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DEFENSE

JOURNAL

Defense Acquisition Research JournaF

’•■A Publication of the^Defense Acquisition University

lm i n k mg ur se Ives

Best Practices to I
Work Smarter f

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Defense Acquisition Research Journal

A Publication of the Defense Acquisition University

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oau

Defense Acquisition University

Mr. Frank Kendall

Under Secretary of Defense for Acquisition, Technology and Logistics

Mrs. Katharina G. McFarland

Assistant Secretary of Defense for Acquisition

Dr. James McMichael

President (Acting), Defense Acquisition University

Research Advisory Board

Mr. Patrick Fitzgerald

Defense Contract Audit Agency

Mr. Richard T. Ginman

Office of Defense Procurement and
Acquisition Policy

Mr. Andre J. Gudger

Office ofDoD Small Business Programs

Dr. Nayantara Hensel

National Defense University

Mr. Brett B. Lambert

Office of DoD Manufacturing and
Industrial Base Policy

Ms. Heidi Shyu

Office of the Assistant Secretary of the
Army for Acquisition, Logistics and
Technology

Mr. James E. Thomsen

Office of the Assistant Secretary of the
Navy for Research, Development and
Acquisition

Mr. David M. Van Buren

Office of the Assistant Secretary of the Air
Force for Acquisition

Editorial Board

Dr. Larrie D. Ferreiro Dr. Mary C. Redshaw

Chairman and Executive Editor Deputy Executive Editor

Mr. Richard Altieri

Industrial College of the Armed Forces

Dr. Michelle Bailey

Defense Acquisition University

Dr. Don Birchler

Center for Naval Analyses Corporation

Mr. Kevin Buck

The MITRE Corporation

Dr. Richard Donnelly

The George Washington University

Dr. J. Ronald Fox

Harvard Business School

Dr. Jacques Gansler

University of Maryland

RADM James Greene, USN
(Ret.)

Naval Postgraduate School

Dr. Donald E. Hutto

Defense Acquisition University

Dr. Ned Kock

Texas A&MInternational University

Dr. Mike Kotzian

Defense Acquisition University

Dr. Craig Lush

Defense Acquisition University

Dr. Mark Montroll

Industrial College of the Armed Forces

Dr. Andre Murphy

Defense Acquisition University

Dr. Christopher G. Pernin

RAND Corporation

Mr. Tim Shannon

Defense Acquisition University

Dr. Richard Shipe

Industrial College of the Armed Forces

Dr. Keith Snider

Naval Postgraduate School

Dr. John Snoderly

Defense Acquisition University

Dr. David M. Tate

Institute for Defense Analyses

Dr. Trevor Taylor

Cranfield University (UK)

Prof. Jerry Vandewiele

Defense Acquisition University

Dr. J. Robert Wirthlin

Air Force Institute of Technology

Dr. Roy Wood

Defense Acquisition University

ISSN 2156-8391 (print) ISSN 2156-8405 (online)

The Defense Acquisition Research Journal, formerly the Defense Acquisition Review Journal, is published quarterly by the Defense
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DEFENSE

JOURNAL

A Publication of the Defense Acquisition University

July 2013 Vol. 20 No. 2 ISSUE 66

CONTENTS I Featured Research

Digging Out the Root Cause: Nunn-McCurdy Breaches in Major
Defense Acquisition Programs

P-128

Irv Blickstein, Charles Nemfakos, and Jerry M. Sollinger

Continuing concern over defense acquisition has led Congress to direct
the establishment of an office in the Department of Defense to oversee
the conduct of root cause analyses on programs that have incurred Nunn-
McCurdy breaches. Analyses of six programs that have incurred such
breaches reveal that many of the causes of the breaches are common to
several programs. However, each program is different, and those differences
suggest that policymakers should be wary of applying policies that assume
all program cost increases stem from common causes.

Reusing DoD Legacy Systems: Making the Right Choice

Meredith Eibandy Timothy J. Eveieigh, Thomas H. Hoizer,
p ^34 anc ^ Shahryar Sarkani _

Department of Defense (DoD) programs often experience cost overruns
and technical difficulties due to reuse of legacy systems. With today's fiscal
climate of resource-constrained DoD budgets, reuse of legacy systems is
frequently touted as the solution to cost, efficiency, and time-to-delivery
problems; however, cost overruns and technical difficulties can significantly
diminish any perceived benefits. Through evaluation of eight diverse DoD
programs, this research shows that the state of a legacy system's documen¬
tation, availability of subject matter expertise, and complexity/feasibility of
integration are key factors that must be analyzed. Based on these three key
factors, the authors propose a framework to aid both the DoD and defense
contractors in the evaluation of legacy systems for potential efficient and
effective reuse.

Valuing the Cost of an Economic Price Adjustment Clause to
the Government

p Scot Arno/dy Bruce Harmon, Susan /?ose, and John Whitley _

An Economic Price Adjustment (EPA) clause in a contract allows for adjust¬
ment of contract price if certain conditions are met. The Department of
Defense (DoD) often uses an EPA clause in contracts where there is an
increased risk that the costs of inputs used by the contractor will diverge
from the forecasts used in the original pricing of the contract. EPA clauses
transfer risk from the contractor to the government; thus, they are of
economic value to the contractor. This article reviews EPA clauses, analyzes
the value of risk transfer, and discusses how DoD could account for this
value in negotiating fees for contracts that contain EPA clauses. Other
government costs and risks associated with EPA clauses are also discussed.

Featured Research

Current Barriers to Successful Implementation of FIST Principles

p TQ4 Ca P t Brandon Keller; USAF, and Lt Col J. Robert Wirth/in, USAF _

The Fast, Inexpensive, Simple, and Tiny (FIST) framework proposes a
broad set of organizational values, but provides limited guidance on prac¬
tical implementation. Implementing FIST principles requires clarifying
the definitions of “fast,” “inexpensive,” and “simple,” recognizing where
FIST does and does not apply. Additionally, a subset of the FIST heuristics
was expanded upon to increase their usefulness for practitioners. The
primary research findings are that FIST principles are less conducive for
highly complex or novel systems, immature technologies, future needs,
acquisitions in early development phases, or when performance is the
foremost value. FIST principles were also found to be constrained by the
acquisition process, the requirements process, and oversight.

Defense Logistics Agency Disposition Services as a Supply
Source: A DoD-Wide Opportunity

Capt Nate Leon, USMC, Capt Todd Paulson, USMC, and Geraldo Ferrer

The Defense Logistics Agency Disposition Services (DDS) provide
centralized disposal management of excess and surplus military prop¬
erty. An important component of its mission is the reutilization of excess
equipment within the military services to prevent wasteful purchases
within the Department of Defense. This research analyzes the extent
to which the U.S. Marine Corps (USMC) is implementing reutilization
through DDS as a source of supply. The results and recommendations of
this study will enable decision makers within the USMC and the Defense
Logistics Agency to address institutional and systemic obstacles to maxi¬
mize reutilization. Some of the lessons learned herein may be useful to all
the military services, resulting in more value from their operations and
maintenance budgets through reutilization.

A Publication of the Defense Acquisition University July 2013 Vol. 20 No. 2 ISSUE 66

CONTENTS I Featured Research

n 242 _

Professional Reading List

Democracy's Arsenal—Creating a Twenty-First-Century Defense Industry

by Jacques S. Gans/er

P-245 _

Call for Authors

We are currently soliciting articles and subject matter experts for the
2013-2014 Defense Acquisition Research Journal (ARJ) print years.

p. 246 _

Guidelines for Contributors

The Defense Acquisition Research Journal (ARJ) is a scholarly peer-
reviewed journal published by the Defense Acquisition University (DAU).
All submissions receive a blind review to ensure impartial evaluation.

P-254 _

Defense Acquisition University Web site

Your online access to acquisition research, consulting, information, and
course offerings.

p.255 _

Defense ARJ Survey

We want to know what you think about the content published in the
Defense ARJ.

From the Deputy
Executive Editor

The articles included in this month's issue suggest a
time-honored maxim that is consistent with the philosophy
and guidelines espoused by Under Secretary of Defense for
Acquisition, Technology and Logistics Frank Kendall (2013)
in a recent memorandum. The maxim is Caveat Emptor —Let
the buyer beware! One reasonably might ask: How does that maxim relate to Mr.
Kendall's memorandum, or to the articles in this issue?

In the commercial world, caveat emptor means that the buyer bears the
risk for the quality of goods purchased unless they are covered by the seller's
warranty. A standard commercial principle is that product use other than for
intended purposes may void any manufacturer's warranties. Extending that
principle, acquisition managers inadvertently may negate anticipated benefits
of best practices if they fail to thoughtfully and deliberately analyze their appro¬
priateness to the context and conditions under which they are to be applied.

Mr. Kendall emphasized that key enduring acquisition principles and
evolving best practices work when they are applied effectively with a thorough
understanding of the program context and an understanding of the risks. He
stressed the need to “apply our education, training, and experience through
analysis and creative, informed thought" to program decisions (Kendall,
2013, p. l).His principal guideline was succinct: Think.

In our first article, RAND coauthors (Blickstein, Nemfakos, and Sollinger)
shared lessons learned from their analyses of nine major defense acquisition
programs that experienced Nunn-McCurdy breaches. Their analyses provided
insight into the breaches and some lessons for how other programs can avoid
them. The authors also note that every program is different, and they caution
that managers should be wary of applying policies founded on the premise that
all program cost increases stem from common causes.

Coauthors from Lockheed Martin (Eiband) and The George Washington
University (Eveleigh, Holzer, and Sarkani) examined reuse of legacy systems as
an “oft-touted" approach to achieve affordability and reduce acquisition time-
frames. Failure to analyze the implications of reuse may result in adverse cost,
schedule, and system performance outcomes. The authors developed a Reuse
Evaluation Framework to aid program planners identifying opportunities for
reuse that offer the greatest chance of success.

Coauthors from the Institute for Defense Analyses (Arnold, Harmon, Rose,
and Whitley) discussed the need for adjusting target fees when using Economic
Price Adjustment (EPA) clauses in contracts. They noted that EPA clauses can
entail unintended risks and drive unwanted behavior; assessing those risks and
behavior motivations requires in-depth assessment of the specific contract and
the contractor.

Similarly, coauthors from the Air Force Institute of Technology (Keller and
Wirthlin) examined the Fast, Inexpensive, Simple, and Tiny (FIST) principles
touted in various circles as a means to reforming acquisition. The authors
offered their own planning considerations to augment the FIST heuristics and
identified barriers and limitations to successful implementation of the concept.

Finally, authors from the Marine Corps Logistics Base Albany, GA, Defense
Language Institute, and Naval Postgraduate School (Leon, Paulson, and Ferrer,
respectively) explored the extent to which equipment reutilization can achieve
cost savings from wasteful, duplicative purchases—savings that can be used to
cover other shortfalls in a dwindling defense budget. Ironically, one obstacle that
potentially prevents managers from aggressively seeking those savings is the
DoD culture, implying that managers must constantly examine and challenge
patterns of shared, basic assumptions about their business.

These articles represent research results from a variety of organizations
and perspectives. I hope that you will enjoy them and can use the information
they contain to inform your selection of best practices. Enjoy!

(

Dr. Mary C. Redshaw
Deputy Executive Editor
Defense ARJ

Reference

Kendall, F. (2013, April 24). Implementation directive for Better Buying Power 2.0—

Achieving greater efficiency and productivity in defense spending [Memorandum].
Washington, DC: Office of the Under Secretary of Defense (Acquisition, Technology
and Logistics).

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DAU Center for
Defense Acquisition
Research

Research Agenda 2013

The Defense Acquisition Research Agenda is intended to make
researchers aware of the topics that are, or should be, of partic¬
ular concern to the broader defense acquisition community
throughout the government, academic, and industrial sectors.
The purpose of conducting research in these areas is to provide
solid, empirically based findings to create abroad body of knowl¬
edge that can inform the development of policies, procedures, and
processes in defense acquisition, and to help shape the thought
leadership for the acquisition community.

Each issue of the Defense ARJ will include a different selection
of research topics from the overall agenda, which is at: http://
www.dau.mil/research/Pages/researchareas.aspx

Affordability and cost growth

• Define or bound “affordability” in the defense portfolio. What is it?
How will we know if something is affordable or unaffordable?

• What means are there (or can be developed) to measure, manage, and
control “affordability” at the program office level? At the industry
level? How do we determine their effectiveness?

What means are there (or can be developed) to measure, manage,
and control “Should Cost” estimates at the Service, Component,
program executive, program office, and industry levels? How do we
determine their effectiveness?

What means are there (or can be developed) to evaluate and compare
incentives for achieving “Should Cost” at the Service, Component,
program executive, program office, and industry levels?

July 2013

• Recent acquisition studies have noted the vast number of programs
and projects that do not make it successfully through the acquisition
system and are subsequently cancelled. What would systematic
root cause analyses reveal about the underlying reasons, whether
and how these cancellations are detrimental, and what acquisition
leaders might do to rectify problems?

• Do Joint programs—at the inter-Service and international levels—
result in cost growth or cost savings compared with single-Service
(or single-nation) acquisition? What are the specific mechanisms
for cost savings or growth at each stage of acquisition? Do the data
support “jointness” across the board, or only at specific stages of a
program, e.g., only at research and development or only with specific
aspects, e.g., critical systems or logistics?

• Can we compare systems with significantly increased capability
developed in the commercial market to DoD-developed systems of
similar characteristics?

Is there a misalignment between industry and the government
priorities that causes the cost of such systems to grow significantly
faster than inflation?

If so, can we identify why this misalignment arises? What relation¬
ship (if any) does it have to industry's required focus on shareholder
value and/or profit, versus the government's charter to deliver
specific capabilities for the least total ownership costs?

A Publication of the Defense Acquisition University

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DEFENSE ACQUISITION RESEARCH JOURNAL

126

July 2013

ISSUE 66 JULY 2013 VOL. 20 NO. 2

A Publication of the Defense Acquisition University

http://www.dau.mil

Keywords: Nurm-McCurdy Breaches, Defense
Acquisition Cost Growth, Selected Acquisition
Report (SAR), Wideband Global Satellite (WGS),
Performance Assessments and Root Cause Analyses
(PARCA)

Digging Out the Root Cause

Nunn-McCurdy Breaches in
Major Defense Acquisition
Programs

f Irv Blickstein, Charles Nemfakos,
and Jerry M. Sollinger

Continuing concern over defense acquisition has led
Congress to direct the establishment of an office in
the Department of Defense to oversee the conduct of
root cause analyses on programs that have incurred
Nunn-McCurdy breaches. Analyses of six programs
that have incurred such breaches reveal that many
of the causes of the breaches are common to several
programs. However, each program is different, and
those differences suggest that policymakers should be
wary of applying policies that assume all program cost
increases stem from common causes.

128

DefenseARJ, July 2013, Vol. 20No. 2:128-153

Image designed by Diane Fleischer »

• •

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Congress has long been concerned about cost overruns in Major
Defense Acquisition Programs (MDAPs). Beginning in the 1970s when
it expropriated the Selected Acquisition Report (SAR) as a gauge of pro¬
gram performance, Congress has continued to create mechanisms to
gain insights into program execution. 1 However, SARs did not become a
legal reporting requirement until 1975, with Public Law (Pub. L.) 94-105
(Leach, 2003). In 1981, Senator Samuel Nunn and Congressman David
McCurdy introduced the Nunn-McCurdy Amendment to the Department
of Defense Authorization Act, 1982 (Pub. L. 97-86,1981). The purpose
of the amendment was to establish congressional oversight of defense
weapon systems acquisition programs whose costs rise above certain
limits. The Nunn-McCurdy Amendment defines two types of unit cost.
The first is total program acquisition unit cost (PAUC), which is the
sum of development cost, procurement cost, and system-specific mili¬
tary construction for the acquisition program, divided by the number of
fully configured end-items to be produced for the acquisition program.
The second is average procurement unit cost (APUC), which is the
procurement funding divided by the number of units procured. Cost
growth of a weapon system was measured by how much the unit costs
in 1982 exceeded the same respective unit costs reported in the weapon
system's SAR dated March 31,1981. Hence, the amendment applied only
to those major weapon systems reported in SARs dated March 31,1981.
The original amendment required the Secretary of Defense to notify
Congress when a major weapon system's unit cost growth exceeded
15 percent. If unit cost growth exceeded 25 percent, the program was
assumed terminated unless the Secretary of Defense submitted written
certifications to Congress within 60 days of determining that a breach
had occurred. The provisions were made permanent in the Department
of Defense Authorization Act, 1983, and these breaches are commonly
referred to as Nunn-McCurdy breaches.

Over time, the Department of Defense (DoD) leadership promulgated
many external as well as internal initiatives to reform the acquisition
system. Figure 1 captures the DoD Issuances as well as a few of the major
initiatives pushed by Congress and by the DoD leadership, where the
acquisition system has been the prime focus. Clearly, over time these
efforts for reform have increased.

The National Defense Authorization Act for Fiscal Year 2006
changed the Nunn-McCurdy reporting requirements to include the
original baseline as a benchmark against which to measure cost growth.

130

Defense ARJ, July 2013, Vol. 20 No. 2:128-153

Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

FIGURE 1. DoD ISSUANCES AND REFORM OVER TIME

IDIDIDIDIDIDIDIOIDIDIDIDIOIDIDIDIDIDIDID
OOOOOOOOOOOOOOOOOOOOlDlDlDlDCDCDtOCDCDCD
O ~' 1 MWJiWOl'J00(OO J 'N>C/-J4^<-ncn^lOOtD

U1 CT) ^1 00 ID

The Weapon Systems Acquisition Reform Act (WSARA) of 2009 is the
latest effort, and it incorporates definitions for two categories of weapon
system breaches: significant and critical (Pub. L. 111-23,2009). A breach
is determined by comparing original and current PAUC and APUCs,
and a breach can occur if the unit costs exceed either the current or the
original baseline by a specific percent. Thresholds appear in Table 1.

The National Defense Authorization Act for Fiscal
Year 2006 changed the Nunn-McCurdy reporting
requirements to include the original baseline as a
benchmark against which to measure cost growth.

Congressional interest in, and efforts to contain spending on,
defense acquisition have continued (Government Accountability Office,
2011). The Weapon Systems Acquisition Reform Act (WSARA) of 2009
established a number of requirements that affected the operation of
the Defense Acquisition System and the duties of the key officials who

DefenseARJ, July 2013, Vol. 20 No. 2:128-153

131

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TABLE 1. BREACH THRESHOLDS

Level

Unit Cost

Baseline

Threshold

Significant

PAUC

Current

>=15%

APUC

Current

>=15%

PAUC

Original

>=30%

APUC

Original

>=30%

Critical

PAUC

Current

>=25%

APUC

Current

>=25%

PAUC

Original

>=50%

APUC

Original

>=50%

support it, including the requirement to establish a new organization in
the Office of the Secretary of Defense (OSD) with the mandate to con¬
duct and oversee Performance Assessments and Root Cause Analyses
(PARCA) for MDAP (Pub. L. 111-23, 2009).

Pub. L. 111-23 assigned the resultant PARCA organization five pri¬
mary responsibilities:

1. Carrying out performance assessments of MDAPs;

2. Performing root cause analysis (RCA) of MDAPs whose
cost growth exceeds the threshold as detailed in the Nunn-
McCurdy provision;

3. Issuing policies, procedures, and guidance governing the
conduct of performance assessments and RCAs;

4. Evaluating the utility of performance metrics used to mea¬
sure the cost, schedule, and performance of MDAPs; and

5. Advising acquisition officials on performance issues that
may arise regarding an MDAP.

The PARCA office has a relatively limited staff, and reporting dead¬
lines for breaches are short—less than 2 months. Therefore, the director
has asked outside organizations, primarily federally funded research and
development centers, to assist in conducting the RCAs directed by the

132

Defense ARJ, July 2013, Vol. 20 No. 2:128-153

Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

law. RAND has supported the PARCA office by analyzing six programs:
the Zumwalt-Class Destroyer (DDG-1000), the Joint Strike Fighter F-35,
Longbow Apache Helicopter, Wideband Global Satellite, Excalibur artil¬
lery round, and the Navy Enterprise Resource Program. Further, RAND
has recently completed the analysis of the Joint Tactical Radio System
Ground Mounted radio, the P-8A Poseidon aircraft, and modifications
to the Global Hawk Unmanned Aerial Vehicle. 2

Purpose

This article has four purposes. First, it briefly describes the meth¬
odology RAND developed to carry out RCAs. The approach to RCAs has
matured over time and may prove useful to other organizations that
either must do an RCA or wish to understand what the process involves.
Second, it presents an example of such analyses—the Wideband Global
Satellite, a program with both significant and critical breaches. Third,
the article provides insight into the causes of breaches across several
programs. Fourth, it offers lessons learned about breaches and how to
avoid them.

DefenseARJ, July 2013, Vol. 20 No. 2:128-153

133

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Methodology for Root Cause Analysis

Congressional deadlines for an RCA are tough to meet for two rea¬
sons. First, the time available to do them is short. Depending on the
circumstances, the RCA must be done in either 45 or 60 days. 3 Second,
each RCA is unique because each program is unique. Thus, no “cookbook”
spells out all the components and identifies key documents and their loca¬
tions. RAND has developed a generic methodology, depicted in Figure 2.

The generic process is designed to use the short time available as
efficiently as possible. The process is general enough that it can apply to
the RCA of any system yet still accommodate the unique attributes of
each system. It begins with a hypothesis about what caused the program
to breach the threshold. That hypothesis guides many of the subsequent
activities, including setting up interviews with key players both in indus¬
try and government, which can take some time to arrange. Work has to
proceed in parallel so that the required products can be delivered to the
PARCA office in a timely manner. In the RCAs performed to date, the
PARCA office has requested the following deliverables:

• a completed root cause matrix in the format supplied by the
PARCA office;

• a summary narrative;

• a set of briefing charts based on the narrative; and

• a full RCA report.

All deliverables except the full RCA report should be supplied by
PARCA office deadlines to ensure that these materials can be used to
support the recertification decision.

134

Defense ARJ, July 2013, Vol. 20 No. 2:128-153

Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

FIGURE 2. GENERIC RCA METHODOLOGY

Construct a timeline of cost
growth relevant events from
the program history

l
1

* s

V \ i?

* Electronic record of \
i data sources and J
data sources archive

...

* \

Create the program cost
profiles and pinpoint
occurrences of cost growth

Match timeline with cost
profiles and derive root
causes of cost growth

Root Cause Analysis of Wideband
Global Satellite <WGS) Program

The WGS program was funded in 2001 to acquire an unprotected
wideband satellite communications (SATCOM) capability by using a
commercial off-the-shelf satellite bus and Ka-band technology, thereby
meeting DoD's demand for military SATCOM. WGS provides both
X-band communications compatible with the older Defense Satellite
Communications System (DSCS) platforms and Ka-band broadcast
capability like the Global Broadcast System (GBS). Throughput for each
satellite is estimated at over two gigabits per second (U.S. Air Force
[USAF], 2007).

