We are constantly amazed – but, by this time, not surprised
– by the inevitable increases in prices on military acquisition programs and
the 100% guaranteed cost overruns. We’ve
discussed many of the factors that cause this but here’s one that we haven’t
emphasized enough: quantity reductions.
The more you build of something, the cheaper it gets due to
economy of scale … at least, that’s the theory although it’s almost impossible
to find evidence of that in any acquisition program. But, what happens when the initial quantities
get reduced as the program progresses?
Prices skyrocket for the remaining items and subsequent construction
bids soar.
As a reminder, consider the historical programs listed below
and the change from the initial quantities to the final purchased amounts, as
shown. Note that some of the quantities,
especially the planned quantities, vary depending on source. I’ve listed the most commonly cited
quantities that I’ve found. For programs
with international sales, the figures shown are for US sales only.
There are also programs that have not yet concluded but
appear to be on their way to reducing the planned quantities.
With this background, does anyone think programs such as the
B-21, Columbia-class, and Constellation-class will survive with no quantity
reductions?
Discussion
To return to the original premise, how do quantity
reductions impact costs and future program bids? Think about it. If you’re running a defense industry company
and you’re asked to bid on a project, you know, with near 100% certainty, that
the quantity you’re bidding on will be reduced at some point. So, what do you do? Obviously, you calculate the actual cost to
produce the specified number of products and then you add a significant extra
amount to your bid to cover the inevitable reduction in quantity. You have to do this to ensure your profit. This isn’t price gouging … it’s just basic,
common sense business.
The military’s instability in program quantities drives up
costs as a simple matter of business. If
the military would hold to the planned quantities, the savings would be huge.
- Seawolf-class - planned 29, built 3
- Zumwalt-class – planned 32, built 3
- Zumwalt AGS – planned 64, built 6
- F22 - planned 750, built 195
- LCS – planned 55, built 35
- LCS Modules – planned 64, built 35
- B-2 – planned 132, built 21
- M10 Booker – planned 504, built 80
- MQ-8C – planned 177, built 38
- EFV – planned 1025, built 0
- LRASM – interest has died and the program is on the verge of termination
- F-35B – planned 353, now planned 280
- F-35C – planned 353, now planned 280
- ACV – planned 1122, now planned 632
- P-8 – planned 138, now planned 128
- F-35 planned 2866, now planned 2470
- MQ-4C Triton – planned 70, now planned 27
Not just costs, strategic blunders play more important roles. Many to do with shift toward fighting regional powers and terrorists. For instance, F-22 production was halted as they are not good on ground attack while, at that time, people thought their air superiority was not very useful due to lacking competent opponents. F-35 were considered more suitable for then grand strategy.
ReplyDeleteMost precious thing which they wasted is not money but TIME.
Now, as Pentagon has changed its grand strategy to superpower competition, stop ordering weapons made for fighting regional powers make sense.
Problems lie on where are weapons countering China in future? when will F-47, F/A-XX, DDG(X), ......
The issue in this post is not the strategic or operational validity of the products. Instead, it is just about the impact on industry, bids, and construction costs.
Delete"it is just about the impact on industry, bids, and construction costs."
DeleteSolution: Comittment from both sides
from Military side:
1) designing weapon systems with lifespan of 20 years, and not waste time creating unrealistic wonder weapons.
2) fixing the requirements for a given batch of product/service.
any new/updated requirements ? they will be part of next batch
from Industry side:
provide Military an option to buy additional units of exact same spec equippment, at same price, before the last product of batch is handed over.
of course, this is simplified version, the terms of the conditions should be more specific
"Comittment from both sides"
DeleteNo, not really. There is no onus on industry to do anything other than offer a bid and complete the contract, if accepted. It is 100% on the military to execute the acquisition program and to follow through on the contracted quantities.
World events are to blame for some of this. For example, the fall of the Berlin Wall ended the need the need for the Sea Wolf class. In my opinion, the burgeoning cost of the wars in Afghanistan and Iraq ended the F-22 program.
ReplyDelete"World events are to blame for some of this."
DeleteNo, not really. Professional warriors should be able to predict conditions through the reasonable lifespan of the product and know whether the product will be useful. The number of truly surprise, cataclysmic changes that would necessitate a restructuring of military forces is vanishingly small.
