DODI 5000.02 Enclosure 8: Affordability Analysis and Investment Constraints

1. PURPOSE

This enclosure establishes the fundamental concepts and approaches for developing and applying affordability constraints to acquisition programs as part of life-cycle investment analysis, decision making, and management.

2. OVERVIEW

a. Affordability Analysis Long-range planning and decision making that determines the resources a Component can allocate for each new capability by ensuring that the total of all such allocations - together with all other fiscal demands that compete for resources in the Component - are not above the Component’s future total budget projection for each year. is a DoD Component leadership responsibility that should involve the Component’s programming, resource planning, requirements, intelligence, and acquisition communities. The Department has a long history of starting programs that proved to be unaffordable. The result of this practice has been costly program cancelations and dramatic reductions in inventory objectives. Thus, the purpose of Affordability Analysis is to avoid starting or continuing programs that cannot be produced and supported within reasonable expectations for future budgets. Affordability constraintsA program's unit procurement and sustainment cost goals or caps dictated by a Component’s affordability analysis. Constraints are determined in a top-down manner by the resources a Component can allocate for a system given inventory objectives and all other fiscal demands on the Component—not by cost estimates. When approved affordability constraints cannot be met, then technical requirements, schedule, and required quantities must be revisited. for procurement and sustainment will be derived early in program planning processes. These constraints will be used to ensure capability requirements prioritization and cost tradeoffs occur as early as possible and throughout the program’s life cycle.

b. The intent of this policy is to require affordability analysis that addresses the total life cycle of the planned program, including beyond the FYDP The Future Years Defense Program (FYDP) is a database that captures and summarizes forces, resources, and programs associated with all Department of Defense (DoD) operations approved by the Secretary of Defense (SECDEF). The FYDP is structured in three basic dimensions: the organizations affected (military departments and defense agencies), appropriations accounts (Research, Development, Test and Evaluation (RDT&E), Operation and Maintenance (O&M), etc.), and Major Force Program (MFP) (strategic forces, mobility forces, R&D, etc.). The FYDP allows a 'crosswalk' between DoD's internal system of accounting via 11 MFPs and Congressional appropriations. The primary data element in the FYDP is the Program Element (PE). The FYDP is updated twice during the Planning, Programming, Budgeting and Execution (PPBE) process cycle: upon submission of the Program Objective Memorandum (POM) (usually July/August), and submission of the President's Budget (PB) (early February the year following). The FYDP is the program and financial plan for the Department of Defense as approved by the SECDEF. The FYDP arrays cost data, manpower and force structure over a 5-year period (force structure for an additional 3 years), portraying this data by MFP for DoD internal review for the program and budget review submission. It is also provided to the Congress in conjunction with the PB submission. . Program life-cycle affordability is a cornerstone of DoD acquisition planning as indicated in DoD Directive 5000.01 (Reference (a)). Affordability within the FYDP is part of the MDA certification and monitoring required by 10 U.S.C. 2366b (Reference (h)) for Major Defense Acquisition Programs (MDAPs) An acquisition program that is designated by the Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)) as an MDAP; or is estimated to require an eventual total expenditure for research, development, test, and evaluation (RDT&E), including all planned increments, of more than $480 million in Fiscal Year (FY) 2014 constant dollars or, for procurement, including all planned increments, of more than $2.79 billion in FY 2014 constant dollars. GAO-16-329SP, Assessment of Selected Weapon Programs, Mar 2016 FY17 Program Acquisition Cost By Weapon System, Feb 2016 at and beyond Milestone B. Assessing life-cycle affordability of new and upgraded systems is also crucial for establishing fiscal feasibility of the program, informing Analyses of Alternatives (AoAs), guiding capability requirements and engineering tradeoffs, and setting realistic program baselines to control life-cycle costs and help instill more cost-conscious management in the DoD. Affordability analysis and management necessitates effective and ongoing communication with the requirements community on the cost and risk implications of capability requirements.

c. Affordability analysis and constraints are not intended to produce rigid, long-term plans. Rather, they are tools to promote responsible and sustainable investment decisions by examining the likely long-range implications of today’s capability requirements choices and investment decisions based on reasonable projections of future force structure equipment needs—before substantial resources are committed to a program.

