Article from National Defense Magazine, January 2009, by Sandra I. Erwin
A report by the Government Accountability Office last year stirred up a scandal of sorts as it meticulously documented that the Pentagon’s 95 largest weapon systems were nearly $300 billion over budget.
Now, another study by a top accounting firm not only confirms GAO’s dire scenario but actually predicts things will get worse.
Deloitte Consulting LLP conducted an extensive analysis of major defense acquisition programs using cost and unit data that was published in the Defense Department’s selected acquisition reports going back to the early 1990s. The data show that during the past 15 years the cost-overruns have steadily worsened.
“At the current pace, unless game changing mitigations are implemented to address the root causes, the analysis forecasts that in 10 years the average cost overrun may exceed 46 percent, up from 26 percent today,” says the Deloitte study. The analysis of the major programs cost data estimates that cost overruns are increasing by an average of 1.86 percentage points per year.
In a survey that Deloitte conducted to support this study, 43.6 percent of participating government and industry executives said that they believe that aerospace and defense program execution problems are at least as serious as the current crises in housing and banking.
Technical complexity accounts for an ever-increasing percentage of weapons’ cost overruns, according to Deloitte. In 2007, technical complexity on average produced an 8.7 percent overrun relative to the baseline budget. “Today’s programs often include sophisticated software and other advanced technologies that deliver greater functionality, but require a much higher level of integration and interoperability,” the study said.
Talent shortage also contributes to rising costs, said Deloitte. Analysts see a “hollowing out” of core talent in defense contractors, NASA and the Defense Department. “The talent shortage in systems engineering is particularly acute, contributing to widespread quality and budget problems,” said the study. “This is true both for buyers and suppliers.”
One of the biggest problems that Deloitte identified is a flawed funding process that is based on unrealistic cost estimates. “Most programs are funded and launched while there is still significant uncertainty about everything from systems and technologies to integration, interoperability, and supply chain requirements,” said the study. “This lack of certainty and knowledge makes it difficult or impossible to make informed funding decisions, which often leads to cost overruns and schedule delays.”