The program consists of two phases or “blocks,” as shown in the
first row of Table 2. Block I of WGS comprises three satellites, the last
of which went into orbit in December 2009. WGS Block II consists of
three additional satellites—two contracted for the United States to
replace aging DSCS and GBS satellites, and a third wholly purchased by
Australia in exchange for a percentage of global WGS bandwidth. Block
II satellites are essentially the same as Block I, with a high-bandwidth
bypass feature for aerial intelligence, surveillance, and reconnaissance
platforms (Block I, 2010, p. 16.) With the delays and eventual cancella¬
tion of the Transformational Satellite Communications System, DoD

DefenseARJ, July 2013, Vol. 20 No. 2:128-153

135

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TABLE 2. WGS AVERAGE PROCUREMENT UNIT COST (EXCLUSIVE
OF LAUNCH COSTS)

Original

APB

Current

APB/

Original APB

Estimate/

Current

APB

Estimate/

Original

APB

Block

1 & II

1, II, Ilf

Satellites

1-3

1-5

1-8 a

Contract type

FFP

FPIF

APUC

$268m

$294m

$374m

$374 m

Unit cost b

$239m

$377m c

$574m

% A APUC

110%

127%

140%

% A Unit Cost

158%

152%

240%

Note. APB = Acquisition Program Baseline; FFP = Firm Fixed Price; FPIF = Fixed Price
Incentive Firm (Target Price).

a WGS 6 was purchased for Australia and does not show up in U.S budget accounts.
b That is, cost to the government.

c Cost claims currently made by Boeing would suggest that the true cost of the first
three satellites was roughly $377m.

decided to procure the seventh and eighth WGS satellites—Block Ilf—
with a planned total buy of 12 WGS satellites to meet future broadband
communication requirements (Edwards, 2010).

The Nunn-McCurdy Breach

The unit cost to the government of WGS Block II was roughly 50
percent more expensive than Block I ($377 million compared with $239
million), and Block Ilf is again roughly 50 percent more expensive than
Block II ($574 million compared with $377 million), as shown in the
bottom row (Table 2).

Table 2 illustrates the breach. The 27 percent increase between the
current estimate and the current Acquisition Program Baseline (APB)
(third column) exceeds the 25 percent threshold for a “critical” breach.
(The 40 percent increase [fourth column] between the current estimate
and the original APB represents a “significant” but not “critical” Nunn-
McCurdy breach.)

The averages, in turn, permit calculation of a unit cost for Blocks
I, II, and Block Ilf, but not in a straightforward manner. 4 In real (Base
Year [BY] 2001 $) terms, the PAUC of the WGS satellite rose 58 percent
between Block I and II (from $239 million to $377 million). Unit costs
between Block II and Block Ilf are projected to rise 52 percent (from $377

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TABLE 3. WGS ORDER AND LAUNCH YEARS

Satellite

Budget

Year

Launch

Year

Difference
in Years

Block 1

2002

2007

2002

2009

2003

2009

Block II

2007

2011*

2008

2012*

6 (Aus.)

2009

2013

Block Ilf

2011

2016

2012

2017

Note. Aus. = Australia

* These are the launch dates taken from the President’s 2012 budget.

FIGURE 3. WGS PRODUCTION/LAUNCH PERIODS

Year

Note. Launches do not include MexSAT-1 and MexSAT-2. Launch dates will follow
MexSAT-3.

million to $574 million). Table 3 indicates when each WGS satellite was
ordered, when delivered, and the difference in years; Figure 3 indicates
the interval during which the USAF-purchased WGS satellites were built
and launched. Table 3 indicates a large gap between WGS Block I and
WGS Block II, and a smaller gap between WGS Block II and WGS Block
Ilf. However, the time between program approval and launch for WGS
Block I was 5 to 7 years, and the expected cycle time for WGS Block II is

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shorter—4 to 5 years. If current launch dates for Block Ilf prove accurate,
then the gap between Block I and Block II will be somewhat smaller than
the gap between Block II and Block Ilf.

Sources of the Nunn-McCurdy Breach

The WGS cost breach has two components: the increase in unit
costs between Block I and Block II satellites, and the increase in unit
costs between Block II and Block Ilf satellites. The first difference was
ascribed to “what proved to be an artificially low cost for the original
three vehicles under a firm fixed-price contract” (Secretary of the Air
Force M. B. Donley, personal communication, March 8, 2010). We focus
on the latter cost increase, largely because it is the current one and, thus
far, more relevant to decisions to be made on the WGS program.

Table 4 shows both blocks in terms of target and ceiling costs. The
latter includes margin sufficient to account for the possibility of cost
overruns on the FPIF work (combining advanced procurement, base
procurement, and launch support costs).

How do $555 million and $410 million in current dollars (Table 4)
compare with the $574 million and $377 million (in BY 2001 $)? Table 5
illustrates the difference.

TABLE 4. PROGRAM OFFICE UNIT COST BREAKDOWN
(CURRENT $)

Target

Ceiling

Block II

2007

$355m

$410m

Block Ilf

2011

$555m

Note. $ shown are program estimates.

Several features merit note. First, storage and factory restart costs
were very small in going from Block I to Block II, but substantial in going
from Block II to Block Ilf even though the gap before restarting produc¬
tion was 4 years for Block II and only 2^2 years for Block Ilf. We could
not explain this difference. Second, in both cases, Other Government
Costs (estimated based on data from the program office and Secretary of
the Air Force) are fairly large, but roughly the same in both cases. These
costs include contracting office and engineering costs; it was estimated
by subtracting known cost components from total cost components and
checked for overall reasonableness and consistency.

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TABLE 5. RELATING BASE YEAR AND CURRENT YEAR COSTS
($ IN MILLIONS)

Block II

Block Ilf

Unit cost (BY01 $)

377

574

Inflation factor to current costs

1.14 (BY07)

1.207 (BY11)

Unit cost current year dollars

430

693

Less storage and factory restart

Subtotal

426

620

Less other government costs

Subtotal (from Table 4)

355

555

Third, and most importantly, Boeing's price figure for the Block II
satellite, as a basis for comparison, is $355 million each rather than
the $410 million ceiling price. Why? The $355 million represented the
contracted, hence targeted, price of the satellites; if Boeing costs were
higher than $355 million, then, under the terms of the contract, the fed¬
eral government would reimburse Boeing only for 80 percent of those
additional costs. The $410 million was the ceiling price; Boeing would
have to absorb all costs in excess of that amount. Building the Current
APB APUC (for Blocks I and II) out of Boeing's price, but building the
Expected APB APUC (for Blocks I, II, and Ilf) out of the ceiling price
essentially compares apples and oranges. In effect, the WGS program
office built a 15 percent factor—essentially an accounting artifact—into
the price. We cannot explain the programmers' motivation for doing
so, particularly because it led to a critical Nunn-McCurdy breach that
otherwise could have been avoided. Whether this difference represents
their lack of confidence in the estimate can only be a matter of specula¬
tion. Were this 15 percent removed, then the unit cost of Block Ilf would
have been $516 million (in current $) rather than $574 million, yielding
an APUC of $357 million or an increase of 22 rather than 27 percent,
representing a “significant” rather than “critical” breach. Nonetheless,
$555 million is still a substantial increase over $355 million—and needs
to be explained. Table 6 lists the various factors.

We start with Boeing's price of $355 million. Next we add the current
cost overrun of 3 percent ($11 million). (Although the final cost overrun
may be higher or lower, we presume that cost overruns experienced to
date establish a new baseline for what it really costs to build a WGS,
hence $366 million.) The next adjustment, line 4, factors in 4 years'

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TABLE 6. COST INCREASE BETWEEN BLOCK II AND IIF
(CURRENT YEAR $)

Increase Component

Block II

1 .

Boeing price (BY 2007 $)

$355m

3% cost overrun

$11m

Actual unit costs (BY 2007 $)

$366m

Four years 5 inflation at 3.5% per year

1.147*

Expected unit cost circa 2011

$420m

Extra tests

$2m

Higher component prices for 3 items

$35m

Higher component prices overall

$25m

Subtotal

$482m

10.

Risk premium of 15%

$555m

* (1.035 x 1.035 x 1.305 x 1.035 = 1.147 x $366m = $420m)

worth of inflation at 3.5 percent per year (as calculated by the program
office based on historic experience in satellite component and manufac¬
turing costs), 5 hence the $420 million in line 5. Next comes $2 million
for additional tests not required for Block II, $35 million (as calculated
by Boeing) to pay for three critical components that might otherwise
go out of production, 6 and $25 million (also as calculated by Boeing) for
cost increases in other components at risk in the supply chain, hence the
subtotal of $482 million in line 9. The last adjustment arises from the
accounting artifact noted previously—the difference between contract
costs used to calculate Block II prices and the ceiling cost used to calcu¬
late Block Ilf prices. This brings us to the $555 million that the program
office uses to calculate unit costs for Block Ilf.

Explaining the Cost Differences

The $60 million in component cost inflation (over and above the
normal 3.5 percent a year) shown in rows 7 and 8 of Table 6 requires
further explanation. Reflecting a general shift in market requirements,
Boeing shifted its commercial satellite offerings from its HS702HP
(high-power) bus to its HS702MP (medium-power) bus. This shift has
left WGS supporting the production of parts that no longer have much
commercial demand, thereby raising the cost of these components. That
noted, Boeing also reports that the cost ratio between bus and payload
is expected to remain constant, and the cost ratio between component
costs and Boeing's costs is also expected to remain constant. Both imply

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that its internal costs have also risen more or less proportionately with
component costs. This may be reflected in the charges associated with
the cold factory restart noted earlier. Figure 4 indicates a sharp decline
in commercial satellite production at about the same time that WGS
production started. In the 8 years before 2008, Boeing launched 11 com¬
mercial satellites; from 2008 to 2016, it plans to launch six. Although the
pace of satellite construction has recovered, it has not returned to earlier
levels that characterized the first few years of this century.

FIGURE 4. LAUNCH DATES FOR BOEING-PRODUCED SATELLITES

Fiscal year

Component cost inflation also reflects a broader phenomenon—
the growing divergence between WGS and its civilian counterpart.
Commercial products change constantly; military products change
infrequently (but in relatively large chunks) and, in the case of Military
Specification products, may not change at all precisely because product
qualification is complex. In effect, the WGS, born as a modification to
a commercial business line, has evolved to a program that is primarily
military. As noted, the WGS satellite bus has diverged from its civilian
counterpart. The payload of the WGS satellite consists of Ka-band tran¬
sponders, and X-band transponders and channelizers to switch between
the two. X-band is primarily military to begin with. The commercial

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market had flirted with Ka-band 10 years ago, but the trend toward
terrestrial (fiber optics and cell phones) rather than satellite-based
communications has dampened industry's interest in exploring differ¬
ent spectra whose primary virtue is that they are largely unclaimed.
Furthermore, the global business of U.S. satellite manufacturers has
been hampered by increasingly stringent application of International
Traffic in Arms Regulations starting 10 years ago. Components that once
could be supported from both WGS and commercial sales increasingly
rely on the WGS market, and suppliers must be paid a premium to remain
in the market. Similarly, former WGS workers who could count on trans¬
ferring their skills into very similar commercial work when gaps appear
in WGS, face a harder transition. As one observer (Mecham, 2009) notes:

In its 10-year history, the Boeing division's main platform, the
702, has commonly served big commercial requirements, such
as the three current orders for DirecTV and two for Sky Terra.
But the platform also has been used for many of the company's
major government programs, most prominently the Wideband
Global Satcom (WGS) network of six spacecraft that replaces the
Defense Satellite Communications System.... WGS and two other
major government programs—the Global Positioning System
IIF and GOES N-P series—have provided 90 percent of Boeing's
recent work. To redress that imbalance, the company began
looking for new commercial market entries four years ago and
concluded it could take advantage of the 702's flight software,
avionics and power management systems to develop a smaller
bus. (p. 66)

The days when commercial sales could buoy the resources put into
the WGS program between one buy and the next are gone. The econom¬
ics of WGS increasingly depend on the pace and scheduling of WGS
buys alone.

Root Cause Analysis

The 52 percent increase between Block II and Block Ilf unit pricing
is primarily due to the first three factors listed in Table 7. Such results
are necessarily limited by the 60-day window allowed for investigation
under the Nunn-McCurdy legislation that curtailed RAND's ability to
question subcontractors and analyze many of the cost claims that had
to be accepted as valid over the course of the analysis.

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TABLE 7. PRIMARY FACTORS FOR BLOCK II TO BLOCK IIF UNIT
COST INCREASE(BY 2001 $)

Factor

$ Amount

Percent

Risk premium accounting artifact

$60m

30%

Storage and restart costs

$57m

29%

Increased component costs

$51m

26%

Other (e.g., SATCOM industry
inflation, cost overruns)

$29m

15%

The largest factor—almost one-third of the increase—is an account¬
ing artifact where the Block Ilf prices, as calculated by the program
office, include a 15 percent risk premium, whereas Block II unit costs do
not (because they largely reflect expended rather than projected costs).
These results represent an apples-and-oranges comparison. Inasmuch
as the Block Ilf is practically identical to the Block II units that Boeing
is already building, Boeing can be realistically expected to produce the
satellites at near the target cost, which is 15 percent below the ceiling
cost—although Block II is running 3 percent over target. But the ceil¬
ing price is what was reported. Next, Boeing is charging for storage
and restart costs for the 2V2-year hiatus between Blocks II and Ilf. On
the surface, the cause appears to be the interruption in production, but
the 4-year hiatus (measured, as noted, in terms of when satellites were
ordered, not when they launched) between Block I and Block II had a cost
of only $3.5 million, or less than 7 percent of the current estimate. One
explanation is that significant aspects of WGS production are no longer
supported by the commercial market and, therefore, require storage and
restart expenses during production breaks. Finally, key components of
WGS that are no longer supplied to the commercial market will have
greatly increased procurement costs, accounting for another 26 percent
of the cost increase. The second and third factors support the argument
that the root causes of the breach are changes in the commercial market
without corresponding changes in the WGS design and procurement,
and obsolescence.

Despite these large cost increases, the WGS program is essentially
healthy and relatively well managed. The satellites work; three of them
are already on-orbit serving customers. These customers are gener¬
ally happy, which is part of the reason that the currently planned WGS
constellation is larger than the one originally planned (more often, total

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buys decline over the life of a contract). There is no reason to expect that
the cost of subsequent satellites after WGS 8 will increase—quite the
contrary. Boeing's bid proposals for WGS 9 through 12 suggest that these
variants will run $100 million less than WGS 7 did (once due account is
taken of the baseline inflation in the satellite industry). Thus, although
the cost increases in what should be a stable program may appear star¬
tling (and remain somewhat startling even after explanation), this is no
indicator of a program facing technological or production problems that
cannot be reasonably solved.

The broader lesson learned for this program is that when DoD pro¬
curement piggybacks on a commercial base—notably the commercial
base of a particular company—it takes a risk. The base may shrink, leav¬
ing it with less capacity to cover total overhead costs. Even if the base
does not shrink, it will evolve. If DoD requirements do not evolve in par¬
allel—and there is no inherent reason why they should—the divergence
between DoD's requirements and the market's requirements means
that either the requirements are compromised (admittedly, this may be
acceptable in some circumstances) or, eventually, such programs have
to stand or fall on their own merit. They can no longer be free riders, so
to speak. This suggests that a certain procurement discipline is called
for, or DoD will pay the difference. Start-stop programs cost more than
steady-state programs (i.e., when buys are consistent from one year to
the next), which, in turn, are somewhat more costly than total-buy pro¬
grams. Although DoD cannot necessarily commit to even procurements
for a variety of reasons (e.g., changing requirements, risk management,
congressional politics), everyone concerned should understand that
maximizing acquisition flexibility entails costs.

WGS Conclusions

Three primary factors contribute to the Nunn-McCurdy breach: an
accounting artifact, increase in the cost of component parts, and stor¬
age and restart costs. Each contributes to about one-third of the cost
increase between Block II and Ilf. An underlying factor of the increase,
particularly with respect to the storage and restart costs, is the change
that occurs in the commercial product base that affected the WGS costs.
The government incurred additional costs because the commercial base
of Boeing no longer supported the WGS.

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Common Root Causes and Lessons Learned

Table 8 displays the root causes of breaches in the six programs
examined. It places the causes of the various program breaches in three
categories: planning, changes in the economy, and program manage¬
ment. The check marks indicate either a root cause or a root cause with
relatively greater effect in causing the program to breach.

As can be noted, while these six programs reveal certain cost growth
characteristics, they also reflect important differences in how and why
cost growth occurred. This point is an important one for policymakers
to keep in mind because they sometimes attempt to universalize policies
as if all program cost increases stem from common causes.

Understanding the principle that quantity change
is rarely a governing root cause for cost growth is
fundamental to investigating cases where quantity
changes accompany unit cost threshold breaches.

Table 8 indicates that quantity increases or decreases figured into
all six of the programs listed. However, RAND's experience suggests
that while quantity change can affect a program in important ways, such
change is rarely the root cause of a Nunn-McCurdy breach. For example,
the DDG-1000 program went from 10 ships to 3, which naturally raised
the unit cost and signaled a breach. But the reason for the quantity change
stemmed from a recognition of changes in the operational environment.
Similarly, the increase in the Apache quantities was driven by a decision
to procure additional helicopters for operational reasons. Understanding
the principle that quantity change is rarely a governing root cause for cost
growth is fundamental to investigating cases where quantity changes
accompany unit cost threshold breaches. The RAND experience to date
shows that although programs had associated quantity changes when
they incurred Nunn-McCurdy breaches that triggered RCA examinations,
in each case the quantity change was grounded in other program-specific
factors that resulted in unit cost growth. Uncovering the grounds upon
which quantity changes are founded is an important part of the thorough
and insightful RCAs demanded by the WSARA.

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Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

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DefenseARJ, July 2013, Vol. 20 No. 2:128-153

147

Note. DDG = Guided Missile Destroyer; ERP = Enterprise Resource Planning; JSF = Joint Strike Fighter.

A Publication of the Defense Acquisition University

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Based upon our research into the root causes of breaches of the
programs analyzed thus far, and an examination of similarities and
differences as reflected in Table 8, RAND offers three overarching
recommendations:

1. In the development of early program planning, understand
thoroughly the implication of the testing regimes and the
numbers of test articles required to execute those regimes.
Planning for the testing regime and use of simulation cannot
be overstated. As noted in previous RAND research, the F-35
exemplified that problem (Blickstein et al., 2011, pp. 1,15-16).

2. Clearly stipulate costing methodologies that rely on commer¬
cial production or even commercial production practices.

The danger is both that necessary cost controls will not
be implemented and that important cost analysis alterna¬
tives will not be recognized and used. Based on research
conducted by RAND with the PARCA at the WGS program
office, there does not appear to be a good understanding
that fabricating a vehicle to be used by the military can cost
significantly more than a commercial vehicle with an inter¬
national “list price.”

3. Where a program depends upon planned product
improvements over time, ensure a clear understanding
of relationships among several factors, primarily time in
inventory, ongoing research and development, and periodic
platform upgrades or blocks through the entire out-year
period. Failure to understand this can cause program man¬
agers to lose sight of program cost growth, as was the case
with the Apache Longbow.

148

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Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

A ckn o wle dgm ent

We are indebted to our RAND colleague, Martin Libicki, for his
analysis and description of the root causes of the Nunn-McCurdy breach
on the Wideband Global Satellite.

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Author Biographies

Mr. Irv Blickstein is a senior engineer at
the RAND Corporation. Before joining
RAND, he served in both the Departments
of the Navy and Defense. In 1994, he became
the director of Acquisition Program
Integration in the Office of the Under
Secretary of Defense for Acquisition and
Technology. In 1996, he returned to the
Navy as the Assistant Deputy Chief of Naval
Operations for Resources, Warfare
Requirements and Assessments. Mr.
Blickstein holds a BS in Industrial
Engineering from Ohio State University
and an ME A in Engineering Management
from The George Washington University.

(E-mail address: irving@rand.org)

Mr. Charles Nemfakos is a senior fellow
at the RAND Corporation, providing
research, analyses, support, and advice to
clients, as he did for private domestic and
international entities in Nemfakos Partners
LLC and Lockheed Martin Corporation.
His service in government culminated as
Deputy Assistant Secretary for Installations
and Logistics, and as Deputy Under
Secretary and Senior Civilian Official for
Financial Management and Comptroller.
He received four Presidential Rank Awards,
American University's Roger W. Jones
Award for Executive Leadership, was
elected Fellow of the National Academy of
Public Administration, and honored as one
of nine Career Civilian Exemplars in the
history of the Armed Forces. Mr. Nemfakos
holds a BA in History from the University
of Texas (Pan American College) and an
MA in Government from Georgetown
University.

(E-mail address: nemfakos@rand.org)

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Digging Out the Root Cause: Nunn-McCurdy Breaches in Major Defense Acquisition Programs

Dr. Jerry M. Sollinger is currently
a communications analyst at RAND.
Prior to joining RAND in 1990, Dr.
Sollinger was an Army officer, retiring
at the rank of colonel. He served tours
in Vietnam, Korea, Germany, and the
United States. He is a graduate of the
Armed Forces Staff College and the
National War College. Dr. Sollinger
holds a PhD in English from the
University of Pittsburgh.

(E-mail address: jerrys@rand.org)

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References

Blickstein, I., Boito, M., Drezner, J. A., Dryden, J., Horn, K., Kallimani, J. G.,

... Wong, C. (2011). Root cause analyses of Nunn-McCurdy breaches:
Zumwalt Class Destroyer ; Joint Strike Fighter, Longbow Apache, and
Wideband Global Satellite (Vol. 1). Santa Monica, CA: RAND National
Defense Research Institute.

Block I of WGS Constellation completed. (2010, March 8). Aviation Week &
Space Technology, 772(10), 16.

Department of Defense Authorization Act, 1982, Pub. L. No. 97-86 (1981).

Department of Defense Authorization Act, 1983, Pub. L. No. 97-252 (1982).

Edwards, J. S. (2010, January 25). Military space becomes increasingly
important as capabilities mature. Aviation Week & Space Technology,
774(4), 122.

