Should-Cost Management

This page is MITRE authored content curated from many DoD sources.

“Should-Cost Management, the idea that acquisition managers should exploit every opportunity to squeeze unnecessary and unproductive costs out of their programs rather than assuming that the cost and schedule overruns that have plagued defense programs for years are an immutable characteristic of defense acquisition. The basic philosophy here was that we should not just accept the independent cost estimates as a self-fulfilling prophesy and assume that we’d spend to those levels.  We should look at opportunities to reduce cost well ahead of time, and I think that idea has gotten across to the workforce now. It took a long time, but I think we’ve gotten a lot of success with that.”Frank Kendall, USD/AT&L

Should-Cost Management (SCM) is a technique implemented by the DoD on their acquisition programs to understand the true cost of a program once all the unnecessary costs are eliminated.  It helps Program Managers (PMs) identify and eliminate inefficient and non-productive tasks from their program. It’s designed to proactively target cost reduction and drive productivity improvement. Mr. Kendall champions SCM as “an important tool to control costs both in the short term and throughout the product life cycle” making it a core element of his Better Buying Power initiatives. SCM is required for all ACAT I-III programs with acquisition executives responsible for approving cost targets and monitoring progress.

Of the 43 current programs we assessed, 39 have conducted a “should-cost” analysis resulting in anticipated savings of over $35 billion; approximately $21 billion of these savings have been realized to date. – GAO’s 2016 Assessment of Selected Weapons Programs 

Developing a Should Cost Estimate

Should-Cost is a PM’s cost goal for an acquisition program, or particular activity or product within an acquisition program, developed by analyzing all elements of the program’s Independent Cost Estimate (ICE), the “Will-Cost Estimate”, and planning reasonable measures to reduce them. These specific, discrete “Should-Cost” initiatives are developed with prudent, cost-benefit based considerations of associated risks, but without unacceptable reductions in the value received. A program’s “Should-Cost” Target represents what the PM believes the program ought to cost if identified cost saving initiatives are achieved. Should-Cost estimates can be developed in any of three ways or in a combination:

  • Bottoms-up estimate
  • Identify reductions from Will-Cost estimates — determine specific discrete and measurable items or initiatives that can achieve savings against the Will-Cost estimate
  • Competitive contracting and contract negotiations to identify Should-Cost savings

The key elements of a Should-Cost Estimate consist of a set of “tangible and executable” program initiatives reduce costs below a Will-Cost Estimate, or program budget. Should-Cost Estimates focus on the technical baseline, and forms the basis for contract negotiations. They can lead to negotiating positions that fall below the ICE, and contain tools for keeping costs low throughout a program life-cycle.

  • Will-Cost Estimate (WCE) is the budget baseline for should cost excursions and used in internal program execution
  • PM works with its Integrated Product Team (IPT) which includes the contractor and all stakeholders, to establish measurable initiatives to achieve savings
  • Opportunities for cost savings is a process reviewed at every phase of the program’s life cycle – Includes government and contractor costs
  • SCE is based on realistic technical and schedule baselines
  • Assumes “tangible”, success-oriented outcomes from implementation of efficiencies, lessons learned, and best practices
  • When Should Cost initiatives are implemented, a new lower baseline is set
  • Applied cradle-to-grave in program life cycle phases
  • Should Cost does not mean trading away the long-term value for short-term gain
  • Find sensible things to do in our programs to save money

Source: AFLCMC Perspectives on Will Cost/Should Cost Management, Janice Burke (AFLCMC/FZC), Scott DeBanto (AFLCMC/AZF), 25 Mar 14

Will Cost vs Should Cost

Will-Cost

Should-Cost

Status Quo

Challenges Status Quo

Reasonable Extrapolation

Drive Productivity

Emphasis on the Past…

Historical Data, Assumptions, and Lessons Learned

Emphasis on the Future…

Our past is an “economically inefficient operation”

Established Program’s Funding Levels

based on Independent Government Cost Estimate (IGCE)

Establishes Affordability Targets

IGCE (WCE) less SCIs=SC

Established level of technical, schedule, and program risk

(50% < CL < 80% )

Implementation of efficiencies, lessons learned, and best practices

Will-Cost becomes “the floor” for which costs escalate

Should-Cost is the “ceiling” below which costs are contained

Threshold for budgeting APB, SAR, Nunn-McCurdy

Target for program management baseline execution and contract negotiation

Repeatable past performance and behavior

Challenges past performance and seeks to change behavior

Savings opportunities are not baselined

Opportunities for program efficiencies are baselined

Primarily a “Government Only” Activity

Emphasizes collaboration and partnership with Industry

Often compromises requirements to reduce cost growth

Embraces new technologies without compromising requirements

Accepts program cost elements based on history

Scrutinizes Program Cost Elements for efficiencies and savings opportunities

Savings Opportunities

There are many opportunities for programs to reduce cost. The following is a list of potential cost savings opportunities a program could explore.

