Quantifying Annual Affordability Risk of Major Defense Programs

Abstract

To a first approximation, acquisition programs never spend what they originally said they would spend when they began. In fact, the error bars around an initial cost estimate are much larger than is generally understood, once program cancellations, restructurings, truncations, and block upgrades have been accounted for. Worse yet, all of this uncertainty arises in a context where programs must fit within annual budgets it is not enough to only spend as much as you said you would; you must also spend it when you said you would, or problems ensue. We have developed a methodology that uses historical program outcomes to characterize the year-by-year budget risk associated with a major acquisition program. This methodology can be applied to both development costs and procurement costs and can be extended to understand the aggregate affordability risk of portfolios of programs. The method allows Resource Managers to estimate annual budget risk levels, required contingency amounts to achieve a target probability of staying within a given budget, and many other relevant risk metrics for programs. It also allows policy makers to predict the impact on program affordability of proposed changes in how contingency funds are managed.