Leach, B. (2003, May). Acquisition reporting overview & unit cost

reporting/Nunn-McCurdy breaches. Office of the Under Secretary
of Defense (Acquisition, Technology and Logistics) briefing to AT&L
personnel (pp. 9-11). Retrieved from http://www.google.com/search
?q=Leach%2C+B.+%282002%2C+June%29.+Acquisition+reporting+
overview&rls=com.microsoft:en-us:IE-Address&ie=UTF-8&oe=UTF-
8&sourceid=ie7&rlz=1l7GGHP_enUS476

Mecham, M. (2009, December 7). Hosted payloads growth eyed by U.S.
satellite makers. Aviation Week & Space Technology, 777(21), 66.

U.S. Air Force. (2007). The Air Force handbook. Retrieved from http://
www.fas.org/irp/agency/usaf/handbook.pdf

U.S. General Accounting Office. (1980). Comptroller General’s report to the
Congress: ‘SARs’ - Defense Department reports that should provide
more information to the Congress (Report No. PSAD-80-37). Retrieved
from http://archive.gao.gov/f0102/112285.pdf

U.S. Government Accountability Office. (2011). High-risk series: An update
(Report No. GAO-11-278). Washington, DC: Author.

Weapon Systems Acquisition Reform Act of 2009,10 U.S.C., Pub. L. 111-23
(2009).

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Endnotes

1. The SAR’s initial purpose was to act as a vehicle to keep its
sponsor, the Assistant Secretary of Defense (Comptroller),
apprised of the progress of selected acquisitions and to
compare this progress with planned technical, schedule, and
cost performance. In February 1969, the Chairman of the Senate
Armed Services Committee asked the Secretary of Defense to
provide status reports on major weapons systems. The parties
agreed in April 1969 that the SAR would be the vehicle to satisfy
the committee’s needs (U.S. General Accounting Office, 1980).

2. RAND is a nonprofit institution whose mission is to help improve
policy and decision making through research and analysis. The
name is an acronym for “research and development.”

3. The 45-day period between program manager report of a breach
and military department secretary notification of a critical unit
cost breach to Congress starts the day after the initial report

of the breach to the Service Acquisition Executive. The 60-day
period within which the Secretary of Defense must submit a
program recertification decision to Congress starts on the day
after the due date of the first SAR that reports the breach.

4. Note that the original APB was $268 million (fifth row, Table
2) per satellite, but the unit cost is now estimated to be $239
million (fourth row, Table 2). The difference between the two is
accounted for by the fact that other government costs ended up
$29 million per satellite lower than estimated.

5. Note that this 3.5 percent exceeds the 1.8 percent used as an
overall price deflator by the Office of the Secretary of Defense to
convert constant into current dollars.

6. The three critical components that might otherwise go out of
production were the Xenon Ion Propulsion System (XIPS), certain
transponders, and a crypto box.

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Keywords: Reuse, Legacy, Reuse Framework,
Evaluating DoD Legacy Systems

Reusing DoD
Legacy Systems:

Making the Right Choice

i Meredith Eiband, Timothy J. Eveieigh,
Thomas H. Holzer, and Shahryar Sarkani

Department of Defense (DoD) programs often experi¬
ence cost overruns and technical difficulties due to
reuse of legacy systems. With today’s fiscal climate of
resource-constrained DoD budgets, reuse of legacy
systems is frequently touted as the solution to cost,
efficiency, and time-to-delivery problems; however,
cost overruns and technical difficulties can significantly
diminish any perceived benefits. Through evaluation of
eight diverse DoD programs, this research shows that
the state of a legacy system’s documentation, availability
of subject matter expertise, and complexity/feasibility
of integration are key factors that must be analyzed.
Based on these three key factors, the authors propose
a framework to aid both the DoD and defense contrac¬
tors in the evaluation of legacy systems for potential
efficient and effective reuse.

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Within the DoD, there is an increasing need to deliver products that
are both technologically cutting-edge and affordable. Currently, the DoD
budget is facing sequestration and planned reductions, cost overruns
of DoD acquisition programs over a 7-year period were approximately
$919 billion (Defense Business Board, 2010). At the same time, a survey
of all DoD programs shows that the DoD acquisition life cycle, which
begins at the identification of needs, goals, and objectives and completes
at the disposal of the system was on average 11 years (Tomczykowski,
2001). One potential solution to the issues of cost overruns and prolonged
acquisition timeframes is to reuse DoD legacy systems. While this may
seem like an ideal solution due to the legacy system being complete,
tested and even operational, reusing legacy systems can lead to unfore¬
seen technical complications and financially prohibitive difficulties
when integrating with newer technologies. A prime example of this is
the potential to have a technological gap between the legacy system and
the newly created system. In this instance, additional cost is frequently
incurred when developing the solution for the systems to work in unison.

Interestingly, even the terms “reuse” and “legacy” have multiple defini¬
tions depending on their source. In the software engineering domain, the
term reuse may imply that a software product was designed as a reusable
building block. For this study, it was imperative to derive a definition from
established sources that did not limit the study or exclude other forms of
reuse that are common within the DoD. Similarly, definitions of legacy
systems abound, and often the term is used to simply describe a system
that is considered old. However, within the DoD, the term legacy system
has a much more specific meaning. In the DoD context, a legacy system's
age does not distinguish it as legacy, but merely denotes that the system
is one in which DoD has a substantial investment of both time and money
(Defense Acquisition University [DAU], 2009). To investigate this topic,
the authors used the following taxonomy of terms:

• Reuse - the integration of an already developed part (e.g.,
engine), product (e.g., inventory database), or legacy system
(e.g., telemetry processing system) into another context or
component.

• Legacy System - “a system or application in which an orga¬
nization has already invested considerable time and money”
(DAU, 2009).

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Reusing DoD Legacy Systems: Making the Right Choice

Despite the challenges involved in the reuse of legacy systems, defense
contractors, whether required by contract or by design, are regularly
agreeing to do so as a cost and schedule mitigation strategy without either
the U.S. Government or the defense contractor fully analyzing what the
effect of reuse may actually be on the cost, schedule, risk, and perfor¬
mance of the product life cycle (General Accounting Office [GAO], 1993).
In some cases, reuse of a legacy system provides an affordable and efficient
alternative to a newly developed system, as in the KC-135 Stratotanker.
In this case, the original fleet has been updated, retrofitted, and modified
over 12 times in the last 50 years, each time saving the DoD the estimated
$40 billion cost of developing a new aircraft for a similar purpose (GAO,
2004; Clark, 2010). On the other hand, the Navy Marine Corps Intranet
(NMCI) contract was grossly underestimated by both the prime contrac¬
tor and the U.S. Government, and as of 2007, the prime contractor had
lost $3 billion (Jordan, 2007). One of the many continuing struggles on
the NMCI program is the incorporation of tens of thousands of different
legacy software versions and applications into a common operating envi¬
ronment (Jordan, 2007). Given the valuable lessons observed (and maybe
learned) from these and many other programs, what factors are critical
to consider before deciding to reuse a legacy system?

Reusing legacy systems can lead to unforeseen
technical complications and financially prohibitive
difficulties when integrating with newer technologies.

Research into the application of software reuse is plentiful, and gen¬
erally falls into three common themes: theoretical work, cost impacts,
and software tools used to aid in the reuse process. In the area of theoret¬
ical work, researchers have developed software legacy and reuse-based
acquisition life-cycle frameworks (Ahrens & Prywes, 1995), described
the causes of technological uncertainty (Fleming, 2001), discussed
implementing design reuse (Gil & Beckman, 2007), formalized reuse
processes (Redwine & Riddle, 1989), defined strategies for reuse (Frakes
& Terry, 1996), and created a better reuse design based on knowledge
management techniques (Hicks, Culley, Allen, & Mullineux, 2002). The
literature surrounding the cost and economic impacts of reuse include
works tying cost to software development (Wang, Valerdi, & Fortune,
2010), updating software cost models for current issues (Boehm et al.,

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2000), and evaluating the impacts of the cost of software reuse (Boehm,
1981; Gaffney & Durek, 1989). Perhaps the most expansive studies in
reuse are derived from the creation of software tools and applications.
Examinations in this area include work in evaluating reuse through a
total system approach (Kim & Stohr, 1998; Mili, Mili, & Mili, 1995; Isoda,
1995) and exploring reuse abstraction (Freeman, 1983).

Regardless of all of the theoretical work, tools, and cost models
available, one key area remains inadequately researched: how program
managers should determine whether or not they will efficiently and
effectively reuse hardware and software legacy systems based on cost,
schedule, risk, operations and maintenance (O&M), and performance. To
investigate this, an interpretive case study approach was used to evaluate
a group of DoD programs to accomplish three objectives:

• Identify the key factors decision makers need to consider
when determining whether or not to reuse legacy systems.

• Determine how often the key factors have an impact on
studied programs and what preventative measures could be
applied to diminish unsuccessful reuse of legacy systems.

• Create a framework of imperative questions and quantifi¬
able answers that can improve the decision maker's ability
to pinpoint which legacy system opportunities for reuse
stand the greatest chance of success.

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Reusing DoD Legacy Systems: Making the Right Choice

Identifying Key Factors in
Reusing Legacy Systems

Eight existing DoD programs spanning the areas of aircraft, infor¬
mation technology, systems of systems, communications, satellites, and
facilities were used as a sample of DoD program domains where reuse
of legacy systems exists. Programs were delineated by their capacity to
successfully reuse DoD legacy systems. For this study, successful reuse
was based on each program's capacity to reuse a legacy system within the
projected cost, schedule, risk, and performance baselines. Data—includ¬
ing GAO reports; program-specific lessons observed; and independent
third-party analyses that explored cost, schedule, risk, performance, and
O&M impacts—were used to determine the success or failure of legacy
system reuse. Additionally, data were analyzed to ascertain the funda¬
mental reasons that cost, schedule, or risk increased on the program.

To substantiate the findings of this study, the collected data were
then validated by experts in the field of systems engineering who were
familiar with the programs selected. Data were also controlled for factors
that were outside the control of either the DoD or the defense contractors.
For example, six of the programs studied have acquisition life cycles of
10 years or more, and thus were more susceptible to volatility in their
budgets. Since budget fluctuations are often out of the control of both
the DoD as a whole and defense contractors in particular, any results
that were directly influenced by these types of external causes were not
included in the final analysis.

Upon initial review of the eight programs, three recurring factors
were found when programs were unsuccessful in reusing legacy systems:

• Substandard, inadequate, or nonexistent systems engineer¬
ing documentation including: requirements, architectures,
statements of work, work breakdown structures, concept
of operations, test documentation, and standard operating
procedures.

• Insufficient subject matter expertise including: inadequate
identification of current users of the legacy system, little or
no accounting for training existing employees on the system,

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and assuming experts within a specific field should be able
to operate the system simply because of the interrelation¬
ship between the newer system and the older legacy system.

• Inadequate analysis of the cost, schedule, and risk of
integrating a legacy system including: incompatible tech¬
nologies, inadequate security postures of the legacy systems
against the current security landscape, substandard pro¬
cessing of data after integration, and creation of additional
systems or functions to connect the new pieces of the sys¬
tem to the legacy system.

Conversely, for the programs that successfully reused legacy sys¬
tems, these factors were either addressed early in the program life cycle
or accounted for in the reengineering work associated with the program.
To fully validate the dominance of these key factors, the eight programs
and their software and hardware projects were evaluated against the
following three hypotheses:

• Hypothesis 1: Decision makers overestimate the quantity
and quality of legacy system documentation available.

• Hypothesis 2: Decision makers underestimate the criticality
of legacy system subject matter expertise.

• Hypothesis 3: Decision makers underestimate the time,
cost, and feasibility of the integration phase.

Frequency of Factors

Of the eight programs analyzed, six of the programs overestimated
the quantity and quality of legacy system documentation (Figure 1).
When unsuccessful programs did have documentation, the quality of the
documentation did not meet the industry or military standard, and thus
required additional effort to meet these standards. Similarly, a different
set of six of the programs also overestimated the cost and time to deliv¬
ery of integrating new technology with the applicable legacy systems,
while another set of five program decision makers underestimated the
criticality of legacy system subject matter expertise. Unsuccessful pro¬
gram teams that did not understand the importance of subject matter
expertise often employed personnel who were experts in a specific field

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related to the legacy system, but who had never worked on that system
specifically. In this situation, all five of the program managers quickly
exhausted the budget and schedule resources allocated for training their
staffs, and even then fell short in the area of system knowledge.

FIGURE 1. FREQUENCY OF KEY FACTORS

Number of Programs that
Overestimate the Quality and
Quantity of Documentation

Number of Programs that
Underestimate Subject
Matter Expertise

Number of Programs that
Underestimate the Cost
of Integration

■ 6 of 8 Programs ■ 6 of 8 Programs ■ 5 of 8 Programs

■ 2 of 8 Programs ■ 2 of 8 Programs ■ 3 of 8 Programs

Quality and Quantity of Documentation

Data analysis shows that decision makers overestimate the quantity
and quality of on-hand legacy hardware and software system documen¬
tation 72.7 percent of the time. In fact, three of the programs studied
had little to no requirements, architecture, statement of work, or work
breakdown structure artifacts for the legacy systems involved. Due to
ever-evolving military and industry standards for documentation within
the systems and software engineering fields, gaps often exist in quality
and quantity of requirements, operational concepts, and legacy archi¬
tecture documentation, which must be understood prior to beginning
the program life cycle. These artifacts frequently must be redocumented
to current standards during the initial phase of the program to satisfy
contractual deliverables. If the level of redocumentation is not bid into
the contract, the unscoped efforts directly impact program planning,
resources, and performance. This leads to higher risk, additional costs
for either the DoD or defense contractor depending on the contract vehi¬
cle type, and the possibility of schedule impacts, thus having a negative
impact on successful legacy system reuse.

This conclusion held true for 100 percent of programs that reused
legacy software systems, but it only held true for 50 percent of programs
that reused hardware components (Figure 2). Since the relative age of the
software engineering field is less than that of the hardware engineering
field, these results are not entirely surprising. The software engineering

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field is still maturing in the frameworks used to apply it, which includes
how systems are documented and to what degree. The initial results indi¬
cate that while reviewing and obtaining documentation is a challenge
for the vast majority of programs regardless of the hardware or software
system being built, added diligence is warranted when reusing DoD
legacy systems. Based on these findings, the hypothesis that decision
makers overestimate the quality and quantity of legacy documentation
is supportable.

FIGURE 2. COMPARISON OF HARDWARE AND SOFTWARE

PROJECTS

100 %

90%

80%

70%

60%

50%

40%

30%

20 %

10 %

0 %

Hypothesis 1 Hypothesis 2 Hypothesis 3

Documentation Subject Matter Integration
Expertise

Subject Matter Expertise

The analysis illustrates that decision makers do in fact underesti¬
mate the importance of having the correct subject matter expert at the
right time for the program 62.5 percent of the time on both software and
hardware projects. When proper subject matter experts are not engaged,
knowledge recovery becomes a critical endeavor in understanding the
legacy system. In particular, knowledge recovery activities included
legacy system training, additional documentation of system operating
procedures, and specialized use cases. During the planning phase, four of
the programs studied had unquantified knowledge recovery efforts. Data
show this added time to schedules and raised the cost of the program
while inexperienced employees were brought up to speed. Programs
on which underestimation of subject matter expertise occurred shared
the common problem of hiring experts in a field of study that includes
the legacy system, while assuming that the experts could immediately
begin working on that system. The field subject matter experts were often

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Reusing DoD Legacy Systems: Making the Right Choice

very knowledgeable, but did not have the specific knowledge that comes
from working directly on or with the legacy system, which increased the
learning curve and, subsequently, program cost and schedule. Similarly,
hiring additional manpower after these realities were established typi¬
cally occurred too late to effectively mitigate their impacts.

When obtaining experts for hardware and software components,
a common problem is the complex and unique nature of the DoD appli¬
cation of a given capability. The DoD regularly pushes the bounds of
common hardware and software tools by using commercial equipment
that is often designed for smaller and less intricate applications. In
these cases, expertise is imperative, as even the experts in the field are
challenged by the application of a legacy system. To lessen the effects of
inexperienced staff, the DoD and defense contractors should determine
the complexity of the legacy system and what, if any, legacy experts
should be employed on the program to ensure successful delivery.

Of the programs that reused legacy software systems, 80 percent
underestimated the importance of this factor, while this was only true
of 50 percent of hardware programs (Figure 2). This result emphasizes
the importance of subject matter expertise to both hardware and par¬
ticularly software programs. Since legacy DoD software can be unique,
special attention should be paid to hiring staff with particular expertise
for the given legacy system. These results show that underestimation in
this area can significantly degrade the success of reuse.

Feasibility of Integration

Data show that decision makers on the programs in the analysis
underestimated the time and cost of integrating with legacy systems
72.7 percent of the time. For example, on one program in the study, the
original bid included an assumption that the outdated software code
could be converted and ported to new hardware to reduce the cost of
purchasing or developing completely new software. Despite careful
analysis and hiring subcontractors specializing in performing this
task, the integration failed. Further, the schedule was impacted, and the
subcontractor was still performing work to create a usable system at the
time the data were collected. With work still being performed on this
system, the benefit of reusing the legacy software cannot be calculated,
but it is likely that this rework activity will add to the schedule, cost,
and risk of the program. In the previous example and others like it, the
program risk profile will be increased, and the probability of impacts to

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both cost and schedule is greater without active risk mitigation strate¬
gies in place (Bennett, 1995). As identified by Orrego and Mundy (2007),
there is little research into the level of risk impact when reusing systems.
Because of this, an opportunity exists for future research in this area to
further refine the decision-making process for reuse and develop risk
mitigation techniques that program managers can leverage to better
manage reuse-related technical risks.

Security implications must also be considered in any analysis of a
legacy system's integration potential. The rapid pace of change in today's
security environment will likely necessitate significant penetration
testing, security scanning, and hardening to identify vulnerabilities
and retrofit any legacy system to meet current DoD and industry stan¬
dards. Additionally, the cost and risk of reusing hardware or software
in a classified environment can increase the complexity of integration.
Intensive systems engineering and security architecture analysis will
likely be required to ensure that classified data security is not put at risk
due to latent vulnerabilities that may be exposed when integrating with
a legacy system. As observed on one of the programs studied, underes¬
timation of these efforts at the beginning of a project drives significant
unplanned investments later in legacy system reuse projects—even if
only to navigate the complex government processes required to pursue
waivers or deviations for any vulnerabilities that cannot be overcome
without prohibitively high additional costs (Jordan, 2007).

Legacy System Reuse Framework

Documentation, subject matter expertise, and feasibility of integra¬
tion were all found to impact legacy reuse success individually, but they
were consistently found to overlap with compounding effects (Figure
3). On programs with little documentation, 87.5 percent of the programs
underestimated the criticality of obtaining the correct experts at the
proper time, and this directly impacted the time and cost required for
integration. An additional finding shows that there may be a relationship
between the age of a legacy system and the feasibility of its reuse due to a
confluence of the factors discussed here. Data show that programs that
reuse increasingly older legacy systems had not only larger documenta¬
tion gaps, but also difficulty bridging the technological divide between
the new and old parts of the system. All five of the software programs
had documentation gaps, but of those systems, the two attempting to
use software systems older than 10 years had virtually no requirements,
architecture, or operational concept documentation to leverage. Given

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Reusing DoD Legacy Systems: Making the Right Choice

the clear impact that this has on subject matter expertise retention and
integration facilitation, this demonstrates that there may, in fact, be
a tipping point at which a legacy system's age directly determines the
feasibility, or lack thereof, of reusing that system.

FIGURE 3. KEY FACTORS IN REUSE

Key Documentation Questions

• What types of documentation exist?

• How much documentation exists for each type?

• If documentation does not exist or is deemed
insufficient for current needs, what reengineering
efforts must be done to understand and document the
system moving forward?

Key Subject Matter Expertise
Questions

What experts are necessary?
Do experts have experience
working on or with the legacy
system?

If no experts exist, what and
how much training is required
for current team members?

Key Feasibility of Integration
Questions

Are there technological gaps
that exist?

How broad are the
technological gaps?

If there are technological
gaps, is there a path forward
that can enable integration?

In these cases, by the time problems are identified, efforts must be
made to provide proof of why the legacy system is not suitable, thereby
adding yet more cost to the effort. At the point that a subsequent judg¬
ment on suitability is rendered, pursuit of a more optimal solution may
no longer be an option. Due to the investment and development already
done on a reuse-based system, creation of an optimal, new solution may
be outside of the acceptable cost for the final product. Interrelation of
these factors necessitates their consideration individually and collec¬
tively to properly assess areas of compounding risk.

Within each of the key reuse factors shown in Figure 3, imperative
questions should be answered prior to the decision point of determining
whether to reuse a legacy system (Table). These questions were devel¬
oped by isolating the problem areas identified from the research that
contributed to cost and schedule impacts on each program. Similarly,
programs that were successful were analyzed for mitigation strate¬
gies applied. Based on this analysis, a question-based framework was
developed, and standard quantification methods were applied to each
area. Program decision makers employing this methodology will need

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TABLE. REUSE EVALUATION FRAMEWORK

Reuse Factors Key Questions for Analysis Quantification Method

Documentation • What types of documentation exist?
° Operational Concept

- Use cases

° Requirements
° Architecture

- Functional Flow Diagrams

- Activity Diagrams

- Block Definition Diagrams
° Work Breakdown Structure
° Design

- Software Design Documents

- Hardware Design Documents

- Interface Control Documents
° Test

- System Acceptance Test
Plans/Results

- System Integration Test
Plans/Results

- Security Test and Evaluation
Plans/Results

° Security Analysis

- System Security Plan
° System Operations and

Maintenance Procedures
° Industry or Military Standards

• How much documentation exists for
each type?

• If documentation does not exist or
is deemed insufficient for current
needs, what reengineering efforts
must be done to understand and
document the system moving
forward?

° What are the contract line item
deliverables?

° Are there documents that are
necessary, but not listed in the
contract line item deliverables?

Cost - based on prior
documentation or
redocumentation efforts
Schedule - based
on prior basis of
estimates for length
of documentation
activities
Risk - based on
risk assessment
of documentation
availability

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Reuse Factors

Key Questions for Analysis

Quantification Method

Subject Matter

• What experts are necessary to

• Cost - based on training

Expertise

understand the legacy system?

and personnel hours

° Are there experts within the DoD

• Schedule - based on

or within industry?

training efforts and

° Will the contractor need

transition period

assistance in locating experts if

• Risk - based on risk

they reside within the DoD?

assessment of subject

• Do they have experience working on

matter expertise

or with the legacy system?

• If no experts exist, what training and
how much training is required for

current team members?

