3.2. Affordability
Affordability Analysis is a Component leadership responsibility that should involve the Component’s programming, resource planning, requirements, intelligence, and acquisition communities. The Department has a long history of starting programs that proved to be unaffordable. The result of this practice has been costly program cancelations and dramatic reductions in inventory objectives. Thus, the purpose of Affordability Analysis is to avoid starting or continuing programs that cannot be produced and supported within reasonable expectations for future budgets. Affordability constraints for both procurement and sustainment are derived early in program planning processes. These constraints are used to ensure requirements prioritization and cost tradeoffs occur as early as possible in the program’s life cycle. Implementation of this new affordability policy is in early stages, so revisions to this guidance are likely in the future as the specific products and processes are developed.
Program life-cycle affordability is a cornerstone of DoD acquisition planning as indicated in DoD Directive 5000.01, Affordability within the Future Years Defense Program (FYDP) is also part of the Milestone Decision Authority (MDA) certification and monitoring required by section 2366b of title 10, United States Code, for Major Defense Acquisition Programs (MDAPs) at and beyond Milestone B (MS B). However, the intent of Affordability policy is to require additional affordability analysis that addresses the total life cycle of the planned program beyond the FYDP. Assessing life-cycle affordability of new and upgraded systems is crucial for long-range investment planning beyond the FYDP, establishing fiscal feasibility of the program, informing Analyses of Alternatives (AoAs), guiding requirements and engineering tradeoffs, and setting realistic program baselines to control life-cycle costs and help instill a more cost-conscious culture in the Department. Affordability analysis and management necessitates effective and ongoing communication with the requirements community on the cost and risk implications of requirements.
Section 3.2.1 describes how affordability is considered during the identification of military capability needs, and at acquisition milestone reviews. Section 3.2.2 provides parameters and analytic approaches for preparing affordability analyses. Section 3.2.3 describes affordability implementation and enforcement and Section 3.2.4 explains the Department's full-funding policy.
3.2.1. Affordability in Decision Support Systems
The Milestone Decision Authority (MDA) considers affordability at all major decision points of an acquisition program. Consideration and subsequent enforcement of affordability constraints help to ensure sufficient resources will be available to support the procurement and operation and support (O&S) of the system throughout its life cycle. The MDA also examines the realism of projected funding over the program’s life cycle, given likely DoD Component resource constraints.
Affordability analysis and constraints are not intended to produce rigid, long-term plans. Rather, they are tools to promote responsible and sustainable investment decisions by examining the likely long-range implications of today’s requirements choices and investment decisions based on reasonable projections of future force structure equipment needs—before substantial resources are committed to a program.
3.2.1.1. Affordability in JCIDS
Even before a program is approved for formal initiation into the acquisition process, affordability plays a key role in identifying capability needs as part of the Joint Capabilities Integration and Development System (JCIDS), which balances cost versus performance in establishing requirements for new acquisitions.
After the Materiel Development Decision (MDD), an Analysis of Alternatives (AoA) is initiated to examine potential materiel solutions to satisfy a capability need documented in an approved Initial Capabilities Document (ICD). Integral components of the AoA are the cost analyses of each material alternative under consideration as well as cost-effectiveness comparisons of the alternatives.
Moreover, all elements of life-cycle cost (or total ownership cost, if applicable) are documented as part of the Capability Development Document and the Capability Production Document (section 16 in both documents). To ensure the program is affordable, cost constraints are established to drive early consideration of potential tradeoffs.
3.2.1.2. Affordability Defined
Affordability is the ability to allocate resources out of a future total budget projection to individual activities. It is determined by Component leadership given priorities, values, and total resource limitations against all competing fiscal demands on the Component. Affordability goals set early cost objectives and highlight the potential need for tradeoffs within a program, and affordability caps set the level beyond which actions must be taken, such as reducing costs.
Affordability analysis and constraints are not synonymous with cost estimation and approaches for reducing costs. Constraints are determined in a top-down manner by the resources a Component can allocate for a system given inventory objectives and all other fiscal demands on the Component. Constraints then provide a threshold for procurement and sustainment costs that cannot be exceeded by the Program Manager (PM) without advanced permission of the MDA and Component leadership. On the other hand, cost estimates are generated in a bottom-up manner and forecast whether the system can be acquired under those constraints and at what level of risk. Thus, constraints are not set based on cost estimates but rather on a different calculus of whether a Component can afford the estimated costs of a system. The difference between the affordability constraints and the cost estimates indicate the levels of risk at the current requirements and quantity levels, and whether actions must be taken to prevent exceeding the constraints.
Cost control and cost reduction approaches are central to maximizing the buying power of the Department and should be considered in all phases and aspects of program management as ways to meet or beat affordability constraints. Reducing the cost of program management, RDT&E, procurement, or sustainment of a product that meets validated requirements is always of importance, independent of achieving affordability constraints; however, if those constraints cannot be met—even with aggressive cost control and reduction approaches—then technical requirements, schedule, and planned quantities are revisited, with support from the Component’s Configuration Steering Board, with any requirements trades proposed to the validation authority. If constraints still cannot be met and the Component cannot afford to raise the constraint level by lowering constraints elsewhere in their analysis and obtaining MDA approval, then the program may be cancelled.
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