Defense Contracting - Cost Overruns, Delays, and Feature Creep Discussed

It seems that we must cut all of the major expenditures of our federal government if we are to balance the budget of our great nation, as our national debt is going to an non-viable place. This means we will have to cut Social Security, Medicare, and yes, some of our military as well. Some in Washington DC have said there can't be any sacred cows. Of course we know that's not how Washington DC works. Okay so let's talk about places we can make cuts.

One place the Pentagon has identified is in the government contracting of large weapons systems. Some believe that the contractor should agree on a fixed cost, and not be allowed to add additional expenses, or cost overruns on their part. Well, it's not usually the contractor that causes the increase, it is often that the military changes their needs, or the politicians themselves choose a different path forward based on current world events and politics.

Not long ago, I read a research paper titled; "Fixed-Price Development: Contracts: A Historical Perspective," by William Lucyshyn from the Center of Public Policy and Private Enterprise School of Public Policy at the University of Maryland which was published on May 16, 2012, and the paper noted amongst other things that:

"A 2006 RAND report found that the average adjusted total cost growth for a completed program was 46 percent (RAND TR-343) and the roughly 100 projects under development during fiscal year 2007 experienced average cost growth of 26 percent and average schedule delay of 21 months over initial estimates (GAO-08-1159T) and that the GAO also estimated that these programs will cost $295B more than originally projected."

Things that I believe are some of the biggest causes in all of this I've listed below. And as someone that runs a think tank we talk about this a lot because it is not just military contracting where this occurs, it happens any time you are developing new prototypes, or innovating in just about any industry or subsector. The issues we most encounter happen to be;

Rush orders
Feature Creep
Change Orders Due to New Needs
Availability of supplies or raw material increases

The authors of the research paper above that I mentioned suggest in studying 4 major weapons system case studies; The C-5 Galaxy, the Boeing Aerial Tanker, The A-12, and the F-111 that amongst other things the main challenges in cost overruns and project delays were;

Design stability
Production maturity
Changing requirements
Technological unknowns
Inaccurate cost estimates

Thus, suggesting that; "A "Fixed-Price" contract is often anything but fixed-price." Further, although these "contracts appear to be less risky than cost-reimbursement contracts, the results prove that not to be the case, and large, complex projects will generally experience schedule slips, technical changes, and cost growth, as the programs evolve," and so in conclusion the author's point out that such contracts "do not eliminate these challenges, and may produce perverse incentives that make the problems worse."

What I'm saying is it may not be something that is that easy to fix. Often these large weapons contracts take years to complete, and sometimes the game changes midstream. Consider if you will a weapons contract which was awarded in the year 2000, before 9/11. Along came 9/11, and a new enemy emerged, and therefore those other weapons systems were not needed for their typical purposes, so therefore many change orders needed to be made, so they could be utilized as assets fighting the war on terror instead. Are you beginning to see my point here?