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Heads Up, Supercommittee: Here’s How to Cut Billions From Overpriced Weapons

If the Department of Defense was required to do real “should-cost” studies, the historical overpricing would be obvious.

Heads Up, Supercommittee: Here’s How to Cut Billions From Overpriced Weapons

If the Department of Defense was required to do real “should-cost” studies, the historical overpricing would be obvious.

Part of the Series

Now that the supercommittee is coming down to its last few weeks, there is a scramble of lobbyists and members of Congress to stop any cuts to the Department of Defense (DoD) budget, either the already promised cuts or the larger cuts that will be triggered if the supercommittee does not reach a deal.

Each weapons system has a constituency that claims that the free world will be over as we know it if a dime is removed from their “vital” program. The Congress could, if they had the political will, enact a law that could cut each weapons program 30 percent or more by paying what a weapon “should cost,” and not, as they have for years, what a weapon “will cost.”

This isn’t new to the Pentagon. They have been fighting any attempts to do this for decades. There was a push to price weapons this way from the 1960s through to the 1980s, when the Congress did pass a bill to require that weapons be priced and monitored on how much they “should cost.” However, the Pentagon bureaucracy has done everything to kill this method, and by the mid-1990s, the requirements to use “should cost” as a method of pricing weapons had been obliterated.

Now the civilian leaders have supposedly revived “should cost” and, under their new director of defense pricing, Shay Assad, they have claimed to have finished a should-cost pricing review of the troubled Lockheed Martin’s F-35 on Halloween and are briefing the company on the results. But what the DoD leadership has called “should cost” and “will cost” don’t match what traditionally have been important industrial engineering tools to measure efficiency. They have pulled out these terms that, in the past, stood for truly measuring and holding DoD contractors accountable, and now they are using the results to make them look like they are holding the contractors’ feet to the fire. Some in the DoD leadership may not even realize the bastardization of these terms because they don’t know the real history of cost accounting in the Pentagon.

This week, I will get into the weeds and show what should-cost really is. Next week, I will examine what the substituted new should-cost is. If the DoD civilian leadership would embrace the old industrial engineering methods of should cost and the Congress would pass a bill similar to what was passed and then obliterated in the 1980s, we could be on our way to saving billions of dollars across the board without harming national security. But it won’t be easy.

For decades, the DoD has decided what each new weapon will cost by looking at what historically similar weapons “did cost” in the past. So, if you decide to buy a new fighter plane, you look at what the previous plane cost as the baseline, and then add on more for all the new advances and gadgets you plan to put on the new plane. This has been disastrous because all of the contractor’s fraud, waste and fat that were tolerated in the past plane’s costs by the ever-appeasing DoD bureaucracy now become the baseline for the new plane. This makes every generation of weapon more and more unaffordable as the waste and fraud from generations before is rolled over to the new weapon. The result is that the bloated costs are expanded exponentially and we have fewer and fewer weapons for more and more money.

This is happening right now to the F-35 program, even as Mr. Assad is briefing Lockheed on his so-called “should-cost” review, because, according to Reuters, “The Pentagon’s F-35 program office last week said that four airplanes had been cut from the proposed purchase to cover some of the $771 million in cost overruns on the first three batches of planes, reducing the planned purchase to 30 airplanes.”

More bucks and less bang has been the legacy of this did-cost/will-cost basis of pricing weapons. While I was investigating DoD weapons costs over the years, whenever I found that the DoD had paid excessively for a weapon, the DoD gave me the standard answer that if the Pentagon paid the bill for the weapon, it must have been “reasonable.” The continuing spare parts scandals that I first exposed in the 1980s are a clear example of institutional overpricing – a legacy of historical, “did-cost pricing” – which the public can easily understand. You know that it is too much to pay $435 for a claw hammer, but it is hard to know what a plane, tank or ship should cost, even though they are priced with the same pricing formulas. When the hammer cost was widely publicized and the DoD was forced to investigate, they found that the hammer was “exorbitant but legal” because of institutionalized overpricing.

This why using the industrial engineering method of “should cost” is so important in weapons pricing, in a system that is not like the competitive private market, which could naturally drive down costs with true and varied competition.

Ernest Fitzgerald, known as the granddaddy of whistleblowers because of his exposes of the C-5 cargo plane overruns in the 1960s, spent over 40 years in the DoD trying to get the Pentagon to institutionalize should-cost as the standard for the DoD. The way that you figured out what something should cost was to use work measurement, which told you what it would take to manufacture the weapon from the bottom up, instead of using the baseline of what past weapons cost. Fitzgerald describes the method in his 1989 book, The Pentagonists:

Work measurement is one of the primary instruments for determining what a manufactured article should cost. Properly performed, work measurement establishes the time it “should take” a qualified worker to perform a manufacturing operation; for complex product, the should-take times for a myriad operations must be added to arrive at an estimate. Work measurement was such a powerful cost-reduction and appraisal tool that its use was specifically outlawed by the Pentagon’s cost-estimating gurus during my first tour of duty there. At first officials didn’t understand what I was trying to do; when they did, they became outright hostile.