d. Affordability analysis and affordability constraints are not synonymous with cost estimation and approaches for reducing costs. Constraints are determined in a top-down manner by the resources a DoD Component can allocate for a system, given inventory objectives and all other fiscal demands on the Component. Constraints then provide a threshold for procurement and sustainment costs that cannot be exceeded by the Program Manager. On the other hand, cost estimates are generated in a bottom-up or parametric manner and provide a forecast of what a product will cost for budgeting purposes. The difference between the affordability constraints and the cost estimates indicates whether actions must be taken to further reduce cost in order to remain within affordability constraints. Independent of affordability constraints or cost estimates, program managers should always be looking for ways to control or reduce cost. Proactive cost control is central to maximizing the buying power of the Department and should be an integral part of all phases and aspects of program management. Cost estimating approaches are discussed in Enclosure 10 of this instruction.

e. When approved affordability constraints cannot be met—even with aggressive cost control and reduction approaches—then technical requirements, schedule, and required quantities must be revisited; this will be accomplished with support from the DoD Component’s CSB Established by component acquisition executives (CAE) to review all requirements and significant technical configuration changes that have potential to impact cost and schedule of Acquisition Category (ACAT) I and IA programs. Generally, changes will be rejected and deferred to future increments unless funds are identified and schedule impacts are addressed. The Program Manager, in consultation with the Program Executive Officer (PEO), will on at least an annual basis, identify and propose to the CSB a set of descoping options that reduce program cost and/or moderate requirements. Final decisions on descoping option implementation will be coordinated with the capability requirements officials. Required by DoDI 5000.02 for ACAT I and IA programs; required by public law (FY 2009 NDAA, section 814) for ACAT I programs., and with any requirements reductions proposed to the validation authority. If constraints still cannot be met, and the Component cannot afford to raise the program’s affordability cap(s) Binding unit procurement and sustainment constraints set for a program at the Development Request for Proposal (RFP) Release Decision Point, Milestone B, and beyond. Affordability caps provide fixed-cost requirements functionally equivalent to Key Performance Parameters. by lowering constraints elsewhere and obtaining MDA approval, then the program will be cancelled.

3. LIFE- CYCLE AFFORDABILITY ANALYSIS

DoD Components are responsible for developing life-cycle affordability constraints A program's unit procurement and sustainment cost goals or caps dictated by a Component’s affordability analysis. Constraints are determined in a top-down manner by the resources a Component can allocate for a system given inventory objectives and all other fiscal demands on the Component—not by cost estimates. When approved affordability constraints cannot be met, then technical requirements, schedule, and required quantities must be revisited. for Acquisition Category (ACAT) I and IA acquisition programs for procurement unit cost and sustainment costs by conducting portfolio affordability analyses Long-range planning and decision making that determines the resources a Component can allocate for each new capability by ensuring that the total of all such allocations - together with all other fiscal demands that compete for resources in the Component - are not above the Component’s future total budget projection for each year. that contain a product life-cycle funding projection and supporting analysis. The basic procurement unit cost calculation is the annual estimated procurement budget divided by the number of items that should be procured each year to sustain the desired inventory. (As a simple example, if a Component plans to maintain an inventory of 200,000 trucks, and the trucks have an expected service life of 20 years, then an average of 10,000 trucks must be procured each year. If the Component can afford to spend an average of $1 billion per year on trucks, then the affordability constraint for procurement is $1 billion divided by 10,000, or $100,000 per truck. The Component’s requirements for a new truck must be restricted to those that can fit into a $100,000 package. Similar calculations will be made to derive sustainment affordability constraints.) If they are provided, Components will use office of the Under Secretary of Defense for Acquisition, Technology and Logistics standardized portfolios for their analysis. Portfolios can be based on mission areas or commodity types, and will define a collection of products or capabilities that can be managed together for investment analysis and oversight purposes. Components will normally make tradeoffs within portfolios, but if necessary, can and should make tradeoffs across portfolios to provide adequate resources for high-priority programs.

a. A Product Life Cycle, Component Portfolio Analysis (30 to 40 Years Nominal). Component leadership—not the acquisition community or program management—conducts affordability analysis with support and inputs from their programming, resource planning, requirements, intelligence, and acquisition communities. Each Component determines the processes and analytic techniques they use for affordability analysis within the following basic constructs:

(1) Future Budget. A future total budget projection for each DoD Component for affordability analysis provides the first-order economic estimate for allocation of future resources to each portfolio. This projection establishes a nominal rather than optimistic foundation for the future and covers all fiscal demands that compete for resources in the Component, including those outside acquisition and sustainment.

(2) Time Horizon. Component level affordability analysis examines all programs and portfolios together, extending over enough years to reveal the life-cycle cost and inventory implications of planned program for the Component. The same analysis is used as individual programs come up for review. Nominally, affordability analysis covers 30 to 40 years into the future.

(3) Consistency. The aggregation of portfolio cost estimates for each year, when combined with all other fiscal demands on the Component, may not exceed the Component’s reasonably anticipated future budget levels.

