A Model for Understanding the Relationship Between Transaction Costs and Acquisition Cost Breaches

Abstract

Many studies have examined cost growth in DoD programs, yet little research has been done on the relationship between transaction costs and cost overruns. This study expands the work done by Biggs in 2013 to examine the relationship between transaction costs (using the SE/PM cost ratio as a proxy) and the likelihood of cost breaches experienced by a program. We do this in two ways. First we look at the data using a survival model to explore the relationship, which allows us to model the hazard of cost breaches over program maturity time. Second, we look at Nunn-McCurdy breaches as well as APB breaches. We find that higher SEPM ratios, either to date or estimated at completion, significantly increase the risk of both kinds of cost breaches in many models. In the models of APB breaches, a 1 percentage point increase in estimated SEPM at completion increases the risk of breach by 3-5%. The estimated impact is reduced in the model with to date SEPM, where it is about 2% when we do not control for contract type. Our results suggest that the SEPM ratio is a promising measure of the likelihood that programs will experience a cost breach.