° Is there a similar system where
experts may have overlapping

skills?

availability

Feasibility of

• Are there technological gaps that

• Cost - if the legacy

Integration

exist?

technology can be

° Compatibility of legacy software

integrated

and/or hardware with the new

• Schedule - if the legacy

system

technology can be

° Data transfers and protocol

integrated

° Performance requirements in the

• Risk - based on

new environment

risk assessment of

° Platform differences

technological gaps

° Security standards and

and cost and schedule

accreditation

• How broad are the technological
gaps?

° Would a technical solution be

more difficult to implement than
selecting nonlegacy hardware or

software?

• If there are technological gaps,
is there a path forward that can
enable integration?

° Is there a common technical

solution, how often is it used, and

with what results?

flexibility

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to collect and apply their own program-specific data to feed the frame¬
work. In turn, a determination on a legacy system's candidacy for reuse
success may be more easily obtained. The framework can be used to
augment these and other traditional analysis methods, thereby allowing
decision makers to bring the frequently overlooked or underestimated
legacy system factors into the decision-making process.

Based on the answers to the questions outlined in the framework,
the decision maker can associate cost, schedule, and risk with any
redocumentation effort. These quantification methods should be based
on historical data collected and applied for analogous proposal activi¬
ties. Similarly, cost, schedule, and risk can be associated with subject
matter expertise. Feasibility of integration can be linked with risk, cost,
and schedule; and if there are technological gaps that can be solved, the
program can associate cost and schedule impacts. If a technological
gap cannot be reasonably overcome, the program manager should not
reuse the legacy system and instead begin work to identify alternative
solutions. By utilizing these measurements, program managers can
make an informed and grounded estimation of the costs, schedule, risk,
performance, and O&M needed to successfully reuse the legacy system.

Conclusions

Reuse of DoD legacy systems is a tempting enterprise for both the
DoD and defense contractors, but the perceived value of reusing a legacy
system is often outweighed by the very real technical difficulties and
costs associated with doing so.

With improved upfront analysis, a smarter application of reuse can
play an important role in diminishing time to market and affordability
initiatives. However, early analysis is rarely done. Despite the fact that
two of the programs within this study were able to successfully reuse
legacy systems, the overall findings suggest that the decision to do so
is not being assessed properly on these programs, particularly since
no reuse analysis was performed prior to the decision to go forward.
In fact, all five of the program managers who reused software in this
study overestimated the quality and quantity of documentation needed
as well as the feasibility of integration; and 80 percent of the program
managers who reused software underestimated the criticality of legacy
system subject matter expertise. While legacy hardware reuse was more
successful, 50 percent of these programs also succumbed to improper

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estimation of the key factors outlined here. With so many unaccounted
activities, program managers—not surprisingly—will see overruns in
cost and schedule on programs where legacy system reuse is attempted.

Reuse of DoD legacy systems is a tempting
enterprise for both the DoD and defense contractors,
but the perceived value of reusing a legacy system
is often outweighed by the very real technical
difficulties and costs associated with doing so.

These findings underscore the necessity of utilizing a framework
to quantitatively evaluate legacy systems prior to the decision to reuse
them. Both the DoD and defense contractors can benefit from applica¬
tion of this framework. Contractors can use it to justify the inclusion
of reuse in a proposed solution, or alternatively to justify higher initial
costs to perform ground-up development and avoid reuse altogether. The
DoD can additionally leverage this framework to perform an indepen¬
dent analysis of contractor bids and ensure that reuse feasibility was
adequately evaluated by each contractor. All too frequently, proposals
including reuse in the solution space are enticing because of their lower
cost estimates and other perceived benefits, but when these benefits fail
to materialize, the damage is already done. Since no two programs are
alike, applying this framework in conjunction with developing a compre¬
hensive risk profile and performing a cost-benefit analysis will provide
a more complete examination of reuse potential. A combination of these
techniques to perform such analyses could also be a valuable subject for
future research.

Of importance to note is that even if the cost of reusing a legacy
system is more than what was budgeted, reusing the legacy system may
still be a more efficient and effective alternative in terms of cost, sched¬
ule, performance, and risk than building an entirely new system. In this
instance, the framework should be used to aid in better cost estimation
during the discovery and contracts phase of the acquisition life cycle.
The results of such rigor would benefit both the DoD and defense contrac¬
tors alike. Unless an analysis is performed, the implications of reusing a
legacy system are entirely unknown.

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Author Biographies

Dr. Meredith Eiband is a systems engineer
at Lockheed Martin. Her career includes
extensive experience working with the United
States Army, Navy, Air Force, Missile Defense
Agency, and DoD on a variety of technical
projects. She holds two U.S. patents; a BA in
Business Administration from Trinity
University in San Antonio, Texas; and an MS
and a PhD in Systems Engineering from The
George Washington University (GWU).

(E-mail address: meredith.eiband@imco.com)

Dr. Timothy J. Eveleigh is an adjunct pro¬
fessor at GWU and an International Council
on Systems Engineering (INCOSE) Certified
Systems Engineering Professional. Dr.
Eveleigh has over 30 years' industry experi¬
ence working in such diverse areas as DoD
and intelligence community information
technology (IT) acquisition challenges,
research and development, enterprise archi¬
tecting, and IT governance. Dr. Eveleigh holds
a DSc in Systems Engineering from GWU
and an MS in Remote Sensing/Physical
Geography from the University of Delaware.

(E-mail address: eveleigh@gwu.edu)

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Dr. Thomas H. Holzer is an adjunct profes-
sor at GWU. He is the former director,
Engineering Management Office, Enterprise
Operations Directorate, National Geospatial-
Intelligence Agency. He has over 35 years'
experience in life-cycle systems engineering,
leading large-scale IT programs and process
improvement initiatives. Dr. Holzer holds a
DSc and an MS in Engineering Management
from GWU, and a BS in Mechanical
Engineering from the University of Cincinnati.

(E-mail address: holzert@gwu.edu)

Dr. Shahryar Sarkani is an adjunct profes-
sor in the Department of Engineering
Management and Systems Engineering at
GWU. He has over 20 years of experience in
the field of software engineering, focusing on
architecture and design. Dr. Sarkani holds a
DSc in Systems Engineering from GWU, an
MS in Mathematics from University of New
Orleans, and a BS in Electrical Engineering
from Louisiana State University.

(E-mail address: emseor2003@yahoo.com)

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Keywords: Contracting, Economic Price Adjustment
(EPA) C/auses, Risk, Target Fee

Valuing the Cost of an
Economic Price Adjustment
Clause to the Government

( Scot Arnold, Bruce Harmon, Susan Rose,
and John Whitley

An Economic Price Adjustment (EPA) clause in a
contract allows for adjustment of contract price if certain
conditions are met. The Department of Defense (DoD)
often uses an EPA clause in contracts where there is
an increased risk that the costs of inputs used by the
contractor will diverge from the forecasts used in the
original pricing of the contract. EPA clauses transfer
risk from the contractor to the government; thus, they
are of economic value to the contractor. This article
reviews EPA clauses, analyzes the value of risk transfer,
and discusses how DoD could account for this value in
negotiating fees for contracts that contain EPA clauses.
Other government costs and risks associated with EPA
clauses are also discussed.

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An Economic Price Adjustment (EPA) clause in a contract allows for
adjustment of contract price if certain conditions are met. The Federal
Acquisition Regulation (FAR) (2005) permits use of an EPA clause when
“there is serious doubt concerning the stability of market or labor condi¬
tions that will exist during an extended period of contract performance” 1
The DoD uses EPA clauses in areas like multiyear procurement (MYP)
contracts; for example, recent C-17, F/A-18 E/F, and AH-64D Apache
Longbow MYP contracts all contained EPA clauses covering certain
labor costs and contracts for highly volatile commodities, e.g., fuel.

EPA clauses transfer risk from the contractor to the government;
thus, they are of economic value to the contractor. For example, a con¬
tractor may be able to get better financing terms for a project, given the
contractor's lower risk exposure. In other areas of government contract¬
ing, hedging a contractor's risk is grounds for adjusting the target fee
used in establishing contract price. For example, the Defense Federal
Acquisition Regulation Supplement (DFARS) recommends using a
higher target fee in a Firm Fixed Price (FFP) contract than in a Fixed
Price Incentive Firm (FPIF) contract, where more risk is shared with
the government. But, the weighted guidelines method contained in the
DFARS does not clearly address how to adjust target fee 2 when an EPA
clause is used. 3 After a brief review on the background of EPA clauses,
this article analyzes the potential value of EPA clauses and discusses
how this value could be taken into account in negotiating a contract.

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Background

A fixed price contract commits the contractor to absorb the cost risk
associated with providing the agreed-upon product or service. Cost risk
can result from unexpected changes in input prices, unfavorable changes
in a manufacturing process, labor strikes that shut down production, or
other unforeseen events. This works both ways for contractors. If they
are not able to control costs, they are exposed to losses; if they are able
to control and reduce costs, they retain the higher profit.

Different types of contracts distribute risk between contracting
parties in various ways. An FPIF requires the contractor to share cost
changes from a negotiated target while an FFP contract puts all of the
cost risk on the contractor. EPA clauses place the inflation risk for cer¬
tain elements of cost—e.g., steel, titanium, labor, or a combination of cost
elements—with the government.

The typical EPA clause specifies “[adjustments based on cost indexes
of labor or material” (FAR, 2005). The indexes chosen should be corre¬
lated with the cost elements at risk, but should also be broad enough to
be outside of the contractor's control (DFARS Procedures, Guidance,
and Information, 2012). Most EPAs are written with symmetry between
upward and downward price adjustments. However, contractors who
have the greatest exposure to upward pressure on input costs will more
likely prefer an EPA clause. An EPA clause would be disadvantageous to
those expecting a decrease in input prices (which would normally lead to
higher profits); to the degree that contractors can influence whether an
EPA clause is included, this would result in a higher incidence of upward
price adjustments. 4

In addition to the intended transfer of risk for particular labor or
material inputs, EPA clauses can entail unintended risks from such
things as poorly chosen indexes and strategic behavior driven by the
existence of the EPA clause. The choice of the price index is important.
Researchers of past studies have found difficulties in the application of
EPA clauses. In some cases, the EPA clause was linked to price changes
that were not sufficiently coupled to the actual underlying inputs to the
contract that established the need for the clause. We refer to this as
“basis risk.” For example, Keating, Murphy, Schank, and Birkler (2008)
found that the Steel Vessel Index, constructed in the 1950s to track the
prices of common materials used in ships, was not representative of

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modern naval vessels and had been substantially more volatile than the
prices of common input materials for modern naval ships. To overcome
this inaccuracy, several ship program managers have created their own
materials cost indexes.

The DFARS directs that the costs subject to the EPA be fixed at
contract start, including the proportions of labor and material, and
their allocation across time. This is intended to limit the contractor's
ability to shift resources and “game” the EPA clause once a contract has
started. Choice of index is also important in limiting gaming of an EPA
clause, as some indexes that have been used could allow the contractors'
actions to affect index values. For example, in the first F/A-18E/F MYP
contract, an index based on the contractor's actual labor rates was used. 5
The Department of Defense Inspector General (DoDIG, 2008) found that
Boeing's prefunding of pension liabilities directly affected the Bureau of
Labor Statistics' aircraft industry labor compensation index, which was
used in calculating EPAs for three Boeing contracts. These unintended
risks may result in payments to the contractors that otherwise would
not have occurred. Updates to the DFARS and improvements in govern¬
ment/industry practice have better regulated these issues; the F-22 MYP
contract includes a good example of a well-written EPA clause. In this
case, the portions of contract cost affected were narrowly defined, and
the labor indexes specified used a broad formulation for fringe benefits.
However, given imperfect information and the limitations of available
indexes, the possibility of using an inappropriate index remains.

EPA-like clauses are also used to mitigate risks in commercial,
long-term supply agreements in capital-intensive industries (Goldberg
& Erickson, 1987). A common objective of these agreements in com¬
mercial transactions is to stabilize supply availability; the purpose of
the EPA-like component is to transfer pricing risk to the party most
able to manage it. Like an EPA clause in a government contract, the
private contracts use a price index to adjust the transaction price in
the long-term agreement. For example, a supplier of wrought titanium
might index processed mill product prices to the cost of titanium sponge.
Public firms must estimate the value of these EPA-like clauses for their
quarterly and annual financial reporting if the language of the clause
implies an embedded risk option. In some cases, the firm can use market
prices for similar options for a valuation; in other cases, it must use a

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Valuing the Cost of an Economic Price Adjustment Clause to the Government

model. For estimating the value of an EPA clause in a defense weapons
system contract, the same process can be applied. The valuation method
is dependent on the type of commodity covered under the clause.

Value of Risk Transfer in Government Contracts

EPAs in government contracting transfer risk from the contractor to
the government. In commercial transactions of this sort, the party that
“sells” risk is expected to pay a premium to the party that “buys” risk. The
financial and insurance industries have developed sophisticated tools
for estimating the value of risk, thus the “premiums” that should be paid
for various types of risk transfers. In government contracting, the pre¬
mium would be paid by a downward adjustment to the target fee earned
by the contractor, set during determination of the contract price. The
DFARS does not clearly address fee adjustments to account for the risk
transfer when including an EPA clause. 6 Presently, contracting officers
use their own judgment in determining whether to reduce the contract
fee to reflect the lower cost-risk exposure, and no guidance is provided to
contracting officers as to what might be an appropriate adjustment level.

The DFARS does take into account other forms of risk transfer and
provides recommendations on target fee adjustments to account for
their value, e.g., moving from an FPIF to an FFP contract. These recom¬
mendations can provide rules of thumb for valuing other types of risk
transfer. The Table lists the range of fees paid for contract risk based on
contract type.

TABLE. DFARS CONTRACT RISK FEE POLICY

Contract Type

Normal

Value

Designated

Range

Firm-fixed-price (FFP), no financing

5.0%

4 to 6%

FFP, with performance-based payments

4.0%

2.5 to 5.5%

FFP, with progress payments

3.0%

2 to 4%

Fixed-price incentive (FPI), no financing

3.0%

2 to 4%

FPI, with performance-based payments

2.0%

0.5 to 3.5%

FPI, with progress payments

1.0%

0 to 2%

Cost-plus-incentive-fee

1.0%

0 to 2%

Cost-plus-fixed-fee

.5%

0 to 1%

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For example, if an FFP contract with progress payments has a 15
percent fee, 3 percentage points are for contract risk. The value of the
risk transfer (as indicated by the DFARS “profit” rules) associated with
an FPIF contract vice an FFP contract is 1 percent. 7 Note that the rules
make no distinction between an FPIF with a high share ratio (e.g., 80 per¬
cent of overruns/underruns absorbed by the government) and one with
a low share ratio. However, the designated range allows the contracting
officer some leeway in accounting for the different levels of risk transfer
possible in an FPIF contract.

Valuing EPA Risk Transfers
Using Financial Models

The value of an EPA clause is what the finance literature calls the
“risk premium”—the minimum price (or fee reduction) that the govern¬
ment might charge for taking the specific risk from a contractor. 8 The
financial tools used to determine the market price of risk implied in
hedging debt and commodities form the basis for valuing an EPA clause.

Keynes (1930, pp. 142-44) and Hicks (1946, pp. 146-47) were the
first to develop theories on the returns associated with commodities
futures markets. Their normal backwardation theory postulated that the
risk premium would accrue, on average, to buyers of futures (analogous
to the government for an EPA). This was due to producers (the contrac¬
tor) selling futures—thereby hedging their profits—to speculators (the
government), who required in return a price below the expected spot
price at maturity (potential decrease in negotiated fee). This is similar
to a hedger buying insurance from an insurance firm that serves as the
speculator. The insurer expects that the premium includes compensation
for administration and other management expenses associated with the
insurance policy. These are all analogous to an EPA.

To apply this to valuing the cost of risk to the government associated
with EPA clauses, consider two extremes: a contract that is exposed to
general inflationary risks in all elements of cost, e.g., labor and materi¬
als, and a contract exposed exclusively to risk in its commodity costs.
In the first case, the entire contract is exposed to general inflation and
the risk that this inflation deviates from the forecasted inflation used
in developing the contract. The risk that, overall, all inflation deviates
from forecasted inflation is called the Inflation Risk Premium (IRP).
In this case, if the government were to charge a risk premium to hedge

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Valuing the Cost of an Economic Price Adjustment Clause to the Government

the contractor from the entire amount of this risk, it could be estimated
directly as the IRP. This premium would be reflected as a reduction of
the fee paid to the contractor.

To understand the IRP, begin by examining risk premium generi-
cally. A risk premium is the discount required on an investment whose
cash flows are subject to fluctuations in value due to its exposure to a
particular risk. The price discount is computed as the price relative to the
same asset that is free of the risk exposure. For example, the equity risk
premium, as used in the capital asset pricing model, is the discount inves¬
tors require on an investment in the market portfolio of equity securities
relative to the risk-free rate. For U.S. stocks, this can be estimated by
calculating the rate of return implied by the Standard & Poor's 500 index
over 10 years and subtracting the yield on the 10-year Treasury Note.

The value of an EPA clause is what the finance
literature calls the “risk premium”—the minimum
price (or fee reduction) that the government might
charge for taking the specific risk from a contractor.

This equity risk premium example is merely an illustration of the
purpose of a risk premium. An EPA clause is designed to target very
specific risks, in most cases inflation. Fortunately, this type of risk can
be decoupled from certain types of publicly traded debt instruments.
For a fixed rate note, the value of the interest payments is eroded should
the rate of inflation exceed the rate that was assumed when the note was
originally issued. 9 The IRP compensates investors for bearing the risk
of inflation.

The other extreme case is when the risk is due to exposure to price
volatility of specific commodities, only a fraction of the overall cost of
the contract value is at risk. In this case, if the government hedges the
contractor from commodity price inflation, the value of the risk premium
is more like that embedded in the related commodities futures market—if
one exists—in which commodities producers hedge price risk by selling
futures contracts. Commodities make up only a small fraction of the cost
of major defense acquisition programs. Even with the largest historical
price swings for such commodities as titanium or nickel, the overall cost

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of the contract is unlikely to change by more than 1 percentage point
(Arnold, Patel, & Harmon, 2011; Tran-Le & Thompson, 2005). While a
risk premium based on specific commodities can be estimated, it may be
the case that such an EPA would not justify the cost of its implementation
and management effort. 10

The U.S. Government raises debt through two main
offerings: U.S. Treasury securities, which pay
nominal interest rates, and Treasury inflation-
protected securities (TIPS), which pay “real rates.”

An EPA clause is most likely to be used in situations between these
two extremes where most of the input price volatility is correlated with
volatility in the overall inflation rate. 11 In these cases, one approach is
to begin with the IRP and adjust it for the fraction of total contract cost
represented by the inputs covered by the EPA clause.

The U.S. IRP can be estimated by analyzing U.S. Treasury securi¬
ties along with a consistent inflation forecast. 12 The U.S. Government
raises debt through two main offerings: U.S. Treasury securities, which
pay nominal interest rates, and Treasury inflation-protected securities
(TIPS), which pay “real rates.” The term structure of interest reflects
the set of yields on fixed interest rate notes maturing in the future.
Comparing the effective yield of U. S. Treasury notes against their matu¬
rity date shows the term structure that reflects the market's expectation
of future interest rates. When the economy is expected to grow, the curve
is usually upward-sloping. The market's expected inflation—inferred
from price forecasts, commodity futures, and other economic data—is
also embedded in this term structure. The Figure shows the yield curve
for nominal Treasury securities and TIPS from September 26, 2011
(Board of Governors, 2011).

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Valuing the Cost of an Economic Price Adjustment Clause to the Government

The difference between the yields on similarly maturing nominal
Treasury securities and TIPS is the “break even” inflation (BEI) rate.
The BEI rate can be deconstructed into the expected inflation rate and
the IRP, as follows:

Break Even Rate = IRP + Expected Inflation

The inflation-protected and nominal Treasury securities parallel the
pricing of contracts with and without an EPA (linked to general infla¬
tion), respectively. The government saves the IRP by providing inflation
risk protection; alternatively, the IRP is the cost of paying nominal rates.
The government implicitly charges TIPS investors this premium relative
to the buyers of nominal Treasuries. In similar fashion, an FFP contract
with an EPA (linked to general inflation) is like providing inflation pro¬
tection and the value of this IRP.

FIGURE. NOMINAL TREASURY AND TIPS YIELD CURVE WITH

BREAK EVEN INFLATION RATE

Note. Adapted from "Selected Interest Rates - H. 15: Daily Updates" by Board of
Governors of the Federal Reserve System (U.S.) (September 26, 2011). Retrieved from
http://www.federalreserve.gov/releases/hl5/update/

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Application

The process of applying this to a procurement contract starts with
a clear identification of what input is being covered and whether the
contracting officer can identify a good market index or price series. Next,
the overall effect of the commodity's price volatility on the contract cost
must be estimated. Large price fluctuations for inputs such as titanium
in the F-35 have a relatively insignificant effect on the overall cost of
the contract, because they represent a small fraction of the cost. On the
other hand, even mild fluctuations to general inflation can affect all of
the contract's inputs, leading to relatively large cost changes.

Although the IRP concept is relatively simple, computing an estimate
from interest rate data can be a relatively complicated task. 13 It has been
done using time series analyses of interest rate data and both historical
and forecast inflation rates (Grishchenko & Huang, 2008). The IRP can
also be estimated from prices for fixed income securities other than
Treasuries.

The risk exposure from materials and other
specialty commodities 9 price volatility may be too
small to merit an EPA clause .

Examples of IRP estimates show that the premium varies overtime.
Inflation volatility is not stationary, and the IRP varies with economic
uncertainty and expectations of high or low inflation. 14 Recent estimates
of the IRP show it as low during periods of low inflation expectations and
high during periods of high uncertainty. Shiller and Campbell (1996)
estimated the IRP to be between 50 and 100 basis points by analyzing
nominal 5-year Treasury yields over the period 1953 to 1994. 15 More
recently, Durham (2006) of the Federal Reserve reported the IRP rang¬
ing from 15 to 120 basis points over the period from late 2000 to 2005.
Grishchenko and Huang (2008) reported a smaller IRP—2 to 63 basis
points—from their vector autoregression analysis of TIPS prices. A
more recent staff report by Adrian and Wu (2009) of the Federal Reserve
points to a higher IRP ranging from around 40 to over 250 basis points.

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Valuing the Cost of an Economic Price Adjustment Clause to the Government

As stated earlier, the risk exposure from materials and other spe¬
cialty commodities' price volatility may be too small to merit an EPA
clause. One exception to this could be a contract for a product or service
for which commodities such as food services or fuel were a high fraction
of the cost. The commodities risk premium is typically higher than the
IRP. Estimates from commodities futures data find the premium is simi¬
lar to that for equities—about 4 to 5 percent. This premium was estimated
by Fama and French (1987), among others (Gorton & Rouwenhorst, 2005;
Basu & Miffre, 2011), using an equally weighted portfolio of commodities.