Program Management

  • Find and benchmark analogous government and commercial programs with same contractor and facilities to compare assumptions
  • Are the requirements still valid?
  • Can we reduce government activities, processes, or bureaucracy that drive costs?
  • Are the program’s contractor and government organizations structured and resourced properly?
  • Identify fragmented, overlapped, or duplicated tasks to eliminated redundant work between the Gov’t and contractor
  • Train/engage IPT and stakeholders to look for savings opportunities and question historical assumptions
  • Reduce data and deliverables we don’t need

Contracting

  • Simplify the contracting processes and documentation
  • Incentive contractors to find savings and increase productivity
  • Look for competitive opportunities within a sole source environment
  • Identify strategic sourcing opportunities
  • Leverage existing contracts for the same product or services
  • Analyze the implications of different contract types
  • Clarify which contracting office is responsible for each requirement/contract
  • Common parts buy cross multiple product lines to maximize quantity discount breaks
  • Share risk with contractors if it benefits the Government

Cost/Schedule

  • Scrutinize every element of program including contractor proposals and WCE
  • Review and challenge contractor indirect rates
  • Track and analyze recent program cost, schedule, and performance trends and find ways to reverse negative trends
  • Scrutinize locations of work and opportunities to work at lower cost facilities
  • Streamline and reduced schedule
  • Analyze and understand subcontractor roles and prime contractor sub management activities (eliminated unnecessary pass-through costs)
  • Leverage learning curves and minimize production breaks

Engineering/Logistics

  • Have deep technical knowledge to understand the cost/performance trade space
  • Review contractor’s skill mix to meet requirements and work efforts
  • Explore alternative technologies or processes to reduce costs over the lifecycle
  • Establish a Modular Open Systems Architecture to avoid vendor lock and integrate new subsystems
  • Consolidate sustainment requirements and contracts within and across programs
  • Promote supply chain management to encourage competition and incentive cost performance at lower supplier tiers
  • Take advantage of integrated development & operational testing
  • Leverage modeling and simulation early in design and later in testing
  • Optimize the use of Government test personnel and facilities
  • Government Furnished Equipment (GFE) vs Contractor Furnished Equipment (CFE)

Jennifer Miller outlined opportunities across the acquisition lifecycle in Should Cost: A Strategy for Managing Military Systems’ Money, Defense AT&L Magazine, Mar 2016.

scm-other-peoples-money

FAR and DFARS

The FAR 15.407-4 includes language on Should Cost Reviews

(a) General.

(1) Should-cost reviews are a specialized form of cost analysis. Should-cost reviews differ from traditional evaluation methods because they do not assume that a contractor’s historical costs reflect efficient and economical operation. Instead, these reviews evaluate the economy and efficiency of the contractor’s existing work force, methods, materials, equipment, real property, operating systems, and management. These reviews are accomplished by a multi-functional team of Government contracting, contract administration, pricing, audit, and engineering representatives. The objective of should-cost reviews is to promote both short and long-range improvements in the contractor’s economy and efficiency in order to reduce the cost of performance of Government contracts. In addition, by providing rationale for any recommendations and quantifying their impact on cost, the Government will be better able to develop realistic objectives for negotiation.

(2) There are two types of should-cost reviews — program should-cost review (see paragraph (b) of this subsection) and overhead should-cost review (see paragraph (c) of this subsection). These should-cost reviews may be performed together or independently. The scope of a should-cost review can range from a large-scale review examining the contractor’s entire operation (including plant-wide overhead and selected major subcontractors) to a small-scale tailored review examining specific portions of a contractor’s operation.

(b) Program should-cost review.

(1) A program should-cost review is used to evaluate significant elements of direct costs, such as material and labor, and associated indirect costs, usually associated with the production of major systems. When a program should-cost review is conducted relative to a contractor proposal, a separate audit report on the proposal is required.

