Measuring Transaction Costs in DoD Acquisition Programs

Abstract

This paper reports the preliminary results of a study to explore the influence of transaction costs on Department of Defense (DoD) cost estimates. It is an extension of previous work that established that Transaction Cost Economics has promising explanatory power in terms of costs of major DoD acquisition programs. The current work explores methods of measuring transaction costs as a first step in improving estimation methods by including explanatory variables that capture the coordination and motivation problems associated with a program. The preliminary results indicate that it is possible to measure contractor Systems Engineering/Program Management (SEPM) costs as a proxy for transaction costs. The ratio of SEPM to total costs was examined for two case studies (Javelin and ATACMS) for which ex-ante indicators of transaction costs had been assessed. The results are consistent in that the program with ex-ante indicators that indicated higher transaction costs also had a significantly higher SEPM ratio. Further research is required to better establish the relationship between transaction costs indicators and the quality of DoD cost estimates.