One way to deal with this would be for an FFP contract with an
EPA clause to have a fee decrement of 50 basis points relative to an FFP
contract without the clause, reflecting the IRP estimates for the present
period of low inflation risk. The fee decrement could be adjusted by the
cost share ratio if the contract type was an FPIF. This fee adjustment
reflects the cost of bearing the risk that input prices could differ from
expectations. The contract should already reflect the expected inflation
rate so that the bearer of the risk exposure can reasonably expect to get
the same degree of good news versus bad news.

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Other Considerations

Other issues of risk and cost arise from the inclusion of an EPA
clause in a contract. For example, effort required to manage the clause
once the contract is executed carries an additional administrative cost.
Also, the government faces a number of risks, discussed previously in
the background section, by accepting the clause. These risks are closely
related to the concept of an EPA clause as insurance. The risks include
the basis risk associated with the indexes used; other risks can be related
to risks inherent in any insurance: adverse selection (contractors with
higher inflation risk opting into an EPA) and, to some extent, moral
hazard (the contractor having an incentive to change its behavior to
manipulate the EPA).

In addition to adjusting the contract fee by the IRP, the govern¬
ment should also consider managing basis, adverse selection, and moral
hazard risks the way insurance companies deal with these risks. The
government should evaluate its level of understanding of the contractor's
costs and its incentives given an EPA clause. If the government deems
itself at a significant informational disadvantage, it may need to apply
insurance-like provisions to its contracts to share risks. One common
insurance practice is coinsurance—only insuring a fraction of the loss
exposure, perhaps 75 percent. A variation on coinsurance is a trigger
band that is directed in the DFARS and is common in EPAs: The contrac¬
tor is exposed to a narrow band of volatility—say ±3 percent—outside of
which the government is fully exposed to the loss or gains.

Ultimately, assessing these other risks is idiosyncratic and requires
an in-depth assessment of the specific contract and contractor. This
is in contrast to the methodology described in this article to use
market-derived risk premiums to price specific, but not supplier,
idiosyncratic risks.

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Discussion

An EPA clause transfers risk from the contractor to the government;
in essence, it constitutes an insurance contract. EPA clauses, there¬
fore, provide value to the contractor and cost to the government, and
the government could take this into account in determining contract
price. Setting the target fee used to establish contract price provides an
opportunity to account for the value of an EPA clause, and the DFARS
Weighted Guidelines now provide contracting officers with some flexibil¬
ity to do so. If the government wanted to account for the value of the risk
transfer systematically, it could develop adjustment factors for inclusion
in the weighted guidelines.

The IRP, which is based on the Consumer Price Index (CPI), reflects
a more diversified portfolio of goods than a typical EPA clause linked to
a single commodity such as steel. Further study could also be performed
to gauge the risk exposure of the various contract elements for which the
government is willing to allow EPA clauses. Simplicity in constructing
these clauses is important, and it may be that a single risk premium
is sufficient to equitably price the EPA clause. To develop systematic
guidelines, the government would have to consider adjustments to the
EPA fee decrement to reflect changes in the IRP during periods of very
high inflation expectations. While the literature does provide estimates
of the IRP, a consistently applied method, possibly based on TIPS and
nominal notes, might provide an effective pricing tool that captures
changing inflation trends.

It is important to remember that the IRP will not keep the govern¬
ment from paying inflation adjustments associated with an EPA clause;
rather, compensation to the government for bearing the volatility risk may
drive the adjustments. Furthermore, the fee adjustment concept outlined
herein does not consider the premium for bearing other risks associated
with EPAs, namely basis risk, adverse selection, or moral hazard.

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Author Biographies

Dr. Scot Arnold has worked at the Institute
for Defense Analyses (IDA) for 10 years,
focusing on economic analyses and defense
industrial policy issues. Prior to joining IDA,
he worked in finance at the Visteon
Corporation and the Ford Motor Company.
Dr. Arnold holds a PhD in polymer science
from the Massachusetts Institute of
Technology, an MBA from the University of
Michigan, and a BA from Vassar College.

(E-mail address: sarnold@ida.org)

Mr. Bruce Harmon works for the IDA, where
he has been a professional research staff
member for over 25 years. Mr. Harmon has
extensive experience modeling the costs and
schedules of various aerospace systems, as
well as analyses of other acquisition issues.
He is a PhD candidate in Economics at
American University, Washington, DC.

(E-mail address: bharmon@ida.org)

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Valuing the Cost of an Economic Price Adjustment Clause to the Government

Dr. Susan Rose works as a research staff
member at the IDA. During her 5 years at IDA,
Dr. Rose has worked on a variety of research
analyses for the Office of the Secretary of
Defense, including forecasting of healthcare
costs. She holds a PhD in Economics from
Ohio State University.

(E-mail address: srose@ida.org)

Mr. John Whitley is a senior fellow at the
IDA. Prior to joining IDA, he was director of
Program Analysis and Evaluation (PA&E) at
the Department of Homeland Security (DHS);
and prior to joining DHS, Mr. Whitley worked
in the Department of Defense PA&E, the U.S.
Senate, academia, and served in the U.S. Army.
He holds a PhD in Economics from the
University of Chicago and undergraduate
degrees from Virginia Polytechnic Institute
and State University.

(E-mail address: jwhitley@ida.org)

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References

Adrian, T., & Wu, H. (2010). The term structure of inflation expectations (Staff
Report No. 362). New York: Federal Reserve Bank of New York Staff
Reports.

Arnold, S. A., Patel, P., & Harmon, B. (2011). The material breakdown of the
F-35 Joint Strike Fighter and the Mine Resistant Ambush Protected
Vehicle (IDA Paper P4648). Alexandria, VA: Institute for Defense
Analyses.

Basu, D., & Miff re, J. (2009). Capturing the risk premium of commodity
futures: The role of hedging pressure. Retrieved from http://ssrn.com/
abstract=1340873

Board of Governors of the Federal Reserve System (U.S.). (2011, September
26). Selected interest rates - H.15: Daily updates. Retrieved from http://
www.federalreserve.gov/releases/h15/update/

Department of Defense Inspector General. (2008). Effect of payment into
Boeing pension funds on economic price adjustment clauses in DoD
contracts (Report No. D2008099). Arlington, VA: Author.

Department of Defense Inspector General. (2009). Cost increases related
to the Producer Price Index for titanium mill shapes on DOD multiyear
contracts (Report No. D-2010-004). Arlington, VA: Author.

DFARS Procedures, Guidance, and Information, § 216.202-4 (2012).

Durham, J. B. (2006). An estimate of the inflation risk premium using a three-
factor affine term structure model (Finance and Economics Discussion
Series). Washington, DC: Divisions of Research & Statistics and Monetary
Affairs, Federal Reserve Board.

Fama, E., & French, K. (1987, January). Commodity futures prices: Some
evidence on forecast power, premiums, and the theory of storage.
Journal of Business, 60(1), 55-73.

Federal Acquisition Regulation, Vol. 1 § 16-203-2(i) (2005).

Goldberg, V. P., & Erickson, J. R. (1987). Quantity and price adjustment in
long-term contracts: A case study of petroleum coke. Journal of Law
and Economics, 30(2), 369-398. Retrieved from http://www.jstor.org/
stable/725501

Gorton, G., & Rouwenhorst, K. (2005). Facts and fantasies about commodity
futures. National Bureau of Economic Research Working Paper 04-20.
Cambridge, MA: Yale School of Management.

Grishchenko, O. V., & Huang, J. (2008, April). Inflation risk premium: Evidence
from the TIPS market. Paper presented at the meeting of the 18th Annual
Derivatives Securities and Risk Management Conference, Arlington, VA.

Hicks, J. R. (1946). Value and capital (2nd ed.). Oxford: The Clarendon Press.

Keating, E. G., Murphy, R., Schank, J. F., & Birkler, J. (2008). Using the steel-
vessel material-cost index to mitigate shipbuilder risk (Tech. Rep.). Santa
Monica, CA: RAND National Defense Research Institute.

Keynes, J. M. (1930). A treatise on money (Vol. II). New York: Harcourt, Brace,
& Company.

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Shiller, R. J., & Campbell, J. Y. (1996). A scorecard for indexed government
debt. In B. S. Bernanke and J. Rotemberg (Eds.), National Bureau of
Economic Research Macroeconomics Annual 1996. Cambridge, MA: MIT
Press.

Tran-Le, J., & Thompson, S. (2005). China’s impact on metals prices in
defense aerospace.

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Endnotes

1. In the FAR and DFARS, fixed price contracts (encompassing contacts that
would otherwise be FFP or FPIF) with an EPA clause are considered a
unique contract type. Thus, guidance regarding the EPA clause is included
in sections describing contract types, specifically, FAR part 16 and DFARS
subpart 216.

2. This article uses the term fee to refer to the difference between the contract
price and the underlying cost of the contract to the contractor. This is to
reflect the distinction with contractor economic or accounting profit, which
is unlikely to be identical to the negotiated fee. The concept of fee here is
referred to as profit in DFARS subpart 215.4.

3. Section 215.404-71-3 of the DFARS titled “Contract type risk and working
capital adjustment” provides guidance on pricing contract type risk. If an
EPA clause is included under the contract type category “Fixed-price with
redetermination provision,” the guidance is to set the fee as if it were a fixed-
price incentive contract with below normal conditions. If, without the EPA
clause, the contract would be priced as an FFP contract with a “normal fee”
for contract risk of 3 percent, then this means that adding an EPA would
reduce the fee to less than 1 percent. This fee adjustment may be reasonable
for fixed-price contracts with prospective price redetermination (FP-PPR)
where the price of the entire item being purchased could be adjusted upward
in the future. However, for an FFP contract with an EPA, this could be a severe
fee reduction if the clause references direct labor or materials that could be
small fractions of the overall contract value.

4. In the finance and economics literature, this is referred to as “adverse
selection” and is addressed later in our article.

5. Although there was no evidence of manipulation in this case, using an index
driven by a contractor’s own labor rates opens the possibility of increasing
enterprise-wide profits though cost-shifting.

6. For government contracts, the tools for pricing FAR part 15 contracts are
limited to percentage-of-contract-cost fee guidelines that outline the amount
that should be paid as a function of the level of cost risk and management
effort to which the contractor is exposed.

7. The fee difference between FFP and FPIF contracts could also partially
reflect the greater level of government management effort required for an
FPIF contract.

8. There may be other costs associated with the EPA that the government
may seek to recover from the contractor. For example, there could be
recompensable costs associated with administering the EPA. In this article,
we are restricted to examining the cost of quantifiable risk.

9. Inflation is not the only economic factor that can erode the value of a bond;
other factors are credit risk and the risk that market interest rates may rise.

10. Note that titanium may be vulnerable to potential gaming as the majority of
domestic titanium metal is used in aerospace applications (DoDIG, 2009).

11. The expected inflation rates for contract inputs should already be reflected in
the contract price excluding the EPA.

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12. Alternatively, if the general forecast is believed to be not significantly
different from the recent past, the IRP could be estimated from historical U.S.
Treasuries and Consumer Price Index data.

13. For example, Adrian and Wu (2009) use a Kalman filter to estimate the
parameters of a generalized autoregressive conditional heteroskedasticity
model (GARCH) of the inflation rate risk premium.

14. Adrian and Wu (2009) found the IRP was strongly correlated with the equity
Chicago Board Options Exchange Volatility Index or VIX.

15. Shiller and Campbell (1996) also estimated that the option value of inflation
protection was about 140 basis points.

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Keywords: Fast , Inexpensive, Simple, Tiny (FIST);
Program Management; Heuristics; Innovation;
Oversight

Current Barriers to
Successful Implementation
of FIST Principles

f Capt Brandon Keller, USAF,
and Lt Col J. Robert Wirthlin, USAF

The Fast, Inexpensive, Simple, and Tiny (FIST) frame¬
work proposes a broad set of organizational values,
but provides limited guidance on practical implemen¬
tation. Implementing FIST principles requires clarifying
the definitions of “fast,” “inexpensive,” and “simple,”
recognizing where FIST does and does not apply. Addi¬
tionally, a subset of the FIST heuristics was expanded
upon to increase their usefulness for practitioners. The
primary research findings are that FIST principles are
less conducive for highly complex or novel systems,
immature technologies, future needs, acquisitions in
early development phases, or when performance is the
foremost value. FIST principles were also found to be
constrained by the acquisition process, the requirements
process, and oversight.

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The Fast, Inexpensive, Simple, and Tiny (FIST) articles first
appeared in the Defense Acquisition University (DAU)'s Program
Manager, a periodical later renamed Defense AT&L in January 2004
(Ward, Quaid, & Mounce, 2008). The articles were evaluated, iterated,
and compiled into a cohesive thesis by Air Force Lt Col Dan Ward (2009)
in “The Effect of Values on System Development Project Outcomes .”
To this day, Ward's theories and adept writing style have stimulated
significant debate in the Department of Defense (DoD) acquisition
community and academia. The FIST framework proposes a broad set
of organizational values, but provides limited guidance on practical
implementation. Implementing FIST principles requires clarifying the
definitions of “fast,” “inexpensive,” and “simple,” recognizing where FIST
does and does not apply, and offering additional FIST heuristics based
on the recommendations provided herein, to increase their usefulness
for practitioners.

The purpose of this article is neither to discredit nor to aggrandize
FIST. The intent is to impartially evaluate FIST concepts to increase
knowledge and understanding.

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Current Barriers to Successful Implementation of FIST Principles

FIST Principles

Ward mentions in his various writings, the “tiny” aspect is an “ines¬
capable outcome” of accomplishing the first three (Ward & Quaid, 2006a,
p. 31); therefore, the focus will be on the fast, inexpensive, and simple
tenets of the FIST framework. These tenets should also be thought of
as a single idea rather than a value set having separate parts. As a single
entity, “an attempt to remove some portion of this value set is likely
to impact the program manager's ability to implement any of it at all”
(Ward, 2009, p. 8). Therefore, all the FIST principles must be present
for a program to succeed. For example, the Bazooka is a success story
because the program (and product) was simple and inexpensive and fast
(therefore tiny as well). It adhered to all of the FIST principles.

Scoping “Fast”

One principle to delivering systems quickly is to get early and
iterative feedback from users (Hebert, 2011). The assertion that early
feedback from users leads to rapid development and shorter timeframes
is accurate (Ward, 2004), but the limitations should also be discussed.
Is it possible to get early user feedback on a Naval carrier? What about
early operator feedback on a satellite program? This is nearly impos¬
sible unless a satellite or prototype is launched solely for this reason,
which is often cost-prohibitive. Historically, around 80 percent of a
space system's life-cycle cost is consumed prior to operations (Hebert,
2011). Therefore, operator feedback is often delayed until the system is
fielded because launching a satellite solely for testing and user feedback
is cost-prohibitive. To be fair, operator prototypes and simulators obtain
a degree of operator feedback. This reduces the risk, but rarely is actual
operator feedback with operational assets obtained in the space domain.

The “fast” aspect of the FIST framework also has a fair amount
of overlap with rapid acquisitions. Rapid acquisition requires stable
requirements (Ford, Colburn, & Morris, 2012). As requirements are
usually not fully stable prior to Milestone B for major programs, FIST
must be scoped to a certain phase in the acquisition system. The earli¬
est phase for FIST implementation would likely be the Engineering
and Manufacturing Development phase (post-Milestone B approval),
because a Capability Development Document will be complete with all
technologies at a Technology Readiness Level of 6 or greater.

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For these reasons, FIST is less conducive in the early phases (pre-
Milestone B) of the acquisition process, and therefore is less beneficial
for delivering future needs. FIST is also less conducive for complex, large
programs in which early operator feedback is not feasible.

Scoping “Inexpensive”

Ward suggests several times that large budgets hinder communica¬
tion with the user community (Ward, 2004). Real feedback from users
is extremely important, as Ward would agree, but no evidence is offered
as to why this cannot be done with high-dollar programs. One theory
is that high-dollar programs are generally for the complex, highly inte¬
grated, and interrelated systems. These systems tend to have a variety
of users and stakeholders whose exact roles can be vague or undefined.
For example, who is the user of an F-22? If the sole answer is the pilot,
we are limiting our decisions to one of many users. A “user” with real
combat feedback beneficial to acquirers includes air liaison officers,
aircraft maintainers, air traffic controllers, instructor pilots, and the
training schools, to name a few. Whenever these users have conflicting
feedback and desires for the system, the program office must make engi¬
neering trade-off decisions. If users have conflicting desires, a subset of
users will inevitably be unsatisfied and may view the program office as
unresponsive if their desires were not met.

Therefore, large budgets are not the root cause of communication
issues with users. Large budgets usually accompany complex, major
weapons systems, which have various users and stakeholders with dif¬
fering values. Consequently, FIST is less conducive for systems in which
many users and stakeholders exist.

Scoping “Simple”

Figure 1 is the graphical representation of Ward's Simplicity Cycle.
The graph depicts a certain turning point (shown by a “2” on the graph)
in which adding complexity decreases “goodness” (ability of a system to
do what it's supposed to do).

Understandably, at a certain turning point, adding complexity to
a system actually decreases its “goodness.” However, how do we know
where this turning point is? Program managers and engineers do not
add unnecessary complexity to systems without reason. “An inadequate
appreciation for simplicity can result in an overvalued perspective of

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Current Barriers to Successful Implementation of FIST Principles

FIGURE 1. THE SIMPLICITY CYCLE (WARD, 2005)

complexity, which can cause programmatic disaster” (Ward, 2005, p.
20). The opposite is also true, which causes another set of conflicting
values. Holding to simplicity because the genius behind the complexity
is not understood can also cause programmatic disaster. This concept
is better understood with an example.

Holding to simplicity because the genius behind
the complexity is not understood can also cause
programmatic disaster.

Consider a team meeting to decide if solar retroreflectors are
required on the exterior of a space plane. The viewpoint of the chief
engineer is that they add complexity, cost too much, and will extend the
program schedule. The materials expert contends that the retroreflec¬
tors are required because the sun's rays will burn the exterior before
the payload will reach the proper orbit. Which to choose? One cannot
blindly say that the retroreflectors go against all four FIST principles
and, therefore, should not be pursued. FIST principles must be tempered
with mission assurance.

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As a result, the FIST principle of “simple” is less conducive for pro¬
grams and technologies that are complicated and not well understood.
One way to utilize FIST principles in immature or uncertain program¬
matic environments is to budget and plan for a simple, fast prototype. By
doing this, much of the uncertainty and technical risk is reduced, remov¬
ing these barriers to successful FIST implementation. The majority of
uncertainty occurs in the early acquisition phases, so once again FIST is
less applicable in the early phases of an acquisition. As Mathiassen and
Munk-Madsen (1986, p. 20) state,"... in reality the [product development]
situation is rarely well defined from the start.”

One way to utilize FIST principles in immature
or uncertain programmatic environments is to
budget and plan for a simple, fast prototype.

Will a FIST Program Meet DoD Technical Guidance?

Current DoD technical regulations and guidance do not support
FIST principles. This can be easily seen for programs that must comply
with current DoD technical direction, such as the DoD Net-Centric
Services Strategy or the Net Ready Key Performance Parameter (NR
KPP) from Chairman of the Joint Chiefs of Staff Instruction (CJCSI)
6212. The Net-Centric Services Strategy from 2007 promotes integrated
systems employing net-centric principles, service-oriented architec¬
tures, and global information grid-compliant systems. This strategy
ensures warfighters receive the right information at the right level of
detail, from trusted and accurate sources, when and where it is needed
(DoD, 2007). The NR KPP makes net-centric operations a KPP for all
applicable systems (Chairman of the Joint Chiefs of Staff, 2012). These
collaborative requirements are program-dependent, meaning they rely
on other programs to comply with interface specifications before they
can be compliant. Anything taking control away from the program
manager goes against FIST because if PMs are dependent on external
stakeholders, they will be less able to ensure speed and cost. Additionally,
a graduate systems engineering certificate capstone project by Wong and
Thompson (2006) cites the numerous cost and complexity issues related
to technical interface management. Therefore, requirements mandated
as part of the NR KPP are a current barrier to FIST implementation.

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Current Barriers to Successful Implementation of FIST Principles

Of course the goal is to be compliant as fast and simply as possible,
but complying with the NR KPP is neither a fast nor simple process.
Once interoperability and net-centricity become better understood and
operationalized, fast and simple concepts should be pursued to optimize
performance in these areas. Therefore, if the system must comply with
complex, undefined requirements (not all systems do), it will be more dif¬
ficult to implement the FIST methodology. The point here is that Ward
is absolutely correct that simplicity has many tangible benefits, but the
thick waters of complexity must be waded through first, which many
programs and technologies are still in the process of doing (most often
in the complex, long-standing programs).

In summary, implementation of FIST principles is limited by DoD
technical guidance. When guidance mandates compliance with techni¬
cally complex requirements, achieving FIST principles is very difficult.

FIST is for Evolutionary (Not Revolutionary) Innovations

Ward states that “small teams + thin budgets + short timelines = sig¬
nificant innovation and combat effectiveness” (Ward, 2004, p. 34). This
statement is true for today's fight; however, is it less applicable if the focus
is on winning tomorrow's war? If the military simply has small teams
with thin budgets delivering products and services quickly, we will lose
the innovative edge with respect to our novel, complex systems. Some
complexity is required, as the Simplicity Cycle states, before simplicity
can be achieved.

Books on innovation and Lean principles describe the different
strategies of “Invest in Evolution'' versus “Invest in Revolution.'' Figure
2 maps common verbiage for similar concepts. The incremental improve¬
ment strategy is very similar to the FIST strategy. Both require a steady
industrial base, mature technology, and the existence of a capability or
performance gap in the current system. The risk to this strategy is that
key new opportunities (radical innovations) go unexplored for incremen¬
tal or evolutionary upgrades (Murman, 2002). Although incremental
innovations sustain current capability, they don't produce the radical
innovation necessary to address an asymmetric threat. This strategy
does have value by delivering newer versions of existing systems faster.
The DoD must be careful not to perpetuate existing monuments (in Lean
speak), or not to let core capabilities become core rigidities. 1

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FIGURE 2. COMMON LEXICON FOR EVOLUTIONARY AND
REVOLUTIONARY STRATEGIES

Strategy

Reference

Author

Year

Invest in Evolution

Lean Enterprise

Value

Murman et al.

2002

= Directional ideas

The Medici Effect

Frans Johannson

2006

= Incremental

innovation

Making Innovation

Work

Davila et al.

2005

= Sustaining

innovation

The Innovators DNA

Dyer et al.

