Budgeting for Results

Marvin Sambur, former assistant secretary of the Air Force for acquisition and currently a professor at the University of Maryland, wrote an interesting column about cost overruns and budget issues with defense acquisition programs.

Federal Times.com, March 16, 2009:

…According to DoD rules, before issuing a request for proposal, the services must budget the estimated cost of the program. The estimate process is meticulous, using historical data and managed by a group of costing experts. However, once the winning bid is selected, the service estimate must be replaced by the winning bid number. Since lowest cost is a key factor in determining the winner, all bidders tend to be optimistic in their cost projections. Therefore, the winning number is often too low and cost overruns prevail, when in fact, the original DoD estimates are generally within 3 percent of the final cost…

Mr. Sambur goes on to discuss several rules of budgeting:

…Rule 1. Budgets for program execution should be based on the greater of the program cost estimated by the service or that of the winning bid.

Adherence to Rule 1 prevents the vicious circle that erodes the acquisition process. Each service’s acquisition budget is composed of the summation of the existing programs plus the estimated cost for new programs that will be awarded in the fiscal year. We know from past statistics that these existing programs will likely overrun because the actual cost has been underestimated…

…Rule 2. The winning bidder’s feet must be held to the fire based upon the commitments in his proposal. If the contractor overruns, his future bids should be penalized by adding his overrun percentage to his submitted bid cost. The award fee (if any) should be based upon underruns to the budget determined by Rule 1…

Why can’t DoD hold contractors accountable for their costs? Once the proposal is accepted, this creates the contract. The contractor agrees to provide their solution at the given price proposed. So why has this become so problematic? Several factors are to blame.

First, the government often changes the requirements after contract award, requiring contract modifications and budget overruns. Requirements need to be baselined at contract award and properly managed. Although needs may change, these changes should be carefully reviewed and only approved after a thorough review of impacts on cost, schedule, and performance and by formal channels for such reviews and change requests.

Second, program offices need to ensure proper oversight and budget discipline are integral to effective management of their respective programs. Contractors should be held responsible for ensuring proper cost and program management after contract award, but these important tasks should also be included in their proposal and subsequent contract to hold them accountable.

Third, government personnel, specifically Contracting Officers and Contracting Officer Technical Representatives or COTRs, need adequate training in program management and budget analysis. This includes training in Earned Value Management to ensure cost, schedule, and performance objectives are obtained.

Only through a concerted effort of ensuring accountability and performance will the Government be able to reverse the trend of cost overruns that almost seem inevitable. Mr. Sambur’s common sense approach should be part of any comprehensive acquisition reform discussion.