"the burgeoning cost of the wars in Afghanistan and Iraq ended the F-22 program."
To some extent, yes, but not as a direct cause. The F-22 was horrifically expensive for its time and was competing with other military expenditures (Iraq/Afh among them), the cost of social programs, etc. A major factor was the recession/depression of 2008 which collapsed the markets. All of this combined to increase pressure on the military to cut costs and the F-22 was simply too obvious a target.
The F-22 cancelation seemed mistaken at the time to me. It was nominally expensive but should have always been considered from the perspective of insurance.
DeleteThe F-35 was never an air superiority platform, and while a handful of F-35s would have dominated any opposing Air Force in the world in 2009, we all know the service life of modern jets is 30-40 years and new ones take about two decades or so to move from concept to IOC. The question was never that a large F-22 fleet was critical in 2009 but that it could be in 2029.
Instead of investing in air dominance insurance (and keeping a critical production line open), we instead kept hundreds of of aging F-15s in service (expensive to keep older aircraft going), committed to new build F-15EXs, and also committed to purchasing almost 1,800 F-35As.
Cutting 200 F-35As, avoiding the F-15EX buy, and retiring aging F-15s rather than continue to run them at great expense could have easily allowed the USAF to buy 200 additional F-22A for negligible added total spending.
And sitting here today, we could have opted to keep the production line going until F-47s are actually being delivered in quantity. That optionality has value. Instead, we are buying modernized versions of a fighter that while great for its time first flew during the Vietnam War.
I would exempt the Zumwalt/AGS, the gun didn't meet spec
ReplyDeleteand both programs were cut. If the LCS had been handled the
same way this blog would have a lot less content. ;-)
There are no exemptions. The reasons why any of the programs were reduced is immaterial. The fact is that there is a near absolute trend of program reductions that industry must take into account as they prepare bids. Why it happens doesn't matter; only that it does happen.
DeleteOne of the problems we have as a society and as a defense community is the tendency to want to excuse and rationalize all of our failings. This blinds us to reality. It doesn't matter why every program gets reduced. It only matters that they inevitably do.
There is an exception, Burkes.
DeleteThe B-52 of the Navy.
"Burkes"
DeleteYes, the unending, never ending shipbuilding program!
It's interesting because I always thought the military should be more of a "this ______ is great! We bought 50, but let's get 20 more" kind of organization. So what's the solution?? Create our "needed" number, then cut it in half, and put that out for bid, with an option to continue further production as needed?? I know that seems like just playing a game with the numbers, but perhaps that's what needs to be done(??).
ReplyDeleteFor example, we determine we need 60 DDG(X). We order 30, with the understanding the program would likely end at 30, but retain the option in the fine print to order more in the future. And that first contract should be ironclad, to where the Navy pays for 30 no matter what. So if they cut the program at 20, they still pay for 30. ( which would be ridiculous, so the Navy absolutely gets all 30). That guarantees the initial work for the shipyard. And if we do order 5, 10, or 50 more, fine.
That'd help avoid the workforce instability that slashed programs cause, and perhaps take the "padding" out of the price tag. I can see how it's difficult to be a shipyard that's solely or mostly dependent on Navy contracts, because the Navy is just about the worst customer imaginable!!
"So what's the solution?? Create our "needed" number, then cut it in half, and put that out for bid"
DeletePerhaps a better solution is the WWII model where the Navy developed and owned the blueprints and then simply put the blueprint out for construction. Any yard could build it because they had the blueprints. We've gotten in trouble by moving to a system where the builder or designer develops AND OWNS the blueprints making it difficult for the Navy to put bids out or to get competitive pricing.
We must return to the model of the Navy owning the entire blueprint/data package. Then, the Navy can put any quantity they want out for bid to any yard capable of building it.
And yes, once the order is placed with a builder, the Navy has to pay the entire contract amount whether they cancel or reduce the quantity or not. If that frightens the Navy because they know they can't plan more than ten minutes into the future, they can order in lots of '1'. It will cost more but that's the price of having idiots run the Navy.
You might find the WWII ship order quantities enlightening. They're not what, I suspect, you (or anyone) think they are. In fact, I may have to do a post on this.
"You might find the WWII ship order quantities enlightening."