2011

Invest in Revolution

Lean Enterprise

Value

Murman et al.

2002

= Intersectional ideas

The Medici Effect

Frans Johannson

2006

= Breakthrough

innovation

Making Innovation

Work

Davila et al.

2005

= Disruptive

innovation

The Innovators DNA

Dyer et al.

2011

= Radical innovation

Making Innovation

Work

Davila et al.

2005

The opposite of an Invest in Evolution strategy is an Invest in
Revolution strategy. The Invest in Revolution strategy involves game¬
changing innovations that result in current systems and technologies
becoming obsolete. When a revolutionary innovation emerges, no fur¬
ther evolutionary upgrades are value-added. For example, the advent
of electricity made upgrading candles (for practical lighting) obsolete.
The advent of low-profile, stealth-like characteristics made many sur¬
face-to-air defenses obsolete. The downside of an Invest in Revolution
strategy includes costliness, no guarantee a new capability will be
fielded, and the risk of a gap in current capabilities (Murman, 2002).
However, this is the primary strategy to take advantage of breakthrough
technologies to remain a step ahead of the competition (Dyer, Gregersen,
& Christensen, 2011). This is not trivial when the nation's defense is at
stake. Herein lies the heart of a major barrier to successful implementa¬
tion of FIST principles.

First, incremental improvements are normally completed faster,
with less complexity (more simplicity) and at lower costs (Dyer,
Gregersen, & Christensen, 2011; Johannson, 2006; Davila, Epstein, &

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Shelton, 2006). Radical innovations are characterized by their novelty,
technical immaturity, and mission uncertainty—all contrary to the
FIST framework. Therefore, the FIST methodology closely aligns to
incremental, vice disruptive, innovation. FIST success stories may not
seem incremental based on the extent of the improvements. However,
based on the fact that existing, mature technologies were used and the
original platforms still have value, the improvements are, by definition,
incremental. Although FIST principles have before and can continue to
field radical innovations, these results are the exception. As Maier and
Rechtin (2009, p. 405) state, “proven” and “state-of-the-art” are mutu¬
ally exclusive properties.

Additionally, FIST enhances project stability (Ward, 2009).
A corresponding limitation to project stability is the reduction of
radical innovations. Radical innovation does not come from stable,
secure, assured delivery environments. Rather, these game-chang¬
ing innovations are born from organizations that embrace failure,
are not risk-averse, and have a degree of instability as novel ideas are
investigated.

When guidance mandates compliance with
technically complex requirements, achieving FIST
principles is very difficult .

Lastly, Ward agrees that a key to FIST implementation is the use of
mature technologies (Ward, 2009), which is often the antithesis of inno¬
vation. A FIST program, as with a rapid acquisition program, does not
have time to struggle with immature technologies. Unfortunately, many
new weapon systems, especially space systems, are relying on immature
and complex technologies (Government Accountability Office, 2006).
This creates a barrier that must be overcome when trying to implement
the fast and simple aspects of FIST.

For these reasons, FIST principles reduce radical innovations.
Additionally, FIST principles are not conducive for immature technolo¬
gies (as Ward would agree, citing mature technology as a key to FIST
implementation).

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Adding Realism to FIST

FIST is a set of guidelines, or heuristics, to help steer program man¬
agers to better decisions. However, many of the core aspects FIST urges
program managers to embrace are simply out of the program man¬
ager's control. In these cases, research highlighting the lack of control
and authority program managers have, especially in a Major Defense
Acquisition Program (MDAP), in the current acquisition system is cited.
A realistic set of guidelines for FIST must help program managers decide
between available alternatives, not areas that are outside their control.
One opportunity in which program managers can make engineering
and programmatic trade-offs favoring FIST principles is early in a pro¬
gram, before the requirements, technologies, acquisition category level,
and other decisions have been made more permanent. However, when
program managers inherit programs later in development, many times
implementation of FIST principles is out of their control.

“Simple” Realism

In terms of simplicity, a program manager is given a set of require¬
ments validated by the Air Force Requirements Oversight Council and
Joint Requirements Oversight Council, as required. Although a degree
of requirements tailoring can be achieved through discussions between
the acquirers and users, by and large the requirements have been vetted
when the acquiring organization receives them. The requirements for
complex, novel systems will consequently force the program office into
complexity rather than simplicity.

Whenever and wherever possible, simplicity
is an extremely valid heuristic to help manage
a program.

In addition, the approval process and program oversight have been
shown to be overly complex, very costly, and—to a large degree—out¬
side the control of the program manager (Assessment Panel, 2006;
Neal, 2004; Knue, 1991). Therefore, in the reality of complex, novel
systems, not only does the required performance force complexity, but
the acquisition process forces complexity as well. This is a barrier to
implementing the FIST methodology, but should not be confused with

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the fact that whenever and wherever possible, simplicity is an extremely
valid heuristic to help manage a program. Current research investigates
the applicability of rapid acquisition methods for traditional develop¬
ment programs with promising initial results. Ford et al. (2012) identify
expedited systems engineering and rapid acquisition concepts that can
potentially improve processes for traditional programs.

In summary, the requirements process reduces a program manager's
ability to implement FIST principles. The acquisition process and over¬
sight also constrain FIST implementation.

“Fast” and “Inexpensive” Realism

A program manager has a bit more control with respect to cost and
schedule variables. Still, the acquisition process can have major effects
on these as well, regardless of the program manager's intent. Ward high¬
lights in “Putting the Pieces Together" that the common saying “better,
faster, cheaper: pick two" is short-sighted and unjustifiable (Ward &
Quaid, 2006a, p. 32). All program managers should desire better, faster,
and cheaper each and every time. The problem lies in the DoD acquisition
system, as the military reformers 2 found out while fighting tooth-and-
nail to overcome it. A good example is the F-16 program as described in
The Pentagon Wars (Burton, 1993). The development of the F-16 involved
a bitter fight between the military reformers and existing senior lead¬
ership. The reformers wanted a cheap, focused air superiority fighter
utilizing an existing airframe to reduce costs. At the time, military
leadership lobbied for an all-purpose, air superiority aircraft with all
the “bells and whistles." In the end, the F-16 emerged as a very capable,
inexpensive, and quickly fielded aircraft (qualities the reformers valued).
However, the program continually faced stringent resistance from the
acquisition system and leadership. The normal acquisition processes
had to be circumvented by nothing short of heroic efforts (Burton, 1993).
Therefore, rather than trying to train heroes and ignore the root cause of
the problem, the system should set the average program manager up for
success. “Pick two" is forced upon program managers, and the following
example will highlight how cost and schedule can quickly be taken out
of the program manager's hands.

Program X is an MDAP approaching Milestone B with a cost
estimate of $100 million. The Office of the Secretary of Defense Cost
Assessment and Program Evaluation (CAPE) staff may disagree with
the program office cost estimate when conducting their 80 percent

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estimate. Therefore, to ensure a successful Milestone, the cost estimate
is reconciled and increased to the CAPE's estimate. Subsequently, the
budget approved at Milestone B will reflect this higher cost estimate. In
this simplistic yet realistic example, the program office is forced into an
increased budget. The same example holds true for schedule as well. A
decision authority often regards a condensed schedule as unrealistic, and
either increases the cost estimate to accomplish the condensed work, or
forces the schedule (using independent schedule analyses, which tend
to be more conservative) to expand. The key to passing a Milestone is to
have a low-risk, high-confidence program in an executable cost within
the budget. In other words, offering a strategy that's faster and cheaper
than comparable programs is often viewed by oversight personnel as
the program office staff not fully understanding the scope of the effort or
overestimating a learning curve. In this case, the historical acquisition
deficiencies work against the program offices' efforts to streamline and
plan in efficiencies. Because of this, a “better, faster, cheaper'' program
may not receive Milestone approvals as the program is unlikely to be a
highly confident, executable program.

The acquisition system limits the strategy to the
Iron Triangle concept of cost, schedule, and scope
(performance): pick two .

Ward states in his thesis that simultaneously improving cost, sched¬
ule, and performance without reducing complexity leads to failure.
“Excessive complexity in the organization and the system virtually
requires project leaders to improve only two sides of the “Program
Manager's Iron Triangle," while simple organizations can produce simple
technologies that are simultaneously faster, better and cheaper" (Ward,
2009, p. 87). We must temper this statement with the realization of what
is acquired from simple organizations producing simple technologies:
simple systems. As mentioned earlier, complex, traditional MDAPs do
not meet this criteria.

Therefore, the “better, faster, cheaper" strategy is not practical.
The acquisition system limits the strategy to the Iron Triangle concept
of cost, schedule, and scope (performance): pick two. Additionally, few
simple organizations producing simple technologies exist in the complex

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business of defense acquisition. Program managers must actively man¬
age the trade-offs between cost, schedule, and scope, and be cognizant
of how altering one will inevitably alter at least one of the other pillars.

FIST Principles and Performance

Interestingly, the FIST framework does not include performance
or quality, at least not in the acronym. Ward states that users must be
satisfied with system performance to have value; however, the FIST
framework does not foster high performance. In general, a product
delivered quickly, cheaply, and simply will not perform as well as one
with more time, money, and arguably more complexity. In developing a
new iPhone, would a manager rather have 3 months and $100 thousand,
or 6 months and $400 thousand? Logically, the performance of the more
costly program should be greater. The exception is when acquiring
known capabilities, in which acquiring them cheaper and quicker leads
to the ability to acquire more, therefore increasing overall performance
(think bombs and bullets). However, when discussing performance,
requirements must be revisited. If the requirement is such that it can
be met using FIST principles, by all means FIST should be adhered
to. Defense acquisitions have, at times, lost sight of a requirement's
underlying purpose and delivered gold-plated solutions (solutions with
unnecessary functionality and capability). This is very important. If
FIST principles allow a program manager to effectively meet a require¬
ment, by all means the FIST methodology should be used.

For known capabilities, FIST principles are valid and should be
valued more than gold-plating. For less known capabilities, minimal
cost and minimal schedule should not be valued above performance, but
effectively controlled and managed. As opposed to acquiring a known
capability, “unknown-unknown” risks will surface during development
that could not have been predicted. Managing a thin budget with no
schedule slack for these unknown-unknowns is not smart management.
FIST most certainly reduces unknown-unknown risks if the principles
were followed during initial concept development and program initia¬
tion. However, applying FIST principles after program initiation would
reduce the program's ability to handle uncertainty.

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The FIST principles are not conducive for higher performance
systems. Additionally, FIST principles, applied retroactively, limit a
program's ability to mitigate unknown-unknown risks surfacing during
development.

In review, Figure 3 compiles the FIST limitations discussed thus
far. Now, a logical question would be: Can FIST be applied retroactively
to programs already drowning in complexity? Additional research must
be done to more thoroughly answer this question; however, it is gener¬
ally believed that rapid and traditional programs are distinct in their
requirements, goals, priorities, speed, and complexity. To this end, a
recent Defense Science Board concluded that the Secretary of Defense
should formalize a dual acquisition path separating rapid and deliberate
acquisitions (Defense Science Board, 2009). In this case, FIST would be
much more implementable in the realm of rapid acquisitions due to the
limitations listed in Figure 3. Whenever the limitations listed in Figure 3
are not present in an acquisition, or if they can be influenced early during
program conception, the FIST principles seem to be highly valuable and
effective in meeting warfighter and taxpayer needs.

FIGURE 3. FIST LIMITATIONS

FIST is less conducive for:_

• the early phases (pre-Milestone B) of the acquisition system

• complex, novel programs

• immature technologies

• radical innovations

• delivering future needs

• mitigating unknown-unknown risks

FIST Is less conducive when:_

• early operator feedback is not feasible

• multiple users and stakeholders exist

• performance is foremost value

• DoD technical guidance mandates complexity

Implementing FIST principles is constrained by:_

• the acquisition process

• the requirements process

• oversight

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FIST as a Set of Heuristics

A heuristic is an aid to learning, discovery, or problem solving by
experimental and trial-and-error methods (Heuristic, n.d.). Maier and
Rechtin (2009, p. 29) provide a more useful definition in terms of product
development, describing heuristics as a problem-solving approach “using
guidelines, abstractions, and pragmatics generated by lessons learned
from experience” Heuristics can be considered the “art” side of the “art
and science” of project management and/or systems engineering. The
human test of a good heuristic is whether an experienced listener knows
within seconds that it fits the domain it refers to and cannot be proven
false (Maier & Rechtin, 2009). The value of a good set of heuristics, and
the practitioner's ability to know when they are applicable in different
situations, should not be undervalued. The acronym for FIST in itself
can be considered a set of heuristics:

• Deliver weapon systems as quickly as practical [Fast].

• Deliver at minimal expense [Inexpensive].

• Minimize design and system complexity [Simple].

• Minimize the size of products and processes [Tiny].

Ward concludes his 2009 thesis with a list of FIST heuristics, clearly
stating the importance of heuristics. Heuristics are particularly useful
in program management because program management is not a hard
science, but rather a social discipline (Dyer, Gregersen, & Christensen,
2011). The existing FIST heuristics are generally too broad or contradic¬
tory to be useful or actionable. Meaningful heuristics must be actionable
to the maximum extent possible (Maier & Rechtin, 2009). For example,
heuristic No. 3 from Ward's thesis is: “The tortoise was faster than the
hare.” Heuristic No. 6, however, is the opposite: “The best way to run a
program is quickly” (Ward, 2009, p. 102). Opposite heuristics degrade
usability. To render a heuristic more usable, the heuristic usually must
be de-scoped and more directed to a particular topic. In other words, a
heuristic that says, “optimally expending funds is vital to success” is
much less useful than the more focused “rarely expend more than 90
percent of current fiscal year funds in the first half of the fiscal year.”

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The FIST principles lend themselves well as a set of heuristics
because each FIST term is relative. A tiny unmanned aerial vehicle
and a tiny tank are not the same size. A complex fighter aircraft and a
complex rocket launcher do not have the same complexity. These FIST
concepts are, by their nature, relative terms that cannot be bounded for
all situations. No checklist exists proving a system to be sufficiently
simple, inexpensive, or fast. Therefore, describing FIST through a set of
heuristics fits nicely because heuristics are generally agreed upon and
cannot be proven false.

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In reviewing the multitude of materials related to FIST and in light
of the heuristics discussion, the authors offer here a review of the points
made thus far as a set of heuristics, with the intent of increasing the
set's usefulness for practitioners. As with all heuristics, we leave it to
the community of scholars and practitioners to validate the efficacy of
our recommended additions for themselves. Each grouping of heuristics
relates to the FIST limitations highlighted in Figure 3 and previously
discussed.

The following heuristics relate to the early phases of the acquisition
system:

1. For the most relevant end product, start early.

2. To account for uncertainty, start early (Defense Acquisitions,

2010 ).

3. Without flexible requirements, unconstrained schedule analysis
should be completed before accepting a constrained schedule.

The following heuristics relate to complex or novel programs:

1. Complexity must first be understood, then minimized (Ward,
2005).

2. At a certain program turning point, increased complexity
reduces system “goodness” (Ward, 2005).

3. Define reliability requirements, then minimize complexity to
achieve these requirements (Ward, 2005).

4. Minimize complexity until the point when the cost or time
required becomes more burdensome than the complexity itself.

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The following heuristics relate to innovation and delivering future
needs with immature technology:

1. Rapid development approaches involve the user much earlier
(Ward, 2004).

2. Rigorous independent analyses hold much more weight than
internal, program office analyses (for cost, schedule, and techni¬
cal maturity in particular).

3. Overfunding leads to tinkering and restrains innovation (Ward,
2004).

The following heuristics relate to tailoring DoD technical guidance
and processes to each particular system:

1. Tailor processes to specific systems (Blanchard & Fabrycky,
1998).

2. Ensure processes are tempered with rationalism (Naur, 1982).

3. Don't let a process force a bad decision (Mathiassen & Munk-
Madsen, 1986).

4. Don't let a process hold up a good decision (Mathiassen & Munk-
Madsen, 1986).

5. Utilizing simple or standard interfaces can help reduce complex¬
ity, in turn reducing development costs (Ford et al., 2012).

6. Utilize “It Depends'' management - maximizing knowledge of the
environment and situation at hand optimizes decision-making.

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Lastly, the following heuristics relate to the overall DoD acquisition
process, including the requirements process and oversight:

1. Employ simplicity in both acquisition processes and engineering
development.

2. Contractors should be allowed to bid their expected schedules
without fear of being labeled “nonresponsive” (Ward & Quaid,
2006b).

3. Pick three from the beginning , or else be prepared to pick three
and get two (see “Adding Realism to FIST” section of this article,
discussion on “Fast” and “Inexpensive”).

4. The project leader's influence over the development is inversely
proportional to the budget and schedule.

Conclusions

Acquisition professionals should carefully consider the current bar¬
riers to successful FIST implementation. Realism was added to several
FIST concepts to impartially assess how the framework relates to cur¬
rent practice. Finally, Ward's heuristics were expanded upon to increase
the usability for practitioners. Interestingly, the Air Force announced
that its Next Generation Bomber will be managed under the auspices of
the Rapid Capabilities Office (Reed, 2012). The outcome of this program
will undoubtedly offer a variety of lessons learned. The degree of innova¬
tion, either evolutionary or revolutionary, will be of particular interest
for the FIST debate.

Once again, the FIST framework is an excellent revival of what the
military reformers started: thoughtful inquisition, unyielding drive for
excellence, wariness of the trade-offs between complexity and simplicity,
and the needs of warfighters over the needs of politicians and programs.
However, barriers and limitations exist to successful implementation of
FIST in all types of acquisition scenarios.

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Author Biographies

Capt Brandon Keller, USAF, is currently
the Program Manager, Space Command and
Control at the Air Force Research Laboratory
Information Directorate. A graduate of the
University of Pittsburgh, he also holds an MS
from the Air Force Institute of Technology.
Capt Keller has served as a program manager
in the Global Positioning System Next
Generation Operational Control System (GPS
OCX) program, a $1 billion software-centric
ground control system. Capt Keller's next
assignment was a staff job leading contractor
performance assessment processes and vari¬
ous staff briefings for the GPS program
director. His research interests include
defense acquisition reform and program
management oversight.

(E-mail address: brandon.keller@rl.af.mil)

Lt Col J. Robert Wirthlin, USAF, is an

assistant professor of Engineering Systems
at AFIT. A graduate of the U.S. Air Force
Academy, he also holds an MS and PhD from
the Massachusetts Institute of Technology.
He is a member of the International Council
on Systems Engineering, the American
Institute of Aeronautics and Astronautics,
and the Design Society. His research interests
include: acquisition, engineering manage¬
ment, risk, and lean. Previously, he served as
a systems engineer and a program manager
at Hill AFB, UT; Los Angeles AFB, CA; and
Buckley AFB, CO.

(E-mail address: joseph.wirthlin@afit.edu)

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References

Assessment Panel of the Defense Acquisition Performance Assessment
Project. (2006). Defense acquisition performance assessment report.
Washington, DC: Author.

Blanchard, B. S., & Fabrycky, W. J. (1998). Systems engineering and analysis
(3rd ed.). Upper Saddle River, NJ: Prentice-Hall.

Burton, J. G. (1993). The Pentagon wars: Reformers challenge the Old Guard.
Annapolis, MD: Naval Institute Press.

Chairman of the Joint Chiefs of Staff. (2012). Net-ready key performance
parameter (NR KPP) (CJCSI 6212). Washington DC: Author.

Davila, T., Epstein, M. J., & Shelton, R. (2006). Making innovation work. Upper
Saddle River, NJ: Wharton School Publishing.

Defense acquisitions: Managing risk to achieve better outcomes. Testimony
Before the Subcommittee on Defense, Committee on Appropriations,
House of Representatives. (2010). Testimony of Paul Francis, Michael
Golden, & William Woods (Report No. GAO-10-374T). Washington, DC:
Government Accountability Office.

Defense Science Board. (2009). Fulfillment of urgent operational needs.
Report of the Defense Science Board Task Force. Washington, DC:

Office of the Under Secretary of Defense (Acquisition, Technology and
Logistics).

Department of Defense. (2007). DoD net-centric services strategy.
Washington DC: Chief Information Officer.

Dyer, J., Gregersen, H., & Christensen, C. M. (2011). The innovator’s DNA.
Boston: Harvard Business School Press.

Ford, J. S., Colburn, R. M., & Morris, Y. A. (2012). Principles of rapid acquisition
and systems engineering [Graduate research project]. Wright-Patterson
AFB, OH: Air Force Institute of Technology.

Hebert, B. (2011, August). Appropriations, Congress & budget execution: Color
of money 101. Defense Acquisition University presentation to DMSMS and
Standardization Conference, Hollywood, FL.

Heuristic, (n.d.). In Merriam-Webster’s online dictionary. Retrieved from
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Johannson, F. (2006). The Medici effect. Boston: Harvard Business School
Press.

Knue, T. G. (1991). Oversight of and within the Department of Defense: Is
it becoming counterproductive? Unpublished manuscript, Air Force
Institute of Technology, Wright-Patterson AFB, OH.

Maier, M., & Rechtin, E. (2009). The art of systems architecting (3rd ed.). Boca
Raton, FL: CRC Press.

Mathiassen, L., & Munk-Madsen, A. (1986). Formalizations in systems
development. Behaviour and Information Technology, 5(2), 145-155.

Murman, E. (2002). Lean enterprise value: Insights from MIT’s lean
advancement initiative. New York: Palgrave Macmillan.

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Naur, P. (1982). Formalizations in program development. Behaviour and
Information Technology, 22, 437-453.

Neal, M. J. (2004). Establishing a foundation to capture the cost of oversight
for a major defense program within the information technology
acquisition community. Unpublished manuscript, Air Force Institute of
Technology, Wright-Patterson AFB, OH.

Reed, J. (2012, February 24). AFA: New bomber program ‘underway’.

Retrieved from DoD Buzz Online Defense and Acquisition Journal at

http://www.dodbuzz.corm/2012/02/24/afa-new-bomber-program-

underway/

Ward, D. (2004). Doing less with more. Defense AT&L, JJ(6), 30-34.

Ward, D. (2005). The simplicity cycle. Defense AT&L, 34(6), 18-21.

Ward, D. B. (2009). The effect of values on system development project

outcomes (Thesis No. AFIT/GSE/ENV/09-M08). Wright-Patterson AFB,
OH: Air Force Institute of Technology.

Ward, D., & Quaid, C. (2006a). FIST Part 5: Putting the pieces together.
Defense AT&L, 35(3), 30-33.

Ward, D., & Quaid, C. (2006b). It’s about time. Defense AT&L, J5(1), 14-17.

Ward, D., Quaid, C., & Mounce, G. (2008). The FIST handbook. Beavercreek,
OH: Rogue Press.

