Cost Controls
How Government Can Get More Bang for Its Buck
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Rethink Technical Requirements
For decades, the actual prices of acquiring U.S. military ships and fixed-wing aircraft have risen at nearly double the rate of inflation. This price growth is a different issue from the cost growth discussed earlier. Price growth is the increase in actual cost from one period to the next, thus representing the greater amounts of money paid for similar purchases over time. Such prices could rise because of the changing qualities and capabilities of the purchased items.
Prices of U.S. military ships and fixed-wing aircraft are now so high that they are outstripping the ability of the military services to pay them. Unless the services find some way to get more out of their budgets, price growth means that the size of the navy and air force will inevitably shrink.
Norman Augustine, a longtime aerospace industry executive, made a famous forecast in 1986 in reference to the soaring prices: “In the year 2054, the entire defense budget will purchase just one aircraft. This aircraft will have to be shared by the Air Force and the Navy three and one half days each per week except for leap year, when it will be made available to the Marines for the extra day.” His dire prediction of vanishing aircraft inventories could apply to ships as well.
About half the total price escalations for ships and fixed-wing aircraft stem from economy-driven factors that are beyond the control of the services. These factors — labor, material, equipment, and manufacturer fees and profits — have raised those prices at a steady rate roughly equal to or less than that of inflation over the past several decades. The other half of the price escalations stem from customer-driven factors, which are within the government’s control.
For every type of ship we examined — amphibious ships, surface combatants, attack submarines, and aircraft carriers — the price escalation rates ranged from 7 to 11 percent annually between 1950 and 2000. For every type of aircraft we examined — patrol, cargo, trainer, bomber, attack, fighter, and electronic warfare — the price escalation rates ranged from 7 to 12 percent annually between 1974 and 2005. These rates compare to an average annual inflation rate of 4.7 percent between 1965 and 2004 (see Figure 4).
Figure 4 — For Every Type of Ship and Aircraft Examined, the Cost Escalation Rate Exceeded That of Inflation
SOURCE: Why Has the Cost of Navy Ships Risen? 2006, and Why Has the Cost of Fixed-Wing Aircraft Risen? 2008.
NOTES: Average annual percentage cost escalations for ships are for 1950–2000 and for aircraft are for 1974–2005. Average annual inflation rate is for 1965–2004.
The persistent price growth above the rate of inflation stems from the desire for greater capabilities. The navy has desired ever-more-complex ships: larger, faster, stealthier, more powerful, and with more mission and weapon systems. Other ship improvements in areas such as habitability, working conditions, and environmental regulations have contributed less to the increased prices. Likewise, the services have desired ever-more-complex aircraft. Figure 5 breaks down the composition of price growth from the F-15A fighter jet of 1975 to the F-22A of 2005. The figure shows that the aircraft’s complexity (lighter airframe material, faster maximum speed, greater stealth) contributed most to its price growth.
Figure 5 — Technical Complexity Contributed Most to the Cost Growth of Evolving from the F-15A of 1975 to the F-22A of 2005
SOURCES: Why Has the Cost of Fixed-Wing Aircraft Risen? 2008.
The navy could reduce the price of its ships by limiting their requirements or by building smaller, mission-focused ships rather than multimission ships. An alternative is to expand the use of modular weapon systems, thereby reducing the total number of mission packages across the fleet. Yet another option is to buy a mix of ships: some specialized to a particular mission and others that could serve multiple roles. It appears the navy is now pursuing such a strategy. The federal government could also use longer-term, multiyear contracts to encourage greater efficiencies among contractors. A combination of such efforts might be most appropriate.
There are several options to reduce the price of aircraft as well, but none of them is a panacea. Longer-term contracts could again encourage manufacturers to increase efficiencies. Fewer change orders might reduce prices. The services could curb the growth in technical requirements by focusing on incremental improvements over successive generations of aircraft, but this approach could slow the pace of innovation and risk losing an edge over potential competitors.
To stay within budget, the services appear to be opting for fewer aircraft but with the greatest capabilities. Such a strategy helps ensure that U.S. aircraft remain far superior to those of any other military in the world, but this comes at a price. When budgets were larger and growing, the price increases were not a problem. Now, with tighter and potentially diminishing budgets, the nation needs to make harder choices between the capabilities and the number of fixed-wing aircraft.