Industrial engineers called the raw should-take time for a given task or unit of product “normal time.” Since no one works every minute on the job, allowances are added to the normal time for personal breaks, fatigue, unavoidable minor delays, and the like. The normal time for job plus all the allowances is the “reasonable expectancy” of the time it should take to do the job, and that is called “standard time period.” The reasonably expected amount of work to be done in one chronological hour is called “standard hour of work.” … Old-fashioned, competitive business management tried to get as many standard hours of output as possible for labor hours expended. When a journeyman reached a certain stated level of output, he was “making standard.” Often he could get extra pay for exceeding a “fair day’s work” standard of output.

This sounds like a totally reasonable method to adopt, but if the DoD was required to do real should-cost studies on weapons, and if the contractors were required to supply the type of data that would allow these studies to be done, the historical overpricing would be obvious – and extremely scary for the DoD to justify. In 1983, I edited a book called “More Bucks, Less Bang: How the Pentagon Buys Ineffective Weapons.” I asked Fitzgerald to write the final chapter and to update a study in should-cost that he did in the 1970s. The result was stunning. From his chapter:

The problems we detected in the 1960s and early 1970s not only persisted but also got worse. While fired from the Pentagon, I tried to keep up with developments in weapons acquisitions. Shortly before I returned to work in the Pentagon in 1973, I testified before the Joint Economic Committee on ways to reduce and control the cost of buying weapons systems. At that time, the worst contractor I could get figures on, an electronic manufacturer, was reported by the Army to be operating at such a low efficiency level that I estimated it would cost them almost $200 per standard hour to produce their product. Translated to the private sector, this would mean that a company would have to charge $8000 for a television set that would normally sell for $400 in order to recover their costs. In 1982 I got back into the Pentagon procurement after a 14-year exile. [He was still working in the Pentagon during ten of those years, but was not allowed to get the data he needed to do should-cost reviews. He sued and, finally, in 1982, got his original job back.] At that same time the most inefficient contractor I found would have had to charge more than $100,000 for the set that cost $400 in 1973, which incidentally, still cost about $400 in the 1982 commercial market.

In the mid 1980s, I worked with a group of people, lead by Sen. Chuck Grassley (R-Iowa) and then-Congresswoman now Sen. Barbara Boxer (D-California) to pass a bill and force the Pentagon to get the necessary information from contractors to do should-cost studies. These efforts would compel the DoD to begin to use should-cost as the standard for pricing new weapons and to phase out the disastrous historical-cost pricing system.

It was a pitched battle to get this bill through both houses of Congress. Grassley and Boxer got the bill through before the industry and the Pentagon knew what hit them, and then there was a huge industry lobby effort to repeal it. Grassley and Boxer were trying to work with all parties for a compromise to save the bill from being totally overturned, but the other side did a double- cross and was unwilling to make any compromises. Each time Grassley and Boxer would make a concession, the other side would not make any, and even demanded more concessions. (Sound familiar?) Finally, when Boxer realized she was being totally rolled, she decided to take it to the House floor for a vote. Fitzgerald, with his Southern gentleman’s understatement, wrote in his book what happened next:

Donna Martin [Boxer’s staff aide] was crushed. She had worked hard and in good faith to negotiate a compromise solution, and now she had been double-crossed by the move to repeal. But as she mournfully gave me this news on the phone, I could hear Barbara Boxer, a small woman blessed with a powerful voice, in the background. She was denouncing her opponents, swearing to fight them on the floor of the House and suggesting some rule violations of their persons.

Because of all the DoD exposes and scandals in the 1980s, including the spare parts scandals, the climate was right in the House and Senate for Boxer and Grassley to prevail. It was a start to make the change from did-cost to should- cost. But the Pentagon started, from that moment, to try to squelch the reform. By 1995, the Military Standard 1567A, which required the DoD to do should-cost, was finally killed off by the industry and the military in the DoD.

When Fitzgerald retired from the Pentagon in 2006 (when he was nearly 80), the military moved in to make sure that all traces of should-cost were washed away, to cripple the industrial engineering that allows you to do the technical studies for the true should-cost and to make sure historical costs ruled. Now that Assad is claiming to do should-cost, even though it isn’t the real thing, there is a chance that the original should-cost method could be revived. I will go through all the difficulties of that prospect in next week’s column. This complicated insiders’ fight over weapons pricing may glaze over many eyes, but it is vitally important to stop this more bucks, less bang march into fiscal and military disaster. Even though he doesn’t understand the concept and is trying to keep Defense from being cut, columnist Robert Samuelson, in his October 21, 2011, column, provides statistics that are a perfect illustration of the more bucks and less bang we get from historical pricing: “In 1990, the Army had 172 combat battalions, the Navy 546 ships and the Air Force 4,355 fighters; today, those numbers are 100 battalions, 288 ships and 1,990 fighters.”

Keeping historical or “did-cost” pricing will guarantee that those numbers will continue to slip and no amount of money will be able to buy enough weapons to make a difference. Ironically, the people who want to keep throwing money at Defense and keep the status quo pricing system will guarantee more and more disarmament and take federal money away from our country’s other desperate needs. Mr. Assad, are you listening?

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