Cost Estimates and Affordability
Affordability is the degree to which an acquisition program’s funding requirements fit within the agency’s overall projected budget. Affordability analyses are not solely the responsibility of cost estimators; an affordability analysis involves agency leadership and its planning, requirements, and acquisition communities. However, a program’s affordability depends a great deal on the quality of its cost estimate. By following the 12-step estimating process, estimators help agencies to ensure that they develop and present realistic cost estimates, enabling management to make informed decisions about whether the program is affordable within the portfolio plan.
Decision-makers should consider affordability periodically throughout a program’s life cycle. It is important to know the estimate of the program’s cost at particular intervals in order to ensure that adequate funding is available to execute the program according to plan. Affordability analysis demonstrates whether a program’s acquisition strategy has an adequate budget. It also shows if the agency’s overall portfolio is affordable or if programs within the portfolio should be cancelled or restructured (see figure 4).
Figure 4: An Affordability Assessment
In figure 4, the costs of seven programs (A-G) are plotted against time. The benefit of plotting the programs together gives decision-makers a high-level analysis of their portfolio and the resources they will need in the future. In this example, it appears that funding needs are generally satisfied in fiscal years 1-12, but after fiscal year 12, an increasing need for more funding is readily apparent. This is commonly referred to as a bow wave, meaning there is an impending increase in the requirement for additional funds. Availability of these funds will determine the status of the programs such as continuation as planned, cancellation, or restructuring to fit within a revised program budget. Because the programs must compete against one another for limited funds, it is considered a best practice to perform the affordability assessment at the agency level, not program by program, so that management can make agency-wide informed decisions about tradeoffs. Case study 5 discusses affordability concerns that must be considered at both the program level and agency level, and considerations that management must make when balancing priorities.
The Joint Strike Fighter (JSF) is the Department of Defense’s (DOD) most costly and ambitious aircraft acquisition, seeking to simultaneously develop and field three aircraft variants for the Air Force, Navy, Marine Corps, and eight international partners. The JSF is critical for recapitalizing tactical air forces and will require a long-term commitment to very large annual funding outlays.
Affordability—both in terms of the investment costs to acquire the JSF and the continuing costs to operate and maintain it over the life cycle—is at risk. Rising aircraft prices erode buying power and make it difficult for the United States and its allies to buy as many aircraft as planned. Quantity reductions could drive additional price increases for future aircraft. Further, cost forecasts have increased as the program matures and more data becomes available. Current JSF life cycle cost estimates are considerably higher than the legacy aircraft it will replace; this has major implications for future demands on military operating and support budgets and plans for recapitalizing fighter forces.
The JSF acquisition demands an unprecedented share of DOD’s future investment funding - an annual average of almost $11 billion for the next two decades. The program’s size and priority is such that its cost overruns and extended schedules are either borne by funding cuts to other programs or else drive increases in the top line of defense spending. Until now, JSF problems have been addressed either with more time and money or by deferring aircraft procurement to be borne by future years’ budgets.
The JSF will have to annually compete with other defense and nondefense priorities for the shrinking discretionary federal dollar. Maintaining senior leadership’s increased focus on program results, holding government and contractors accountable for improving performance, and bringing a more assertive, aggressive management approach for the JSF to “live within its means” could help effectively manage growth in the program and limit the consequences on other programs in the portfolio. Controlling JSF future cost growth would minimize funding disruption and help stabilize the defense acquisition portfolio by providing more certainty to financial projections and by facilitating the allocation of remaining budget authority to other defense modernization programs.
While approaches may vary, agencies should consider extending their affordability assessments several years beyond the budgeting time frame to examine long term funding needs of their portfolios. For example, DOD policy is for affordability analyses to address the life cycle of the planned programs in the portfolio, nominally a 30 to 40 year period.9
Thus, program LCCEs give decision-makers important information in that not all programs require the same type of funding profile. Different commodities require different phasing of funding and are affected by different cost drivers.
While some programs may not cost as much to develop—for example, development costs in space programs differ from those costs for ships and aircraft—they may require more funding for production and operating and maintenance in the out-years relative to other programs. Line graphs or sand charts like those in figure 4 are often used to show how a program fits within the organizational plan, both overall and by the program’s individual components. These types of charts allow decision-makers to determine how and if the program fits within the overall budget. It is therefore important for LCCEs to be both realistic and timely so that they are available to decision-makers as early as possible. Case study 6 demonstrates the importance of realistic estimates to enable program planning for portfolio affordability.
Case Study 6: Importance of Realistic LCCEs to inform program and portfolio planning, from Information Technology, GAO-17-281
Information Technology (IT) plays a critical role in the Housing and Urban Development’s (HUD) ability to perform its business functions, which involve the management of billions of dollars to carry out its mission. HUD’s IT budget covers two categories of spending: (1) operations and maintenance of existing systems, and (2) new investments for modernization (often referred to as development, modernization, and enhancement). Operations and maintenance funds refer to the expenses required for general upkeep of the department’s existing systems. Funds for modernization support projects and activities that lead to new systems, or changes and modifications to existing systems that substantively improve capability or performance to better support HUD’s mission and business functions.
The majority of HUD’s modernization budget request for fiscal year 2017 was identified as supporting four modernization efforts, which were in various phases of planning and development. GAO determined that the cost estimates HUD developed for the four selected IT investments were unreliable. The significant weaknesses in the cost estimates for the selected investments were largely attributed to the department’s lack of guidance for developing reliable cost estimates, resulting in cost estimating practices that were decentralized and inconsistent across the department.
Although all of the estimates included costs for specific elements and phases of the investments, none of the estimates included both government and contractor costs of the investment over the life cycle. Because they were not reliable, the IT cost estimates lacked a sound basis for informing the department’s investment and budgetary decisions.
DOD, Operation of the Defense Acquisition System, DOD Instruction 5000.02T. Washington, D.C.: January 23, 2020.↩︎