(4) Fiscal Guidance. Absent specific Component-level guidance by the DCAPE or the Defense Acquisition Executive The individual responsible for supervising the Defense Acquisition System. The DAE takes precedence on all acquisition matters after the Secretary of Defense (SECDEF) and the Deputy Secretary of Defense (DEPSECDEF). , each Component projects its topline budget beyond the FYDP using the average of the last 2 years of the current FYDP and the OSD inflator provided by the Under Secretary of Defense (Comptroller) (USD(C)), resulting in zero real growth.

(5) Inflators. Affordability analysis assumes constant purchasing power. Each Component uses the OSD inflator provided by USD(C) in the Component’s future total budget projection and to inflate their cost estimates for comparison against affordability constraints, assuming budgets will be adjusted later for any differential inflator issues.

(6) Portfolios. Components will subdivide their accounts into portfolios to facilitate trade-off analysis; but when summed, the total cost for all portfolios and their elements cannot be above the Component’s future total budget projection. Components may use existing affordability portfolios, which will be stable between affordability analysis updates. When the analysis is presented for a specific program’s review, the Component will employ the relevant portfolio to facilitate understanding and discussion of life-cycle costs and inventories of related acquisition systems.

(7) Other Portfolio Plans. The Component’s affordability analyses should be consistent with any relevant existing portfolio plans and strategies such as those required by statute (i.e., the 30-year plans required by 10 U.S.C. 231 (for ships) and 10 U.S.C. 231a (for aircraft) (Reference (h))).

(8) Affordability Analysis Updates. Each Component maintains and updates its affordability analysis as needed at the Component or portfolio level to reflect significant changes such as large cost growths in portfolios and programs, changes in defense strategy, force structure changes, or major budgetary changes.

b. Affordability Analysis Output Format. Each Component’s affordability analysis is presented within the governance framework to the MDA in preparation for major acquisition decisions in a format that demonstrates the affordability of the program within the Component and portfolio context, to ensure that the resulting affordability constraints are understood and consistent with the future total budget projection. Transparency ensures that the risk, cost implications, and alternatives of system acquisitions and sustainment are sufficiently understood by the Component leadership and the programming, resource planning, requirements, intelligence, and acquisition communities.

(1) Data Format. At each major acquisition decision point or milestone, the DoD Component will provide stacked area charts (“sand charts”) and underlying spreadsheets. These provide the estimated allocations by year for each program and portfolio of the analysis—including all programs in all portfolios—against the future total budget projection equivalent to the DoD Component’s Total Obligation Authority.

(2) Data Requirements for Programs. Affordability analysis must be consistent with the data in the Cost Analysis Requirements Description for a program under review, including the capability requirements, quantity, and schedule used in the analysis. Affordability analysis also provides data to support the procurement and sustainment constraints that will be documented in the ADMs resulting from the Materiel Development Decision (MDD) A review that is the formal entry point into the acquisition process and is mandatory for all programs. A successful MDD may approve entry into the acquisition management system at any point consistent with phase-specific and statutory requirements but will normally be followed by a Materiel Solution Analysis (MSA) phase. The principal documents at this decision point are the Initial Capabilities Document (ICD) and Analysis of Alternatives Study Guidance and Plan. A successful MDD normally does not mean that a new acquisition program has been initiated. , Milestone A, and Development RFP Release Decision Point, and in the acquisition program baselines normally set at Milestone B and beyond.

c. Timing of Affordability Analysis. Affordability analysis should be conducted as early as possible in a system’s life cycle so that it can inform early capability requirements trades and the selection of alternatives to be considered during the AoA. Affordability constraints are not required before the MDD; however, conducting some analysis before that point is beneficial. The best opportunity for ensuring that a program will be affordable is through tailoring capability requirements before and during the AoA(s) and early development. Thus, the Components will incorporate estimated funding streams for future programs within their affordability analyses at the earliest conceptual point and specify those estimates at the MDD and beyond to inform system design and alternative selection.

d. Importance of AoAs to Affordability. Examination of key requirements cost-performance relationships, when merged with affordability analysis results during AoAs, provides the information needed to support sound materiel solution decisions about affordable products.