DeleteNot sure what you meant- I vaguely recall some of the pre-war acts called for funding 10 or 20%(???) size increases, which when applied to today's fleet size would be slightly underwhelming. Perhaps you were referring to somthing else?? I'll be looking forward to the post!!
Post coming.
DeleteHi CNO,
ReplyDeleteI know the point of the post is how the decrease in actual production runs affects things, but I wanted to ask you about one issue, which is not related but I can't find anything in forums or google search.
You said "LRASM – interest has died and the program is on the verge of termination"
I can't find anything at all about a reduction in interest. I only find that LM has opened a new production line to build more jassm and lrasm's in 2023, and orders for both in 2024 were just over 100 missiles, which is not a reduction either.
I would like to ask if you have a link to articles showing a reduction.
As for your main point, it is, of course, spot on.
Andrew
The LRASM was an urgent capability project in 2014 but, after an initial flurry of interest, began to lag. There were supposed to have been both air and surface launched versions but, after a couple of initial tests, the surface launch option has been shelved. With that, the supersonic version was also dropped. The Marines began to look at the LRASM for their anti-ship, missile shooting concept but dropped it for other missile options. To the best of my knowledge, LRASM is being superseded by OASuW/Increment 2 anti-ship missile before any significant LRASM inventory could be accumulated.
DeleteConsidering that the LRASM began as an urgent need more than a decade ago, progress has been slow and tapering off. Inventories were supposed to have been in the thousands by now and it appears to be a couple hundred or so.
All of this indicates to me that interest has waned and that the program is likely to be cancelled in the near future.
I thought the OASuW/increment 2 missile was cancelled recently, to concentrate on LRASM.
Deletehttps://www.navalnews.com/event-news/sea-air-space-2025/2025/04/u-s-navy-cancels-critical-halo-hypersonic-missile-citing-cost-concerns/
Andrew
LRASM missile is not dead. Latest defense bill..
Delete"$400,000,000 for the development, production, and integration of Navy and Air Force long range anti-ship missiles; "
"$380,000,000 for production capacity expansion for Navy and Air Force long-range anti-ship
missiles;"
"LRASM missile is not dead."
DeleteNever said it was dead ... just low interest and a candidate for termination. The Navy attempted a multi-year procurement buy a year or so ago for a 5 year production run of 477 missiles. That's 95 missiles per year - not exactly the mark of a thriving, urgent program. LRASM appears to be a placeholder, at best. But, who knows? Perhaps it will rise out of the ashes.
I've laid out the evidence. You can accept it or not.
In the RN "follow through" has a different meaning, don't think we need to discuss that! 🤔😉⚓
ReplyDeleteI'm not familiar with whatever it might mean, so forgive me if it's something impolite!
DeleteLow production rates can also be part of the reason for overdue deliveries. Why go for speed if the minute you' ve cranked out the product, its cancelled. Stretch it out and hope the next administration might order more.
ReplyDeleteNow look at Space-x... They have practically priced out anyone due to both volume and resuabilty. They have been rapid building Falcons for 10 years, and are building the starships at rate that exceeds the entire Apollo program at a fraction of the price.
"Now look at Space-x... "
DeleteOne can't help but think that an 'outsider' shipyard with a similar business model could solve a lot of our shipbuilding cost/schedule/quality issues. Ship-x?
As I see it the Pentagon has too much funds for R&D, many of the listed programs are based more on whishful thining than anything else. In many cases there is no clear objective and the priorities shift continuosly and they add more and more new requirements. The development costs more and more and takes to long to develoo anything. So after being billions overbudget and years late the question becomes if the product of the whole program is what is really needed. In too many cases the answer is a big fat NO.
ReplyDeleteTake the M10 it has become to big and to heavy to really support light and airborne forces. But no one seems to have noticed till after the thing has been ordered and produced.
The Army has started a new truck program called CTT, it's about trucks not the Space Shuttle but still it's taking years, they should select a bidder next year, so if everything goes well they should get an old product in 5 years time.
Yesterday's technology, tomorrow!
DeleteThis gets back to what has been exposed in your blog & that is test several prototypes b/4 going into low rate production. Also our military does not believe in following a CONOPS ! Too many examples of cost overruns. ( you mention other drivers for cost overruns as well.)
DeletePB
The lost art and practice of prototyping!
Delete