Wong, J., & Thompson, R. (2006). Assessment of technical interface
management for complex Department of Defense satellite systems.
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Patterson AFB, OH: Air Force Institute of Technology.

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Endnotes

1. “Core Capabilities and Core Rigidities” is the subject of a seminal paper
by Leonard-Barton in her 1992 Core Capabilities and Core Rigidities: A
Paradox in Managing New Product Development.

2. A group of military and civilian analysts emerging in the 1980s opposed
lengthy, high-technology, complex weapon systems.

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Keywords: Equipment Reutilization, Supply, Surplus
Property, Operations and Maintenance (O&M), Defense
Logistics Agency Disposition Services (DDS), Materiel
Management

Defense Logistics Agency
Disposition Services as a
Supply Source:

A DoD-Wide Opportunity

( Capt Nate Leon, USMC, Capt Todd Paulson, USMC,
and Geraldo Ferrer

The Defense Logistics Agency Disposition Services (DDS)
provide centralized disposal management of excess and
surplus military property. An important component of
its mission is the reutilization of excess equipment within
the military services to prevent wasteful purchases within
the Department of Defense. This research analyzes
the extent to which the U.S. Marine Corps (USMC) is
implementing reutilization through DDS as a source of
supply. The results and recommendations of this study
will enable decision makers within the USMC and the
Defense Logistics Agency to address institutional and
systemic obstacles to maximize reutilization. Some of the
lessons learned herein may be useful to all the military
services, resulting in more value from their operations
and maintenance budgets through reutilization.

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image designed by Diane Fleischer »

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Adopting economical business practices in the Department of
Defense (DoD) is a national priority. Media coverage of the federal debt
debate in Congress and in the White House focuses much attention on
the largest contributors to U.S. federal spending—and the DoD is one of
them. A low-hanging fruit readily available for immediate DoD savings
is equipment reutilization—the reuse or initial use of excess or surplus
property to meet known or anticipated requirements. Reutilization
already saves the DoD millions of dollars each year by enabling both
internal and intra-Service transfer of excess supplies and equipment,
thereby preventing unnecessary purchase of property for which a suit¬
able substitute already exists. However, according to reports from the
Government Accountability Office (GAO, 2005a; GAO, 2005b; GAO,
2006) and a Department of Defense Inspector General (DODIG, 2011)
audit, the DoD can and should do much more to capitalize upon the eco¬
nomic benefits of reutilization.

Reutilization already saves the DoD millions
of dollars each year by enabling both
internal and intra-Service transfer of excess
supplies and equipment, thereby preventing
unnecessary purchase of property for which
a suitable substitute already exists.

Within the U.S. Marine Corps (USMC), reutilization occurs at the
headquarters level via intra-unit transfers of principal end items, and at
the unit level through the use of Defense Logistics Agency Disposition
Services (DDS) field sites. DDS is typically used by the USMC for req¬
uisitions of consumable supply items, repair parts, garrison furniture,
clothing, and many other items.

In this study we show that, to prevent excess purchase of supplies
and equipment, and to realize significant organizational savings that
might release funds to be used in other critical areas, the USMC should
expand use of DDS inventory to meet its current and anticipated require¬
ments. The USMC must develop doctrine, standard operating procedures
(SOPs), supply techniques, and automated systems with this objective.
The USMC supply and logistics community must foster and reinforce
the utilization of DDS as truly a first source of supply.

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In the following section, we present the concerns raised inside and
outside DoD regarding the practices and culture of DoD supply systems.
We start by discussing reutilization in the USMC, the information tech¬
nology (IT) interfaces within DDS and the USMC, and how they enable
or hinder the use of DDS as a source of supply. Then, we discuss current
attitudes, assumptions, and initiatives by USMC company-grade supply
officers (0-2 and 0-3) regarding equipment reutilization, as provided in
anonymous feedback during the early stage of this study. This is followed
by a brief discussion and recommendations for improvement. Although
our discussion is focused on data collected from USMC sources, and the
lessons herein are specific to the USMC, we believe that similar benefits
could also be achieved by other military services.

Prior Concerns

The War on Terror that has driven DoD operations since September
11, 2001, has enjoyed much support from the U.S. Congress in the form
of seemingly limitless financial outlays. A report by Vanguard Advisors
(Del Mar, 2010) identified a “blank check of sorts” that occurred between
2001 and 2010 for DoD acquisition, bonuses, pay increases, medical
care, and morale programs. Because of the warfighting focus during this
period, significant efforts to transform DoD business practices and econ¬
omize within the agency took a back seat to operational requirements.

However, the ongoing U.S. financial crisis that began in 2007 has
reminded us of the importance to be good stewards of the taxpayer's
money. In that vein, making the right choices in purchasing and recog¬
nizing the savings opportunities that do not compromise our operational
requirements remain defense budget imperatives. We believe that reuti¬
lization of surplus property is one of these opportunities, as expressed
by the GAO and other observers.

GAO Findings

The reutilization of DoD supplies and equipment continues to be
a focus of the U.S. Congress (Hast & Warren, 2000; GAO, 2005a). The
2005 report identified $2.2 billion dollars in “substantial waste and
inefficiency” (p. 4) because “new, unused, and excellent condition items
were being transferred or donated outside of DoD, sold on the Internet
for pennies on the dollar, or destroyed rather than being reutilized” (p. 4).
The report also found that the DoD purchased at least $400 million of

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identical commodities in Fiscal Years (FY) 2002 and 2003 instead of
reutilizing excess items in like-new conditions available in DDS. GAO
identified numerous examples of DoD equipment sales and donation of
items that were later requisitioned by the DoD at full acquisition cost. A
portion of the report (GAO, 2005a) reads:

We [GAO] requisitioned at no charge a medical instrument chest,
two power supplies, and two circuit cards. Although these items
had an original DoD acquisition cost of $55,817, we paid only
about $5 shipping cost to obtain them. (p. 4)

We also purchased at minimal cost, over the Internet at
govliquidation.com, tents, boots, gasoline burners (stove/heating
units), a medical suction apparatus, and bandages and other
medical supply items. Although the total reported acquisition
cost for these items was $12,310, we paid a total of $1,466 to
obtain them—about 12 cents on the dollar, including buyer's
premium, tax, and shipping cost. (pp. 4-5)

Moreover, the report offered 13 recommendations to DoD for improv¬
ing reutilization, many of which the Defense Logistics Agency (DLA)
already had underway or subsequently implemented. These recom¬
mendations fell under three major headings: Data Reliability, Physical
Control of Property, and Commodity Inventory Systems. All of them are
directed to DLA and/or DDS, with the exception of the fifth and sixth
recommendations, which are directed at the military services. Table 1
displays the 13 recommendations (GAO, 2005a).

Recommendations 2 and 3 are concerned with data reliability, a
problem that we uncovered in our conversations with USMC supply
officers. Recommendations 5 and 6 highlighted the importance of the
military services “to do their part” to help DDS succeed in their mission.
The last three recommendations, focused on excess property in prime
condition, would help uncover reutilization opportunities more easily
than what is done today, possibly generating even more savings than we
discuss in this article. Most important: We were able to observe in 2011
many of the same issues that were raised in the GAO (2005a) report.

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TABLE 1. GOVERNMENT ACCOUNTABILITY OFFICE
RECOMMENDATIONS EXTRACTED FROM REPORT
NO. GAO-05-277 (2005)

1 .

to waive the requirement to verify quantities on turn-ins under
exempted conditions

to assure that excess property receipts are verified and
processed in an accurate and timely manner

to develop a mechanism for linking prime vendor purchase
transactions to National Stock Numbers (NSN) or other unique
product identification

to develop written guidance and formal training to assist
personnel and military service turn-in generators in the proper
assignment of condition codes

to provide accurate excess property turn-in documentation,
including proper assignment of condition codes and NSNs
based on available guidance [directed to the Services]

to establish appropriate accountability mechanisms, including
supervision and monitoring, for assuring the reliability of turn-in
documents [directed to the Services]

to review excess property loss reports to identify systemic

weaknesses

to resolve identified uncorrected security weaknesses

to identify the appropriate number and liquidation sales
locations needed to handle the sales of excess DLA depot
property

10.

to inspect liquidation contractor facilities and take immediate
action to correct structural impairments and other deficiencies

11.

to consider available options and implement an interim process
for identifying turn-ins of excess new, unused, and excellent

condition items

12.

to coordinate on the identification of key data elements for
identifying excess property that should be reutilized

13.

to include edit controls in Business Systems Modernization
(BSM) system design that would reject a purchase transaction
or generate an exception report when A-condition excess items
are available, but are not selected for reutilization

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A Cultural Analysis

Reusing valuable assets is a practice not as common as desired. To
institute it as standard practice, the supply organization must change.
With similar concerns, Doane and Spencer (1997) conducted a cultural
analysis of the acquisition system within the DoD. Their analysis shed
light on how individuals in the DoD resisted process changes, in par¬
ticular in its acquisition activities. They studied two major Navy and
Air Force acquisition programs through the lens of mission and strategy,
goals, means, measurement, and correction.

Doane & Spencer (1997) defined culture as:

... a pattern of shared basic assumptions that the group learned
as it solved its problems of external adaptations and internal
integration, that has worked well enough to be considered valid,
therefore, to be taught to new members as a correct way to per¬
ceive, think, and feel in relation to those problems, (p. 25)

They found two prominent cultural obstacles to DoD acquisition
reform:

• Little incentive for the workforce to change. Most govern¬
ment employees believe there is little competition or threat
to their organization's existence. Since the DoD operated
without a profit and loss sheet, the workforce did not feel the
pressure to meet the bottom line, or the need to take risks.

• The acquisition system is risk-averse. The acquisition
system has been quick to penalize employees who make
mistakes or take risks (also discussed in Ferrer & Dew, 2010).
The workforce is conservative, strict about following rules,
and self-preservationists. They are accustomed to routine
and ordinary work, and are skeptical of initiatives and major
change.

According to the authors, aligning the culture of the organization
with the philosophies of acquisition reform is critical to achieve true ben¬
efits. However, this is difficult within the DoD because “most incentives
and motivations are not apparent for either government or industry”
(Doane & Spencer, 1997, p. 84). Industry incentives and motivation seem

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to be based on the same profit and loss theories that were present before
acquisition reform. Concurrently, the only incentives for government
employees are personal pride in their jobs and respect of their peers.
However, due to the constant rotation of supervisors within the DoD,
change is often difficult to achieve (Doane & Spencer, 1997). So what can
be done to transform culture in pursuing better DoD business practices?
The researchers recommended leadership that questions old assump¬
tions and can overcome organizational inertia and apprehension.

Additionally, leaders in a changing organization must foster open
lines of communication and cooperation among other leaders and the
organization's members. They must be accountable for their actions
and empower the members of the organization, allowing them to fail
and question authority without fear of reprisal. This empowerment will
allow for new perspectives that may encourage innovation and generate
better business practices (Ferrer & Dew, 2010). Reutilization is a prime
example that fits this situation: Given that it is an uncommon practice,
the habit of acquiring used assets from DDS—rather than buying them
brand new—would require a cultural change. This, in turn, would require
the support of civilian and military leaders for a continued period of time
until it coalesced into the SOR However, if the new process is cumber¬
some, and if no organizational incentives are in place to change a process
that is generally accepted, the typical supply professional is unlikely to
seize and apply the reutilization opportunity to its full potential.

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Analysis of USMC Reutilization Efforts

In this section, we analyze how current USMC reutilization activi¬
ties compare to the acquisition practices in other military services. By
analyzing actual requisitions processed by USMC supply activities in F Y
2010 and 2011, we show the potential cost savings that could be achieved
by an increased use of DDS as a source of supply.

Potential USMC Cost Savings Through Reutilization

To get a clearer picture of the potential cost savings that the USMC
could realize through increased reutilization, we analyzed all Marine
Corps NSN requisitions inducted during four, 2-week periods through¬
out FY 2010 and 2011. These requisitions alone do not show the full
breadth of total USMC requisitions, and therefore cannot fully capture
potential cost savings. We had to remove from our analysis many items
that do not have an NSN or are assigned a 'local NSN” generated by the
supply management unit. Nonetheless, NSN requisitions exemplify the
volume of requisition traffic conducted through the USMC's standard
supply system. We chose specific dates to represent each of the seasons
of the year to capture a wide breadth of demand patterns. The specific
dates of analysis were:

• November 8-22, 2010

• February 14-28, 2011

• April 4-18, 2011

• August 8-22, 2011

We compared the demand for all NSNs over the specified sample
periods with on-hand DDS inventory for the same 2-week periods using
data retrieved from the DDS Management Information Distribution
and Access System. We extrapolated the information to project the
cost savings that the USMC could have achieved if it had used on-hand
and available DDS inventory, to the maximum extent possible, to fill its
requisitions. We conducted this analysis for two sample groups. Group 1
included a cost savings roll-up for NSNs listed only in Supply Condition
Code (SCC) A (like-new condition), while Group 2 consisted of a cost
savings roll-up for NSNs listed in SCCs B and C (serviceable condition)

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TABLE 2. POTENTIAL SAVINGS FOR DDS AS SOURCE OF SUPPLY
(SCC A)

Nov8-22 r

2010

Feb 14-28,
2011

Apr 4-18,
2011

Aug 8-22,
2011

Number of

unique NSNs

196

193

284

857

Total

Acquisition

Value

$464,329

$1,465,013

$315,153

$1,104,550

Sources: DLA, USMC Logistics Command, the authors
Total potential savings for 8-week period: $3,349,045

Total potential annual savings: $21,768,793

Table 2 shows the results of our analysis of Group 1, and Table 3
shows the results of our analysis of Group 2, indicating the potential cost
savings for each of the four, 2-week periods. We computed the total acqui¬
sition value in the tables by multiplying the quantity available at DDS for
each unique NSN in the specified period, by the full acquisition price for
the NSN. Extrapolating the 8-week data, we estimate a potential USMC
annual cost savings of $21.8 million using SCC A, in addition to $6.7 mil¬
lion using SCC B items. Extrapolating further, we estimate that the full
adoption of condition SCC A and B items from DDS could have provided
savings of approximately $28.5 million for the USMC in FY 2011.

TABLE 3. POTENTIAL SAVINGS FOR DDS AS SOURCE OF SUPPLY
(SCC B)

Nov 8-22,
2010

Feb 14-28,
2011

Apr 4-18,
2011

Aug 8-22,
2011

Number of

unique NSNs

104

143

Total

Acquisition

Value

$123,853

$194,053

$3,080

$708,296

Sources: DLA, USMC Logistics Command, the authors
Total potential savings for 8-week period: $1,029,282

Total potential annual savings: $6,690,333

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Example of Potential DLA Disposition Services Use

In the previous section, we used the four sampled periods to describe
how USMC requisitions represent a wide variety of supplies and equip¬
ment—from inexpensive repair parts to major pieces of equipment—all
of which were available within the DDS inventory at no cost. To further
isolate potential cost savings that the USMC could have achieved by
utilizing DDS, Table 4 provides a snapshot of the two most expensive
items (SCC A only) from each of the four sampled periods.

Using the USMC NSN requisition data from the four sampled peri¬
ods, we compared the total quantities of requisitioned items with the
total on-hand quantities available at DDS for the same NSNs, during
the same ordering periods. This analysis allowed us to see what types of
supplies had the greatest probability of being filled from DDS inventory.
Table 5 shows some of the most requested supplies for each of the four
sampled periods that were simultaneously available for issue within
the DDS inventory. In this small sample, the total value of the requested
items was $216.8 thousand, of which $188.4 thousand could be supplied
by DDS—87 percent of the total. The large number of requisitions and
the high level of availability are enough to warrant reutilization. This
is especially true when most of these items are SCC A, like-new items.

Sales Through Government Liquidation

At the time of this writing, Government Liquidation (GL) was the
privately contracted company used by DLA to sell excess DDS property
to the public after the property has undergone the full Reutilization,
Transfer and Donation (RTD) screening cycle. Sales are conducted using
a Web-based auction format. According to the DLA, sales through GL
generated a total of $31.4 million in FY 2009, and $29.6 million in FY
2010. We analyzed every sale of NSN items conducted by GL for FY 2010
using a list provided by DLA. We compared this list with the requisi¬
tions conducted by the USMC during the four sample periods previously
described. Our goal was to identify cases in which the DLA sold supplies
and equipment through GL for which the Marine Corps had a valid need
in the same fiscal year. We found that 9,909 unique NSNs in SCC A were
sold in FY 2010 through GL that were also requisitioned by the USMC
during the four sampled periods. Although we could not determine
whether these items were available at precisely the same time they were
requisitioned, our findings nonetheless show that DLA is selling supplies
to the public for which the USMC possesses a valid need and continues
to order at full acquisition cost.

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TABLE 4. LIST OF MOST EXPENSIVE REQUISITIONS FOR SAMPLE PERIOD (SCC A)

Acquisition Quantity Potential
NSN Nomenclature Value Available Savings

1010012589638 Slip Ring, Twelve CH $8,023 1 $8,023

Defense Logistics Agency Disposition Services as a Supply Source: A DoD-Wide Opportunity

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09-

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TABLE 5. DLA DISPOSITION SERVICES SUPPLY AVAILABILITY FOR
USMC REQUISITIONS (SCC A)

NSN

DDS

Inventory

USMC

Requisitions

Nomenclature

Unit

Price

8465011150026

235

2032

Canteen, Water

$5.08

5660002701510

1139

1800

Post, Fence,

Metal

$6.75

7105009350422

1063

1238

Cot, Folding

$70.06

8440005437779

2300

1193

Socks

$1.45

6515015217976

1133

852

Tourniquet,

Non-pneumatic

$43.50

8465008600256

7503

500

Cover, Water

Canteen

$5.85

8465011178699

460

498

Bag, Duffel

$22.90

5310012349416

3598

470

Washer, Flat

$0.01

2590015762424

329

274

Cutter, Cable,

Vehicle Mounted

$14.28

1095015216087

477

263

Bayonet, Knife

$116.18

8465014783009

5010

240

Strap, Webbing

$6.62

8415012968878

424

186

Vest, Tactical

Load Carrying

$48.68

8460006068366

320

158

Kit Bag, Flyer's

$28.98

7240000893827

154

Can, Military

$18.77

1005005506573

121

Case, Small

Arms Cleaning

Rod

$6.82

6220015164926

468

113

Light, Marker,

Clearance

$9.63

6240000802012

112

Lamp,

Incandescent

$0.25

Sources: DLA, USMC Logistics Command, the authors

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Comparison of USMC Reutilization With Other DoD Services

Savings from DoD equipment reutilization impacts each DoD
Service's Operations and Maintenance (O&M) budget. O&M appropria¬
tions traditionally finance those items for which the utility is derived
for a short period of time. They usually comprise expenses rather than
investments. Examples of costs financed by O&M funds are travel, fuel,
expenses of operational military forces, training and education, recruit¬
ing, depot maintenance, spare parts, and base operations support. O&M
appropriations are normally available for obligation for one fiscal year
and are budgeted using the annual funding policy. Equipment reutiliza¬
tion has the potential to save O&M funds that could then be reallocated
to other uses.

We define reutilization rate as the acquisition value of reutilized
equipment as a percentage of O&M funding. Table 6 compares the reuti¬
lization rates of each military service from FY 2008 to 2010. The table
shows that the USMC had the lowest reutilization rates over the three
fiscal years. Although O&M budgets in the other three Services increased
between 7.8 percent and 9.6 percent, their reutilization expenses shrank
-11.5 percent (Air Force), -27.2 percent (Army), and -33.0 percent (Navy),

TABLE 6. DoD REUTILIZATION RATES (2008-2010)

Service

Fiscal

Year

Operations &
Maintenance
Budget

Amount

Reutilized

Reutilization

Rate

Marines

2008

$9,256,100,000

$7,715,701

0.083%

2009

$9,757,100,000

$9,022,663

0.092%

2010

$10,327,300,000

$8,608,010

0.083%

Air Force

2008

$43,490,600,000

$61,250,572

0.141%

2009

$45,388,500,000

$77,291,963

0.170%

2010

$46,869,800,000

$54,194,481

0.116%

Army

2008

$82,838,400,000

$136,513,483

0.165%

2009

$82,877,200,000

$104,777,760

0.126%

2010

$90,793,300,000

$99,352,677

0.109%

Navy

2008

$39,923,200,000

$74,296,155

0.186%

2009

$39,847,100,000

$73,495,085

0.184%

2010

$43,129,600,000

$49,757,887

0.115%

Sources: DLA, Office of the Secretary of Defense, the authors

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as shown in Figure 1. The Marine Corps was the only Service for which
the reutilization expense kept pace with the O&M budget increase.
However, the USMC reutilization rate was steady, but it was low com¬
pared to other Services. Considering the reutilization opportunity of
$28.5 million, previously estimated, the USMC seizes approximately 30
percent of all excess property that matches its current needs each year.
In the following sections, we discuss some reasons why the reutilization
rates at the Marine Corps remain low, and offer some recommendations
for improvement.

FIGURE 1. EVOLUTION OF REUTILIZATION IN DoD (2008-2010)

♦ Marines
■ Air Force
a Army
x Navy

Summary of Requisition Analysis

We estimate that the potential annual savings for USMC adoption
of DDS as a source of supply is $28.5 million in FY 2011. This amount
represents the full acquisition value of supplies that were on-hand and
ready-for-issue within the DDS inventory in the same year that USMC
personnel requisitioned them. Rather than these orders being filled from
DDS on-hand inventory, they were instead filled with brand new supplies
and equipment from standard inventory control points and from prime
vendors at full acquisition cost.

In some cases, filling non-DDS orders might be necessary because of
the need for expedited delivery. The lead-time for DDS order fulfillment
is longer than that of standard order fulfillment. Hence, supplies ordered
with Force Activity Designator priority 3 or higher are better serviced
from standard inventory control points. In the case of lower priority sup¬
plies with no requirement for expedited delivery, the DDS is invariably

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the most cost-effective choice for requisition fulfillment. The following
sections discuss some of the reasons why reutilization is not being used
to its full potential.

Nonintegrated Systems Impair Reutilization

The GAO reported that supply management IT systems at DL A that
enable integration are outdated and are not integrated with the supply
systems used by the Services (GAO, 2005a). The DLA has IT initiatives
underway to correct this deficiency; however, the integration of these
efforts with the systems of all military services is critical. The following
sections provide more detail on the legacy and emerging IT systems that
will be key components in improved reutilization efforts.