Consider Hiring More Shipyard Workers
Of the $4 billion spent by the navy each year for ship maintenance, about $3 billion of the work occurs at four public shipyards. They are located in Portsmouth, Virginia; Kittery, Maine; Bremerton, Washington; and Pearl Harbor, Hawaii. These shipyards employ more than 25,000 civilians.
The navy’s staffing plan for the four shipyards would be a cost-effective strategy for meeting their planned work. The problem, however, is that the planned workload forecasts have consistently underestimated the actual workload demands.
To compensate for underestimated demand, the shipyards have used overtime to an extent that diminishes productivity. We do not propose eliminating overtime altogether. We find that average annual overtime of 9–18 percent above a full-time schedule is a cost-effective strategy. But overtime beyond those levels can result in large decreases in worker productivity, mostly due to fatigue. High and sustained levels of overtime can also pose safety risks.
In addition to overtime, the shipyards have resorted to using temporary, seasonal, and borrowed labor, but none of these alternatives is as productive as resident, permanent labor working standard hours (known as “straight time”). An increase in the resident, permanent labor force could help the navy be more productive and hedge against the costs of workload growth.
The table shows the costs associated with different workforce and workload scenarios. Under current plans (shown in the first row), the navy will have an average available force of 13,800 workers per day to fill an average demand for 15,485 man-days per day through 2013. The shortfall would be met by overtime that averages 13 percent of straight time and peaks at 19 percent. This scenario, involving no unplanned work, would cost the navy $2.8 billion per year. There is nothing wrong with this scenario and this amount of overtime, assuming all goes as planned.
Expanding the Shipyard Workforce Would Save Money If the Workload Grows and Cost Virtually Nothing If It Does Not
| Scenario | Average Available Force (men per day) |
Average Workload (man-days) |
Average Overtime (percentage) |
Peak Overtime (percentage) |
Average Annual Cost (in billions) |
| Expand neither the workforce nor the workload above the plan | 13,800 | 15,485 | 13 | 19 | $2.8 |
| Expand the workload but not the workforce above the plan | 13,800 | 16,433 | 20 | 28 | $3.2 |
| Expand the workforce and the workload above the plan | 14,500 | 16,433 | 11 | 18 | $3.0 |
| Expand the workforce but not the workload above the plan | 14,500 | 15,485 | 9 | 17 | $2.8 |
SOURCE: U.S. Navy Shipyards, 2008.NOTE: Costs are in U.S. dollars for fiscal year 2007. | |||||
The second row of the table shows the overtime and cost implications of a workforce that is not increased to manage a workload that grows by 6 percent. In this case, the navy has 13,800 workers to perform 16,433 man-days of work. Here, the navy would use overtime that averages 20 percent of straight time and peaks at 28 percent. This second scenario would raise the average annual cost from $2.8 billion to $3.2 billion. This is an increase of about 14 percent. Note that with the navy’s planned staffing levels, a 6-percent increase in workload results in a 14-percent increase in cost. The primary reason is that the costly overtime must increase substantially.
The third and fourth rows show how expanding the permanent workforce would hedge against the costs of unanticipated workload growth. The third row shows increases in both the workforce and the workload. Should the navy increase its workforce by 5 percent (to 14,500 workers), the expanded workload would cost only $3 billion. This is because overtime would drop to just 11 percent on average and peak at no more than 18 percent. The 700 additional workers would cut the average annual overtime from 20 percent to 11 percent, nearly halving the additional cost of doing 6 percent more work. Therefore, a cost avoidance can be realized by hiring more workers.
Perhaps most important, hedging against workload growth would cost the navy virtually nothing even if the workload does not grow. As the fourth row of the table shows, should the workforce grow above current forecasts but workload demand not materialize, executing the workload with higher workforce levels would still cost the navy only $2.8 billion. This is because with more workers, the shipyards could use less overtime to accomplish their current, planned workload.
In all cases, the minimum cost strategy is to increase the workforce. This example underscores that it is not the size of the government workforce that matters most, but rather the efficiency and effectiveness of government work. 
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