2

5-year Moving Average of

Annual Growth of Contracted Costs
(largest contracts on major programs, 19852015)

Contract Growth: Development and Early Production

5-year Moving Average: MDAP Contract Portfolio
(scope growth + overruns; in dollars, after inflation)
Annual Total Cost Growth
War on Terror
10%

8%

Post Goldwater-Nichols

Better Buying Power

31-year average

Reagan Buildup
6%

4%
2%

Reinventing Govt
Transformation
TSPR

0%

FY 1985

1990

1995

5-year Moving Average

2000

2005

2010

2015

31-year average
TSPR = Total System Performance
Responsibility

n = 1,123 contracts
for 239 programs
Approved for Public Release; Distribution Unlimited. 16-S-0565, 2 Dec 2015.

DoD Prime Suppliers Profitability Analysis

Historical EBITDA Margin (%) of the Largest Six DoD Primes
18%
16%

EBITDA Margin (%)

14%
Average

12%

Lockheed MarAn Corp

10%

Northrop Grumman Corp

Raytheon Co

8%
6%
4%

General Dynamics Corp

Underperforming GD
acquisiAons drove $2B
writedown of goodwill.

2%
0%
2010

2011

Boeing Co/The*

Boeing BDS operaAng

margin used as trend
proxy in the absence of
segment EBITDA.
2012

2013

2014

2010

2011

2012

BAE Systems PLC

2015

2013

2014

2015

Average

11.8%

12.5%

11.3%

12.8%

13.7%

13.3%

Lockheed Martin Corp

11.2%

10.7%

11.5%

12.1%

14.4%

14.0%

Northrop Grumman Corp

12.0%

14.5%

14.4%

14.7%

15.3%

15.1%

Raytheon Co

12.0%

13.2%

14.1%

14.3%

15.9%

15.1%

General Dynamics Corp

13.9%

13.5%

4.6%

13.6%

14.2%

14.8%

Boeing Co/The

10.4%

10.9%

9.9%

9.7%

10.3%

9.7%

BAE Systems PLC

11.3%

12.4%

13.1%

12.4%

12.1%

11.0%

Development:
Median Biennial Change in
Major Program Costs (Realized plus Estimated)
Biennial Funding Change in Total RDT&E

10%

Both generally decreasing

8%
6%
4%

dollar basis

2%
program basis

0%
-2%

1999 to
2001
(n=62)

2001 to 2002 to 2003 to 2004 to 2005 to

2003
2004
2005
2006
2007
(n=56) (n=58) (n=60) (n=69) (n=72)

2007 to
2009
(n=76)

2009 to 2010 to 2011 to 2012 to

2011
2012
2013
2014
(n=80) (n=69) (n=70) (n=70)

Median biennial change in program total funding

needed has been near zero since 2010
5

Procurement
Median Biennial Change in
Major Program Costs (Realized plus Estimated)
Biennial Funding Change in Total Quantity-Adjusted Unit-Procurement Recurring-Flyaway

10%

Both generally decreasing

8%
6%
4%

2%

program basis

0%
-2%

dollar basis
1999 to
2001
(n=64)

2001 to 2002 to 2003 to 2004 to 2005 to

2003
2004
2005
2006
2007
(n=54) (n=57) (n=56) (n=62) (n=67)

2007 to
2009
(n=67)

2009 to 2010 to 2011 to 2012 to

2011
2012
2013
2014
(n=71) (n=65) (n=67) (n=69)

Median biennial change in program total funding

needed has been near zero since 2009
6

Major Program Contract Cost Growth

Related to Negotiated Cost Targets
Cost-Over-Target on Contracts for
Currently Active MDAPs (controlling for inflation)
Development

Early Production
100%

100%
January 2009

80%

80%

60%

60%

40%

40%

20%

20%

0%

0%

-20%

-20%

-40%
Jan-00

Jan-05

Jan-10

January 2009

-40%
Jan-00
Jan-15

Jan-05

Jan-10

Jan-15

(not firm-fixed price contracts)

7

Development
Percent of Major Programs With
Cost Reductions Relative to Original Baseline
As of 2009:

As of 2014:

better

better

Upward
shift

Significant positive shift from 2009 to 2014

statistically
significant
difference

Should Cost at work

8

Production
Percent of Major Programs With
Cost Reductions Relative to Original Baseline
As of 2009:

As of 2014:

better

better

Upward
shift

Significant positive shift from 2009 to 2014

statistically
significant
difference

Should Cost at work

9

Major Programs Crossing Congressional

Critical Nunn-McCurdy Breaches
Cost-Growth
Critical Thresholds
Count

MDAP Critical Nunn-McCurdy Breaches

10

Trend (statistically significant)

2007

2008

2009

2010

2011

2012

2013

2014

Fewer major programs are crossing

Congressional cost-growth critical thresholds
10

Major Program Contract Lengths

Contract Cycle Time for Currently Active MDAPs

Development
Years
14

Early Production
Development

January 2009

12

Years
14
12

10

10

0
Jan-00

Early Production

Jan-05

Jan-10

0
Jan-15 Jan-00

January 2009

Jan-05

Jan-10

Jan-15

11

Effect of Budget Climates on

Program Acquisition Unit-Cost Growth
Median PAUC Growth Between Budget Climates
Within Same Policy Regime (FY19702007)

50%
no Obliging
comparison

29%

28%
no Obliging
comparison

23%

20%
9%

10%
0%

50%

40%

40%
30%

statistically
significant
difference

9%
5%
n/a

Tight

Obliging

Tight

Obliging

Tight

Obliging

Tight

Obliging

none

FY 1994
2000

none

FY 1970 FY 1981 FY 1987 FY 1983 FY 1990

1980
1982
1989
1986
1993
DSARC

Post-Carlucci

n/a

DAB

AR

Tight

Obliging

FY 2001 FY 2003
2002
2007
Post-AR
12

Better Buying Power Principles

Principle 1:

People matter most; we can never be too professional or too competent

Principle 2:

Data should drive policy

Principle 3:

Critical thinking is necessary for success; fixed rules are too constraining

Principle 4:

Controlling life cycle cost is one of our jobs; staying on budget isn't enough

Principle 5:

Continuous improvement will be more effective than radical change

Principle 6:

Incentives work we get what we reward

Principle 7:

Competition, and the threat of competition, is the most effective incentive

Principle 8:

Defense acquisition is a team sport

Principle 9:

Our technological superiority is at risk and we must respond

Principle 10: We should have the courage to challenge bad policy

13

RDT&E Funding

Our Problem Is Not Innovation; It Is Access

to Capital For New Product Development

(FY17$, B)
$40

$35

6.7: Operational Systems Dev.

$30

$25

6.5: System Dev & Demonstration

$20

$15

6.4: Advanced Component Dev. &

Prototypes

$10

6.3: Advanced Technology Dev.

6.2: Applied Research

$5

6.6: Management Support

2021

2020

2019

2018

2017

2016

2015

2014

2013

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

NOTE: Includes OCO through FY17

2012

6.1: Basic Research

$0

Fiscal Year
UNCLASSIFIED

14

All Acquisition Reform Comes

Down to Four Basic Things
1. Set reasonable requirements
2. Put professionals in charge
3. Give them the resources they need
4. Provide strong incentives to succeed

15