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Cost growth in weapon systems, a vexing problem in defense procurement for many years, has assumed new importance with the Administration's proposals to increase defense investment. In recent years the Congress has debated the sources of weapon cost growth and has enacted reporting requirements designed to control it. This report, prepared at the request of the Senate Committee on Governmental Affairs, summarizes existing studies of the reasons for cost growth and proposals for curbing it. In accordance with CBO's mandate to provide objective analysis, the report contains no recommendations.

This report was prepared by Neil M. Singer of the National Security and International Affairs Division of the Congressional Budget Office, under the general supervision of Robert F. Hale and John J. Hamre. Larry Forest of the National Security Division provided analysis of some of the Administration's proposals to improve the efficiency of defense procurement. Francis Pierce edited the paper and Jean Haggis prepared the report for publication.

October 1982
 
 

Introduction and Summary

The dramatic expansion of defense procurement proposed by the Administration has focused Congressional attention on the persistent problem of weapon system cost growth. Although this is not a new problem, its visibility has been heightened by the high inflation rates of the late 1970s and 1980s, which were greater for many types of defense systems than for the economy as a whole. Concern has been exacerbated by the size of the prospective procurement increases and consequent fears of "overheating" in the defense sector.

Cost growth has been studied repeatedly in the past, as part of the more general problem of estimating weapon costs and improving the acquisition process. While many studies have been limited to particular weapons or classes of systems (for example, air-to-air missiles), several have attempted to identify the sources of cost growth inherent in the acquisition process itself. This report reviews eight major studies of the latter category, summarizing and extending their findings in order to help the Congress identify systems in which cost growth is likely and to find ways to limit future weapon cost growth.

Certain broad patterns may be seen in weapon system cost growth. Cost growth and schedule slippage appear to be most likely in weapons that experience development problems, in Army systems, missiles, and in programs with small overall cost. Inflation-adjusted weapon costs grew at rates averaging 5-6 percent annually during the 1970s. These overall patterns seem to explain only a small portion of the cost growth experienced by individual systems, however. CBO offers these findings merely as guides in the management and oversight of weapon acquisition.

Despite their lack of conclusive analysis of the causes of cost growth, the studies examined suggest a number of changes that the Congress might consider making in the acquisition process to help curb weapon cost growth. It might:

• Limit changes in annual funding for individual systems, to avoid year-to-year changes in program schedules and quantities.
  
  
• Consider changing budgetary procedures in order to eliminate incentives for "bidding in."
  
  
• Encourage competition through actions such as mandating reports on savings and making statutory changes.
  
  
• Change the Selected Acquisition Reports, the principal source of data on weapons systems acquisition, to include the reporting of reasons for cost growth.
  
  
• Require an annual report on how economical production rates affect procurement costs.
  
  
• Encourage multiyear contracting where savings, realistically estimated, are available.
  
  
• Make more use of performance testing.

This document is available in its entirety in PDF.