USMC Standard Automated Materiel Management System

The legacy automated materiel management system for the Marine
Corps is the Supported Activities Supply System (SASSY), which inter¬
faces neither with DLAs Enterprise Business System (EBS) nor with
the automated Digital Accessible Information System (DAISY) used by
DDS. Instead, USMC supply transactions are first filled, if possible, at
the supply management unit. If the unit does not have the item in stock,
it passes the requisition to the Marine Corps Logistics Base Automated
Information Systems Transaction Router (MAISTR). Such transactions
are grouped at each unit and transmitted at the end of the working day.
MAISTR then interfaces with the Defense Automated Address System,
finally resulting in a requisition at the DLA that is screened by EBS,
possibly ordered by the Distribution Standard System (DSS), and finally
shipped to the customer. The entire process from requisition to delivery
has a wait time of several days, depending upon customer priority and
conditioned on item availability.

When the Marine Corps developed SASSY, it was not intended for
supply chain integration with other DoD supply systems. Soon, SASSY
and other legacy systems will be replaced by Global Combat Support
System-Marine Corps (GCSS-MC), currently under implementation—
a major DoD acquisition program that is aligned with other Services'
Global Combat Support Systems. It seeks to seamlessly integrate with
the DLAs inventory and asset visibility systems, providing real-time vis¬
ibility to USMC customers. However, GCSS-MC does not improve upon
SASSY's ability to screen DDS stock since it will not directly interface

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with DAISY, the DDS inventory management system. Therefore, the
GCSS-MC alone will not be the solution for reutilization efforts. The
solution resides in DLAs ability to seamlessly integrate DAISY with its
national system (EBS).

DLA Systems

Prior to the GACfs findings on outdated DLA systems in 2005, the
DLA had begun an IT transformation effort known as Business Systems
Modernization. As part of that effort, EBS was introduced in 2006.
DAISY—fielded in 1990—is still in use and unable to communicate
directly with the EBS. However, a current DLA initiative known as
Reutilization Business Integration will integrate all DSS business pro¬
cesses within the DLA suite of business applications, by moving all data
and functions from DAISY into the DLAs DSS and the EBS. Once this
occurs, it may be possible to directly source supplies from DDS inventory
in fulfillment of requisitions from all military services. The implications
for improved reutilization will be profound, provided that DDS can be
used as a source of supply with the same credibility and accuracy as cur¬
rent DoD suppliers. Figure 2 shows the current DLA systems construct.

Organizational Climate for
Reutilization at USMC

Before we started this study, we sought advice from approximately
300 Marine Corps company-grade supply officers on the types of data and
reutilization topics we should explore. We e-mailed them using contact
information available at the Marine Online personnel management Web
site. Our goal was to use their various insights to help steer our research
into the most relevant and timely areas. Although this outreach did not
constitute a scientific survey or formal interview—responses were volun¬
tary, anonymous, and used solely for background information to review
the community's perception on reutilization—we nonetheless received
some comments that were useful in our study.

Supply Officer Feedback

A total of 62 supply officers in the grades 0-2 and 0-3 provided gen¬
eral comments about their experiences using DDS as a source of supply,
as well as their usage level and predominant method of DDS requisition.
All respondents consented to anonymous citation in this report, sum¬
marized as follows.

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FIGURE 2. REUTILIZATION USING DEFENSE LOGISTICS AGENCY
IT SYSTEMS

Provide item

Replenish item

vendor

DLA supply depot

Request excess items

Deliver excess

Receive item

DLA item mgr

items

unit

■

DDS

Sources: DLA, the authors

Of the 62 respondents, 41 indicated that they had used DDS on at
least one occasion to order supplies, while the remainder never used
DDS for requisitions. The most common method for requisition was the
RTD Web site, followed by a physical walk-in at an installation DDS field
site. Most respondents who had used DDS as a source of supply were at
least somewhat satisfied with the results, though some mentioned errors
in the accuracy of SCC and item identification—a concern previously
raised in Report No. GAO 05-277 (GAO, 2005a).

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Of the respondents who did not use DDS as a source of supply, the
most common reason was the lack of financial incentive to do so. They
mentioned that their budgets were sufficiently large to procure new sup¬
plies at full cost.

The procedures to turn in excess, damaged, or obsolete property
place heavy reliance on the person turning in equipment (known to
DDS as the “generator”) to ensure paperwork accuracy. However, the
generators have little incentive to ensure 100 percent accuracy because
the equipment will no longer be in their custody. DDS employees are often
unable to provide a redundant check because of manpower constraints
or lack of expertise concerning the property. The end result is that items
often enter DAISY with an improper NSN, nomenclature, SCC, or demili¬
tarization code (DLA, 2008).

These inaccurate inventory data were also mentioned in Report
No. GAO 05-277 (GAO, 2005a), which cites “unreliable excess property
inventory data” as a root cause for “billions of dollars in waste and inef¬
ficiency.” According to Kutz' testimony (DoD Excess Property Systems,
2005), the DLA implemented several changes, including the consolida¬
tion of numerous field sites for better property control, changes to their

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process, and the installment of a Senior Executive Service director to
oversee the organization. However, our research shows that many USMC
supply officers remain skeptical of inventory accuracy, based on their
experience turning in equipment at a DDS site.

Finally, many supply officers did not use DDS because they were
simply unaware of the RTD Web site to screen inventory nationally and
internationally. Students at Marine Corps supply schools are trained to
use the RTD Web site, but this training should be analyzed for unifor¬
mity, rigor, and skills retention. Moreover, occasional refreshers may
be necessary. This resonates with GAO Recommendation No. 4 (Table
1). Although DDS does have some resources, they are not sufficient to
ensure a broad reutilization of excess property in their possession by the
Services that need them.

Discussion

We have shown that some of the reasons for not using DDS are that
supply officers are frequently unaware of the benefits of using DDS, that
they lack confidence in the DDS supply chain, or that the IT system is
inconvenient, hindering frequent utilization. Based on the analysis of
equipment reutilization with the USMC, we make some observations
regarding the most notable characteristics of current reutilization efforts.

Many USMC supply community leaders are not aware of the breadth
and utility of the DDS inventory as a source of supply, assuming most
items to be “junk” and therefore ignoring the system. Although supply
officers receive training on DDS screening at the Ground Supply Officers
Course, this one-time class is not reinforced in the fleet, and may be eas¬
ily forgotten. For this reason, many supply officers opt to use the standard
supply system, the General Services Administration, and open purchases
for all orders despite the availability of DDS inventory.

At the same time, USMC supply professionals may consider DDS, but
typically do not trust it as a source of supply due to previous experiences
with the cumbersome turn-in and reutilization processes or misun¬
derstanding of the DDS fulfillment process; therefore, they ignore the
system. Further, DLA and USMC distribution, requisition, and inventory
management systems are not integrated, and therefore prohibit seamless
requisitions of DDS supplies using the standard USMC supply system.

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Consequently, DLA sells supplies and equipment to the public for
which the USMC holds an ongoing requirement. The Marine Corps is
not maximizing procurement of available DDS on-hand inventory, lag¬
ging behind the other Services, and annually forfeiting approximately
$28.4 million in potential cost savings. We present a course of action
that, if undertaken, will enable all military services to achieve substan¬
tial cost savings.

Recommendations

Until such time that GCSS-MC and DDS are seamlessly linked, the
Marine Corps Deputy Commandant, Installations and Logistics, should
establish Service policy in orders, directives, and SOP that requires
screening available DDS inventory prior to inducting standard supply
system requisitions, particularly Class II supplies. It should support
these directives with incentives to the supply community to use DDS
more frequently. This can be accomplished through performance
appraisal and through an awards program for reutilization in conjunc¬
tion with DLA.

Moreover, the USMC Logistics Command should maximize the
untapped potential of the DoD EMALL, which provides on-hand vis¬
ibility of DDS supplies in SCC A, by enabling USMC requisitions through
Military Standard Requisitioning and Issue Procedures. For account¬
ability purposes, such requisitions must be visible to the USMC Standard
Accounting Budget and Reporting System.

DLA has a national marketing program to raise awareness for the
potential of DDS reutilization for all military services. A key part of this
program should be to conduct frequent training visits to supply activities
of all Services to educate supply officers on the benefits of working with
DLA Disposition Services.

DLA Disposition Services should establish a seamless interface
between its automated information system (DAISY) and DLA's enter¬
prise resource planning system (EBS), so that all requisitions placed via
GCSS from any Service can be filled, to the maximum extent possible,
by DDS on-hand inventory.

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Finally, DDS must ensure 100 percent accuracy in inventory man¬
agement data—most importantly the SCC, NSN, and quantity—so that
all deliveries meet customer expectations. This reputation-establish¬
ment effort must begin at the property receipt process and continue
through the entire reutilization cycle. If necessary, capacity at property
receipt points should be overhauled so that DDS employees can effec¬
tively manage workload and ensure 100 percent accuracy in inventory
management data.

We should not let inertia take control of business decisions. With
sound leadership, we can start to pay attention to this opportunity
to improve our expenditures and to do more while spending less.
Nonetheless, seamless IT integration will be necessary before reuti¬
lization becomes common practice.

Author Biographies

Capt Nate Leon, USMC, is currently aground
supply officer in the Logistics Capabilities
Center at Marine Corps Logistics Base in
Albany, GA. He has 17 years of active service,
10 of which he served as an enlisted Marine.
His career experience encompasses a wide
range of operational and staff assignments,
including a tenure as warfighting instructor
at the U.S. Marine Corps Basic School in
Quantico, VA. Capt Leon earned a BA in
Political Science from University of
Mississippi and an MBA from the Naval
Postgraduate School.

(E-mail address: nathanael.leon@usmc.mil)

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Capt Todd Paulson, USMC, is currently a
company commander at the Defense Language
Institute. After attaining a commission as a
second lieutenant in the Marine Corps in
August 2001, he served with the 3rd Battalion,
6th Marines; the Marine Recruit Depot at
San Diego; a combat logistics unit; and the
Tactical Training and Exercise Control Group.
Capt Paulson received his BSc from Arizona
State University and an MBA from the Naval
Postgraduate School.

(E-mail address: todd.paulson@usmc.mil)

Dr. Geraldo Ferrer is an associate professor
at the Naval Postgraduate School. His areas
of expertise include global operations, supply
chain tracking technologies, sustainable
technologies, and reverse logistics. He
received his PhD from INSE AD, a multicam¬
pus international graduate business school
and research institution. Dr. Ferrer also holds
an MBA from Dartmouth College, a BSc in
Mechanical Engineering from the Military
Institute of Engineering in Rio de Janeiro,
and a BA in Business Administration from
Federal University of Rio de Janeiro.

(E-mail address: gferrer@nps.edu)

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Government Accountability Office. (2006). DoD excess property: Control
breakdowns present significant security risk and continuing waste and
inefficiency (Report No. GAO-06-943). Washington, DC: Author.

Hast, R. H., & Warren, D. R. (2000). Better controls needed to prevent misuse
of excess DoD property (Report No. OSI/NSIAD-00-147). Retrieved from
http://www.gao.gov/products/OSI/NSIAD-00-147

Defense ARJ, July 2013, Vol. 20 No. 2:218-241

241

A Publication of the Defense Acquisition University

http://www.dau.mil

The Defense Acquisition Professional
Reading List is intended to enrich
the knowledge and understanding of
the civilian, military, contractor, and
industrial workforce who participate in
the entire defense acquisition enterprise.
These book reviews/recommendations
are designed to complement the education
and training that are vital to developing
the essential competencies and skills
required of the Defense Acquisition
Workforce. Each issue of the Defense
Acquisition Research Journal (ARJ) will
contain one or more reviews of suggested
books, with more available on the Defense
ARJWeb site.

We encourage Defense ARJ readers
to submit reviews of books they believe
should be required reading for the
defense acquisition professional. The
reviews should be 400 words or fewer,
describe the book and its major ideas,
and explain its relevance to defense
acquisition. Please send your reviews
to the Managing Editor, Defense
Acquisition Research Journal:
Norene.Fagan-Blanch@dau.mil.

iSSSfesK*'

Featured Book

Democracy's Arsenal: Creating a
Twenty-First-Century Defense Industry

Author(s):

Jacques S. Gansler

Publisher:

Massachusetts Institute of
Technology Press

2011

ISBN:

978-0262072991

Hard/Softcover:

Hardcover, 432 pages
Reviewed by:

Professor Steven A. Jones,

Defense Systems Management College,
Defense Acquisition University

Professional Reading List

Book Review

Winston Churchill once said “You can always count on Americans to
do the right thing—after they've tried everything else.” When it comes
to our nation's defense acquisition system, you would think Winston
Churchill's quote is spot on. Jacques Gansler describes in his book one
more transformation needed in government and industry to achieve a
new, more effective system of national defense. The author contends
that this transformation is required if this country intends to meet all of
the challenges to national security the new century brings. As suggested
by the title, Creating a Twenty-First-Century Defense Industry ,

Gansler clearly outlines the changes he sees as essential in industry
and the Department of Defense (DoD) business practices. He makes
a compelling case for globalization of defense business and greatly
reduced competition.

This is a well-researched and engaging book. Drawing upon his
decade of experience in industry, government, and academia, Gansler
argues that the old model of ever-increasing defense expenditures on
largely outmoded weapons systems must be replaced by a strategy
that combines a healthy economy, effective international relations,
and a strong (but affordable) national security posture. The author
describes many significant policy decisions made by the DoD over the
last 30 years. He provides a significant bibliography to support policy
decisions in the past and provides rationale for why these policies
should change in the future. His extensive analysis provides the reader
with detailed pros and cons of each hypothesis made and clearly
articulates his conclusions.

One of the many “Globalization Thrusts'' Gansler suggests is to
increase purchases from foreign sources and to codevelop more
weapons systems. He refutes those that claim this approach increases
U.S. Forces' vulnerability and contends globalization brings greater
efficiency and innovation. He provides specific recommended changes
in legislation to recognize this global defense market; he also claims
this approach would establish a more appropriate, risk-based set of
considerations associated with the vulnerability of U.S. Forces.

This book is of particular importance in today's defense acquisition
community as we approach a significant transition. It provides
the reader with a vast knowledge of studies performed by DoD and

Defense ARJ, July 2013, Vol. 20 No. 2:242-244

243

A Publication of the Defense Acquisition University

http: //w w w. dau. mil

Congress that led to policy decisions and legislative actions in the
past. Having this clear lens of hindsight is important to any decision
maker in the DoD. This is especially important to Executive Coaches,
providing a wealth of knowledge in the cache of tools available to
coaches and their clients.

This book may spark a new twist to acquisition reform. Is it possible
Winston Churchill is right? Have we tried everything else?

244

Defense ARJ, July 2013, Vol. 20 No. 2:242-244

Call for Authors

We are currently soliciting articles and subject matter experts for the
2013-2014 Defense Acquisition Research Journal (ARJ) print years.
Please see our guidelines for contributors for submission deadlines.

Even if your agency does not require you to publish, consider these

career-enhancing possibilities:

■ Share your acquisition research results with the acquisition,
technology, and logistics (AT&L) community.

■ Change the way Department of Defense (DoD) does business.

■ Help others avoid pitfalls with lessons learned or best practices
from your project or program.

■ Teach others with a step-by-step tutorial on a process or approach.

■ Share new information that your program has uncovered or
discovered through the implementation of new initiatives.

■ Condense your graduate project into something beneficial to
acquisition professionals.

Enjoy These Benefits:

■ Earn 25 continuous learning points for publishing in a refereed
journal.

■ Get promoted or rewarded.

■ Become part of a focus group sharing similar interests.

■ Become a nationally recognized expert in your field or speciality.

■ Be asked to speak at a conference or symposium.

We welcome submissions from anyone involved with or interested
in the defense acquisition process—the conceptualization, initia¬
tion, design, testing, contracting, production, deployment, logistics
support, modification, and disposal of weapons and other systems,
supplies, or services (including construction) needed by the DoD,
or intended for use to support military missions.

If you are interested , contact the Defense ARJ managing editor (DefenseARJ@
dau.mil) and provide contact information and a brief description of your
article. Please visit the Defense ARJ Guidelines for Contributors at http://
www.dau.mil/pubscats/Pages/ARJ.aspx.

Defense ARJ

Guidelines for Contributors

The Defense Acquisition Research Journal (ARJ) is a scholarly
peer-reviewed journal published by the Defense Acquisition
University (DAU). All submissions receive a double-blind review
to ensure impartial evaluation.

We welcome submissions from anyone involved in the defense acqui¬
sition process. Defense acquisition is defined as the conceptualization,
initiation, design, development, testing, contracting, production, deploy¬
ment, logistics support, modification, and disposal of weapons and other
systems, supplies, or services needed for a nation's defense and security,
or intended for use to support military missions.

Research involves the creation of new knowledge. This generally
requires using material from primary sources, including program docu¬
ments, policy papers, memoranda, surveys, interviews, etc. Articles are
characterized by a systematic inquiry into a subject to discover/revise
facts or theories with the possibility of influencing the development of
acquisition policy and/or process.

We encourage prospective writers to coauthor, adding depth to
manuscripts. It is recommended that a mentor be selected who has
been previously published or has expertise in the manuscript's subject.
Authors should be familiar with the style and format of previous Defense
ARJs and adhere to the use of endnotes versus footnotes, formatting of
reference lists, and the use of designated style guides. It is also the respon¬
sibility of the corresponding author to furnish a government agency/
employer clearance with each submission.

MANUSCRIPTS

Manuscripts should reflect research of empirically supported experi¬
ence in one or more of the areas of acquisition discussed above.

246

Research articles may be published both in print and online, or as
a Web-only version. Articles that are 4,500 words or less (excluding,
abstracts, biographies, and endnotes) will be considered for both print as
well as Web publication. Articles between 4,500 and 10,000 words will
be considered for Web-only publication, with an abstract included in the
print version of the Defense ARJ. In no case should article submissions
exceed 10,000 words.

Audience and Writing Style

The readers of the Defense ARJ are primarily practitioners within
the defense acquisition community. Authors should therefore strive to
demonstrate, clearly and concisely, how their work affects this commu¬
nity. At the same time, do not take an overly scholarly approach in either
content or language.

Format

Please submit your manuscript with references in APA format
(author-date-page number form of citation) as outlined in the Publication
Manual of the American Psychological Association (6th Edition). For all
other style questions, please refer to the Chicago Manual of Style (15th
Edition).

Contributors are encouraged to seek the advice of a reference librar¬
ian in completing citation of government documents because standard
formulas of citations may provide incomplete information in reference
to government works. Helpful guidance is also available in Garner, D.

247

A Publication of the Defense Acquisition University

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L., and Smith, D. H., 1993, The Complete Guide to Citing Government
Documents: A Manual for Writers and Librarians (Rev. Ed.), Bethesda,
MD: Congressional Information Service.

Pages should be double-spaced and organized in the following order:
title page, abstract (120 words or less), two-line summary, list of key¬
words (five words or less), body of the paper, reference list (works cited),
author's note (if any), and any figures or tables.

Figures or tables should not be inserted (or embedded, etc.) into the
text, but segregated (one to a page) following the text. When material is
submitted electronically, each figure or table should be saved to a sepa¬
rate , exportable file (i.e., a readable EPS file). For additional information
on the preparation of figures or tables, see CBE Scientific Illustration
Committee, 1988, Illustrating Science: Standards for Publication,
Bethesda, MD: Council of Biology Editors. Restructure briefing charts
and slides to look similar to those in previous issues of the Defense ARJ.

The author (or corresponding author in cases of multiple authors)
should attach to the manuscript a signed cover letter that provides all of
the authors' names, mailing and e-mail addresses, as well as telephone
and fax numbers. The letter should verify that the submission is an
original product of the author; that it has not been previously published
in another journal (monographs and conference proceedings, however,
are okay); and that it is not under consideration by another journal for
publication. Details about the manuscript should also be included in
this letter: for example, title, word length, a description of the computer
application programs, and file names used on enclosed CDs, e-mail
attachments, or other electronic media.

The Defense ARJ is a publication of the United States Government
and as such is not copyrighted. Because the Defense ARJ is posted as
a complete document on the DAU homepage, we will not accept copy¬
righted manuscripts that require special posting requirements or
restrictions. If we do publish your copyrighted article, we will print only
the usual caveats. The work of federal employees undertaken as part of
their official duties is not subject to copyright except in rare cases.

248

July 2013

Web-only publications will be held to the same high standards and
scrutiny as articles that appear in the printed version of the journal and
will be posted to the DAU Web site at www.dau.mil.

In citing the work of others, please be precise when following the
author-date-page number format. It is the contributor's responsibility to
obtain permission from a copyright holder if the proposed use exceeds
the fair use provisions of the law (see U.S. Government Printing Office,
1994, Circular 92: Copyright Law of the United States of America, p. 15,
Washington, D.C.). Contributors will be required to submit a copy of the
writer's permission to the Managing Editor before publication.

Policy

We reserve the right to decline any article that fails to meet the
following copyright requirements:

• The author cannot obtain permission to use previously
copyrighted material (e.g., graphs or illustrations) in the
article.

• The author will not allow DAU to post the article in our
Defense ARJ issue on our Internet homepage.

• The author requires that usual copyright notices be posted
with the article.

• To publish the article requires copyright payment by the
DAU Press.

SUBMISSION

All manuscript submissions should include the following:

• Cover letter

• Author checklist

• Biographical sketch for each author (70 words or less)

249

A Publication of the Defense Acquisition University

http: //w w w. dau. mil

• Headshot for each author should be saved to a CDR disk
as a 300 dpi (dots per inch) or high-print quality JPEG or
Tiff file saved as no less than 5x7. Please note: images from
Web, PowerPoint, or e-mail will not be accepted due to low
image quality.

• One copy of the typed manuscript, including:

° Title (12 words or less)

° Abstract of article (120 words or less)

° Two-line summary
° Keywords (5 words or less)

° Document excluding abstract and references (4,500
words or less for the printed edition and 10,000 words
or less for online-only content)

• These items should be sent electronically, as appropri¬
ately labeled files, to Defense ARJ Managing Editor, Norene
Fagan-Blanch at: Norene.Fagan-Blanch@dau.mil.

250

Defense ARJ

Print Schedule

The Defense ARJ is published in quarterly theme editions. Please
consult the DAU homepage for current themes being solicited. See print
schedule below.

2013

-2014

Author Due Date

Publication Date

July

January

November

April

January

July

April

October

In most cases, the author will be notified that the submission has
been received within 48 hours of its arrival. Following an initial review,
submissions will be referred to referees and for subsequent consideration
by the Executive Editor, Defense ARJ.

252

Contributors may direct their questions to the Managing Editor,
Defense ARJ, at the address shown below, or by calling 703-805-3801
(fax: 703-805-2917), or via the Internet at norene.fagan-blanch@dau.mil.

The DAU Homepage can be accessed at:

http://www.dau.mil.

DEPARTMENT OF DEFENSE
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