e. Affordability Constraints: Goals and Caps

(1) Affordability constraints are established to inform the capability requirements validation authority, Program Manager, and AoA team of the cost limitations dictated by the Component’s affordability analysis. Early in a program, affordability goals are set to inform capability requirements and major design tradeoffs needed to define the product being acquired. Once requirements and the product definition are firm (prior to Milestone B), affordability caps are established to provide fixed cost requirements that are functionally equivalent to KPPs Performance attribute of a system considered critical or essential to the development of an effective military capability. KPPs are contained in the Capability Development Document (CDD) and the Capability Production Document (CPD) and are included verbatim in the Acquisition Program Baseline (APB). KPPs are expressed in term of parameters which reflect Measures of Performance (MOPs) using a threshold/objective format. KPPs must be measurable, testable, and support efficient and effective Test and Evaluation (T&E). Mandatory KPPs are specified in the JCIDS Manual.. Based on the Component’s affordability analysis and recommendations, the MDA will set and enforce affordability constraints as follows:

(a) At MDD. Tentative affordability cost goals (e.g., total funding, annual funding profiles, unit procurement and/or sustainment costs, as appropriate) and inventory goals to help scope the AoA and provide targets around which to consider alternatives.

(b) At Milestone A. Affordability goals for unit procurement and sustainment costs.

(c) At the Development RFP Release Decision Point, Milestone B, and Beyond. Binding affordability caps.

(2) These constraints will be documented in the ADMs for these decision points. At Milestone B and beyond, the affordability caps Binding unit procurement and sustainment constraints set for a program at the Development Request for Proposal (RFP) Release Decision Point, Milestone B, and beyond. Affordability caps provide fixed-cost requirements functionally equivalent to Key Performance Parameters. will be documented in the program’s Acquisition Program Baseline. Any programs that do not include a Milestone B decision will receive goals or caps commensurate with their position in the acquisition cycle and their level of maturity.

(3) The metrics used for MDA-approved affordability constraints on procurement and sustainment costs may be tailored to the type of acquisition and the specific circumstances of a given program. In addition to capability requirements tradeoffs approved by the requirements validation authority; prudent investments in research, development, and test and evaluation; innovative acquisition strategies; and incentives to reduce costs can be used to ensure that affordability constraints are achieved.

f. Monitoring and Reporting. The MDA will enforce affordability constraints A program's unit procurement and sustainment cost goals or caps dictated by a Component’s affordability analysis. Constraints are determined in a top-down manner by the resources a Component can allocate for a system given inventory objectives and all other fiscal demands on the Component—not by cost estimates. When approved affordability constraints cannot be met, then technical requirements, schedule, and required quantities must be revisited. throughout the life cycle of the program. If a program manager concludes that, despite efforts to control costs and reduce requirements, an affordability constraint will be exceeded, then the Program Manager will notify the Component Acquisition Executive (CAE) Secretaries of the military departments or heads of agencies with the power of redelegation. In the military departments, the officials delegated as CAEs (also called service acquisition executives (SAEs)) are respectively, the Assistant Secretary of the Army for Acquisition, Logistics, and Technology (ASA(AL&T)); the Assistant Secretary of the Navy for Research, Development, and Acquisition (ASN(RD&A)); and the Assistant Secretary of the Air Force for Acquisition (ASAF(A)). The CAEs are responsible for all acquisition functions within their components. This includes both the SAEs for the military departments and acquisition executives in other DoD components, such as the U.S. Special Operations Command (SOCOM) and Defense Logistics Agency (DLA), which also have acquisition management responsibilities. and the MDA to request assistance and resolution. Program managers will also report progress relative to affordability constraints at Defense Acquisition Executive Summary reviews.

4. LOWER ACAT PROGRAMS

Each CAE will develop and issue similar guidance to ensure life-cycle affordability for lower ACAT programs that have resource implications beyond the FYDP The Future Years Defense Program (FYDP) is a database that captures and summarizes forces, resources, and programs associated with all Department of Defense (DoD) operations approved by the Secretary of Defense (SECDEF). The FYDP is structured in three basic dimensions: the organizations affected (military departments and defense agencies), appropriations accounts (Research, Development, Test and Evaluation (RDT&E), Operation and Maintenance (O&M), etc.), and Major Force Program (MFP) (strategic forces, mobility forces, R&D, etc.). The FYDP allows a 'crosswalk' between DoD's internal system of accounting via 11 MFPs and Congressional appropriations. The primary data element in the FYDP is the Program Element (PE). The FYDP is updated twice during the Planning, Programming, Budgeting and Execution (PPBE) process cycle: upon submission of the Program Objective Memorandum (POM) (usually July/August), and submission of the President's Budget (PB) (early February the year following). The FYDP is the program and financial plan for the Department of Defense as approved by the SECDEF. The FYDP arrays cost data, manpower and force structure over a 5-year period (force structure for an additional 3 years), portraying this data by MFP for DoD internal review for the program and budget review submission. It is also provided to the Congress in conjunction with the PB submission. .