Transaction Costs and Cost Breaches in Major Defense Acquisition Programs

Abstract

Transaction costs associated with program management are a component of acquisition cost that is often overlooked when estimating the total costs of a DoD program. This research explores the possibility that transaction costs may be related to major defense acquisition program (MDAP) cost breaches. We examine the two questions: (1) Is there a relation between MDAP transaction costs and cost breaches? and (2) Are cost breaches related to the amount, or percentage of total costs, spent on MDAP transaction costs? Using systems engineering and program management (SE/PM) costs as a proxy for transaction costs, we analyze the level of SE/PM expenditures in MDAPs to determine whether a relationship exists between transaction costs and cost breaches. Contract type and program maturity are also considered. Logistic regression models are used to examine the occurrence of program breaches in MDAPs. We find a positive relationship that is significant at the 5% (p = .05) level between the likelihood of a cost breach occurring and estimate at completion SE/PM cost ratio. On average, for a 1% increase in the SE/PM cost ratio, there is a corresponding 0.8% increase in the likelihood that a cost breach will occur. When maturity and contract type are included in the model, the average effect of the SE/PM cost ratio on the likelihood of a cost breach increases to 1% for cost-plus contracts at a significance level of 10% (p = .10). Although SE/PM cost ratio and cost breaches are shown to be related, it cannot be assumed that transaction costs are a causal factor for cost breaches.