of the O&M budget is to be spent on contracts for goods and services. These types of future budgets often have a large margin of error, but they do show general patters of budgetary ups and downs. For specific details on all of the DoD’s contract obligations that total at least $3000 information can be found at The Federal Procurement Data System—Next Generation, an organization that records product service codes used for tracking federal contracts.

The DoD categorizes their contractual spending between products and services. Statistics show that in 2014, 55% of DoD’s contractual spending went to services while the remaining 45% was in products (these numbers do have some debate as Research Development Test and Evaluation [RDT&E] can be considered as a service or as the product that is being developed).

A breakdown of these contractual expenditures between 2008 and 2014 shows some obvious trends. While at the beginning of this timeframe, in 2008, vehicle spending (aircraft, watercraft, and land vehicles) was by far the biggest expenditure totaling over $70 billion with that number decreasing drastically to under $50 billion in 2014. Vehicle spending remains the largest product expenditure only rivaled by sustainment spending.

When contractual service spending is broken down, knowledge based services has remained the highest priced category since 2009.  In 2008 RDT&E was the highest priced category at just over $55 billion.

The performance of all of this spending is determined by how efficiently these contracts are acquiring value compared to the costs incurred by taxpayers. Because most of this analysis is simply statistical, it will not be deeply covered in this article. Suffice it to say that through general trends in available statistics and through institutional outcomes that the DoD is incessantly trying to improve their policies to increase positive outcomes.

Contract-level Trends:

As we approach trend analysis, there are three points which should be noted:

  1. Only major contractors were used for all of the currently active MDAP’s.
  2. Inflation has already been calculated.
  3. Outliers have already been removed through multiple statistical tests.

With these points in mind, one can approach the statistics provided with confidence.  The first statistic in this analysis is that of price growth.  This statistic indicates how much an institution is spending on research and development, but does not necessarily reflect how successful the research will prove.  This being said, the contracts which have been started since 2009 have generated price reduction more generally than contracts which began before that year.  It is likely that the price reductions, were caused by the downward trend in cost-over-target.

In addition to a downward trend being seen in cost-over-target, there was a significant downward trend in contract cycle time. This is a positive trend because this allows the DoD’s operational capabilities to function at a much faster rate and allows for analysis in a much more timely manner. The problem with these shortened cycles, however, is that they could imply that the DoD is relying more heavily on less-complex systems, which could weaken their technical superiority.

There was no statistically significant results for either change in margins or work-content growth.

Prime Contractor Analysis:

Like the analysis of contract-level trends, the DoD has opted to remove outliers from their analysis of prime contractors.  The analysis provided is of course independent of work-content growth, focusing instead on cost growth.

Analyzing the performance of prime contractors proves difficult because of the great differences in cost-over-target provided by each contractor.  One big reason for this due to these contractors often use bidding strategies that do not reflect an unbiased estimates of project cost.

As far as the performance of these prime contractors goes, Lockheed did consistently have the highest cost-over-target no matter what percentile of contract was being analyzed.  On the other end of the spectrum, Huntington-Ingalls had, consistently the lowest cost-over-target.

When cost-over-target is compared with schedule growth rates, it seems that the higher cost-over-target rates were being translated into higher schedule growth rates. This is seen when Lockheed had very high schedule growth, the second highest of all of the prime contractors who were being considered.  Likewise the schedule growth of Huntington-Ingalls was very small.  Raytheon, however, had very intermediate cost-over-target, but had significantly large schedule growth, higher even than Lockheed.  This anomaly is likely what placed Raytheon firmly in DoD’s top tier of superior suppliers.


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