Response Strategies to the Cost Escalation of Defence Equipment
The challenge of affordability is shaping the defence acquisition environment in most Western countries.
Researchers identified several strategies for the European Defence Agency (EDA) that are transferrable from one country to another and from civil sectors to defence.
In an era of declining defence budgets and increasingly expensive new generations of equipment, the mounting costs of major weapon systems raise concerns for policymakers. Defence inventories are expected to shrink, potentially harming different nations’ overall defence capabilities.
The European Defence Agency (EDA) commissioned RAND Europe to examine response strategies and identify effective approaches adopted by national ministries of defence, defence procurement agencies and a few civil sector industries to minimise the impact of escalating costs over successive generations of defence equipment.
The core elements of RAND Europe’s study included:
- Identifying the key principles in a defence acquisition that enable effective cost control and therefore mitigates the negative consequences of cost escalation.
- Analysing five national cost escalation response strategies from the US, UK, Sweden, Denmark and the Netherlands.
- Analysing cost control strategies within selected civil sectors, including civil aerospace, oil and gas, infrastructure and space.
The study was conducted over a period of four months during 2016. It included a literature review and interviews with experts and stakeholders, including representatives of national defence procurement agencies, defence ministries, academia and independent national audit offices.
The study team identified the following key findings:
- There is substantial evidence to prove the existence of cost escalation between successive generations of defence equipment. However, cost escalation is frequently conflated with cost growth.
- The challenge of affordability is shaping the defence acquisition environment in most Western countries. This requires trade-offs between operational capability, force structures, budgets and schedules to provide the armed forces with effective equipment.
- The nature and characteristics of national defence acquisition systems and the response strategies to cost escalation differ between countries that are focused on developing equipment (e.g. the US, the UK, and to a certain extent Sweden) and those that are more commercially focused (particularly Denmark and the Netherlands).
- Countries with a greater focus on the indigenous development of their defence capabilities, such as the US and UK, place greater emphasis on de-risking early manufacturing processes and understanding key cost drivers during the early production stages.
- All countries have structures and processes in place which, if implemented as intended, have the potential to mitigate many of the negative consequences of cost escalation of defence equipment. However, human biases, behaviours and changing national priorities often prevent effective implementation and execution.
- It may never be possible to evaluate the effectiveness of specific cost escalation strategies and national approaches, as it is very difficult to assess direct causal linkages between strategies and outcomes, and limited data is available.
The study team identified several lessons that are transferrable from one country to another and from civil sectors to defence. These include:
- Independent scrutiny that provides a ‘second pair of eyes’ on cost, schedule, risk and (where possible) technical assessments.
- Getting ‘things right’ at the start, which makes it possible to successfully deliver a project on time and on budget. This requires an understanding of the requirements and associated technologies, an appropriate acquisition strategy, reliable cost estimates that take into account uncertainty and risk, contracts that include appropriate incentives for each partner at each stage of the project and effective project management, decision analysis and monitoring of performance.
- Continuous and transparent dialogue with the defence industry to identify efficiency measures that will be effective in cutting costs and establish a mutual understanding of requirements, available technologies and potential alternative solutions.