(2) A program should-cost review should be considered, particularly in the case of a major system acquisition (see Part 34), when —

  • (i) Some initial production has already taken place;
  • (ii) The contract will be awarded on a sole source basis;
  • (iii) There are future year production requirements for substantial quantities of like items;
  • (iv) The items being acquired have a history of increasing costs;
  • (v) The work is sufficiently defined to permit an effective analysis and major changes are unlikely;
  • (vi) Sufficient time is available to plan and adequately conduct the should-cost review; and
  • (vii) Personnel with the required skills are available or can be assigned for the duration of the should-cost review.

(3) The contracting officer should decide which elements of the contractor’s operation have the greatest potential for cost savings and assign the available personnel resources accordingly. The expertise of on-site Government personnel should be used, when appropriate. While the particular elements to be analyzed are a function of the contract work task, elements such as manufacturing, pricing and accounting, management and organization, and subcontract and vendor management are normally reviewed in a should-cost review.

(4) In acquisitions for which a program should-cost review is conducted, a separate program should-cost review team report, prepared in accordance with agency procedures, is required. The contracting officer shall consider the findings and recommendations contained in the program should-cost review team report when negotiating the contract price. After completing the negotiation, the contracting officer shall provide the ACO a report of any identified uneconomical or inefficient practices, together with a report of correction or disposition agreements reached with the contractor. The contracting officer shall establish a follow-up plan to monitor the correction of the uneconomical or inefficient practices.

(5) When a program should-cost review is planned, the contracting officer should state this fact in the acquisition plan or acquisition plan updates (see Subpart 7.1) and in the solicitation.

(c) Overhead should-cost review.

(1) An overhead should-cost review is used to evaluate indirect costs, such as fringe benefits, shipping and receiving, real property and equipment, depreciation, plant maintenance and security, taxes, and general and administrative activities. It is normally used to evaluate and negotiate an FPRA with the contractor. When an overhead should-cost review is conducted, a separate audit report is required.

(2) The following factors should be considered when selecting contractor sites for overhead should-cost reviews:

  • (i) Dollar amount of Government business.
  • (ii) Level of Government participation.
  • (iii) Level of noncompetitive Government contracts.
  • (iv) Volume of proposal activity.
  • (v) Major system or program.
  • (vi) Corporate reorganizations, mergers, acquisitions, or takeovers.
  • (vii) Other conditions (e.g., changes in accounting systems, management, or business activity).

(3) The objective of the overhead should-cost review is to evaluate significant indirect cost elements in-depth, and identify and recommend corrective actions regarding inefficient and uneconomical practices. If it is conducted in conjunction with a program should-cost review, a separate overhead should-cost review report is not required. However, the findings and recommendations of the overhead should-cost team, or any separate overhead should-cost review report, shall be provided to the ACO. The ACO should use this information to form the basis for the Government position in negotiating an FPRA with the contractor. The ACO shall establish a follow-up plan to monitor the correction of the uneconomical or inefficient practices.

The DFARS has similar Should Cost Review language in 215.407-4 

(b)  Program should-cost review.

               (2)  DoD contracting activities should consider performing a program should-cost review before award of a definitive contract for a major system as defined by DoDI 5000.2.  See DoDI 5000.2 regarding industry participation.

       (c)  Overhead should-cost review.

               (1)  Contact the Defense Contract Management Agency (DCMA) (http://www.dcma.mil/) for questions on overhead should-cost analysis.

               (2)(A)  DCMA or the military department responsible for performing contract administration functions (e.g., Navy SUPSHIP) should consider, based on risk assessment, performing an overhead should-cost review of a contractor business unit (as defined in FAR 2.101) when all of the following conditions exist:

                             (1)  Projected annual sales to DoD exceed $1 billion;

                             (2)  Projected DoD versus total business exceeds 30 percent;

                             (3)  Level of sole-source DoD contracts is high;

                             (4)  Significant volume of proposal activity is anticipated;

                             (5)  Production or development of a major weapon system or program is anticipated; and

                             (6)  Contractor cost control/reduction initiatives appear inadequate.

                     (B)  The head of the contracting activity may request an overhead should-cost review for a business unit that does not meet the criteria in paragraph (c)(2)(A) of this subsection.

                     (C)  Overhead should-cost reviews are labor intensive.  These reviews generally involve participation by the contracting, contract administration, and contract audit elements.  The extent of availability of military department, contract administration, and contract audit resources to support DCMA-led teams should be considered when determining whether a review will be conducted.  Overhead should-cost reviews generally should not be conducted at a contractor business segment more frequently than every 3 years.

Should Cost Management in the Cost Estimation Process

The implementation of Should-Cost Management is one of the cornerstones of the DoD’s Better Buying Power Initiative and has become an integral process in the program management of acquisition programs within DoD 5000.02. As Should Cost Initiatives are established, the discipline of cost analysis becomes critical in quantifying potential program savings and optimizing funding. The SCM process is captured below within the GAO’s Cost Estimating Process for Will-Cost Estimates. Should Cost estimates are performed at each program milestone and reviewed continuously throughout a program’s life cycle.

GAO Assessment of Should Cost

Of the 43 current programs we assessed, 39 have conducted a “should-cost” analysis resulting in anticipated savings of over $35 billion; approximately $21 billion of these savings have been realized to date.

GAO’s 2016 Assessment of Selected Weapons Programs outlined significant progress made by DoD in should cost management.

DOD’s “Better Buying Power” initiatives also emphasize the importance of driving cost improvements during contract negotiation and program execution to control costs both in the short-term and throughout the product life cycle. In accordance with DOD Instruction 5000.02, each program must conduct a “should-cost” analysis resulting in an estimate to be used as a management tool to control and reduce cost. “Should-cost” analysis can be used to justify each cost under the program’s control with the aim of reducing negotiated prices for contracts and obtaining other efficiencies in program execution to bring costs below those budgeted for the program. Any savings achieved can then be reallocated within the program or for other priorities. We found that 39 out of 43 current programs conducted a “should cost” analysis. Three of the four current programs that reported not conducting a “should-cost” analysis are in the process of completing one. Of the 39 programs, 35 identified approximately $35 billion in realized and future savings. Those programs cited several activities as responsible for some or all of their “should-cost” savings, including

  • efficiencies realized through contract negotiations (15 programs),
  • design trades to balance affordability and capability (12 programs), and
  • developmental or operational testing efficiencies (7 programs).

Twenty-six of the 35 programs reported $21.2 billion in realized “should-cost” savings. Of this amount $3.4 billion in savings accrued from savings in development costs, $17.6 billion from procurement costs, and $0.2 billion from other sources. Programs also provided insight as to how their realized savings were allocated. Figure 11 shows the amount of savings reallocated to other purposes.

should-cost-savings-per-2016-gao-report

Of the $21.2 billion in realized “should-cost” savings, $6 billion was kept within the programs to fund other priorities. Programs reported that nearly $286 million of those savings were used to offset budget cuts required by sequestration. Another $5.6 billion of the realized “should-cost” savings went to priorities within the service to which the program belongs and $2.4 billion went to priorities outside of the service. While delivering value to the taxpayer in the acquisition process is one of DOD’s stated objectives, programs may not have strong incentives to realize or report “should-cost” savings if those programs perceive them as resulting in the funding of other DOD priorities. Programs we assessed were unable to account for the destination of roughly a third of the savings they reported.

Current programs that we surveyed expect to realize another $13.8 billion in future should cost savings. Of this amount, $8.5 billion in savings is expected to accrue for development and procurement “should-cost” savings and $5.3 billion is expected from other sources. Of the 12 future programs we assessed, 3 reported having conducted a “should-cost” analysis, and identified $9.6 billion in future development and procurement savings and an additional $7.9 billion in other savings.

10 Ingredients of Should-Cost Management

Dr. Carter’s original Implementation Memo of Will Cost and Should Cost Management in Apr 2011 outlines 10 ingredients of should cost management.

  1. Scrutinize each contributing ingredient of program cost and justify it. Why is it as reported or negotiated? What reasonable measures might reduce it?
  2. Particularly challenge the basis for indirect costs in contractor proposals.
  3. Track recent program cost, schedule, and performance trends and identify ways to reverse negative trend(s).
  4. Benchmark against similar DoD programs and commercial analogues (where possible), and against other programs performed by the same contractor or in the same facilities.
  5. Promote Supply Chain Management to encourage competition and incentivize cost performance at lower tiers.
  6. Reconstruct the program (government and contractor) team to be more streamlined and efficient.
  7. Identify opportunities to breakout Government-Furnished Equipment versus prime contractor-provided items.
  8. Identify items or services contracted through a second or third party vehicle. Eliminate unnecessary pass-through costs by considering other contracting options.
  9. In the area of test: Take full advantage of integrated Developmental and Operational Testing to reduce overall cost of testing; Integrate modeling and simulation into the test construct to reduce overall costs and ensure optimal use of National test facilities and ranges.
  10. Identify an alternative technology/material that can potentially reduce development or life cycle costs for a program. Ensure the prime product contract includes the development of this technology/material at the right time.

Additional Should Cost Management Resources

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