Should-cost and will-cost, explained

Should-cost management is a Department of Defense (DoD) practice in which a program manager sets cost targets below the program's budget and manages to reach them. The budget itself rests on the will-cost estimate, the independent cost estimate (ICE) of what the program will cost if past experience holds. Ashton B. Carter, then Under Secretary of Defense for Acquisition, Technology and Logistics, introduced the pairing in a September 14, 2010 memorandum titled "Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending." The memorandum held 23 principal actions in five major areas. Should-cost was one of them, and it remains in DoD acquisition policy.

Why Carter paired the two

The 2010 memorandum judged an ICE valuable and credible but no help to a program manager trying to drive leanness into a program. Because the ICE reflects business-as-usual management in past programs, the forecast budget is expected to be fully obligated and spent, and the estimate becomes self-fulfilling. Carter therefore required the manager of each major program to conduct a should-cost analysis justifying each element of program cost and showing how it improves year by year. The program budget baseline, used in acquisition decision memorandums and Selected Acquisition Reports, would still be set with an ICE.

The memorandum used the Joint Strike Fighter as its example. The program's will-cost average procurement unit cost grew from $50 million when it was baselined, in 2002 dollars, to $92 million in the most recent ICE, and a should-cost analysis was under way for the early production lots. The stated measure of success was annual savings of a few percent on all ongoing contracted work. The memorandum put DoD contract obligations over the next five years at about $2 trillion.

How should-cost differs from an independent cost estimate

Carter's April 22, 2011 implementation memorandum set the rules for acquisition category (ACAT) I, II, and III programs. Program managers develop, own, track, and report against should-cost estimates and present them at milestone reviews. Should-cost estimates are not used for official program reporting, acquisition program baselines, or budgets; the will-cost estimate remains DoD's official position. Arbitrary cuts and unsupported high-risk goals are not acceptable. A should-cost estimate can be built bottom-up, from discrete and measurable reductions to will-cost, or through competition and negotiation. Once a firm-fixed-price contract is negotiated, the gap between budget and price counts as realized. Each Service named five model programs; the Navy's list included the E-2D Hawkeye.

The current rule, in DoD Instruction (DoDI) 5000.85, Change 1 of November 4, 2021, keeps the split. Major defense acquisition programs (MDAPs) budget to the ICE of the Director of Cost Assessment and Program Evaluation (CAPE) unless the milestone decision authority approves another estimate. Program managers also develop a should-cost estimate. Should-cost applies to all ACATs, all life-cycle phases, and all elements of program cost. Estimates used in negotiation rest on the Government's reasonable expectation of successful contractor performance.

The law and the contracting tool

Congress wrote the same separation into 10 U.S.C. 3226. Cost estimates made for program baselines under CAPE's ICE authority are not to be used for contract negotiations or the obligation of funds. The Under Secretary of Defense for Acquisition and Sustainment, consulting CAPE, must ensure that negotiation targets reflect the Government's reasonable expectation of successful performance, based on the contractor's proposal and previous experience. Funds budgeted under the ICE but excess to the negotiation target remain available, for example to cover increased program costs or to buy additional end items.

A should-cost target differs from a should-cost review, which is a contracting procedure. The FAR Overhaul text of Part 15, at 15.405-4, describes the review as a specialized form of cost analysis by a multi-functional Government team that does not assume a contractor's historical costs reflect efficient operation. A program review examines direct costs and related indirect costs, usually in major system production. The text lists conditions for considering one, among them some initial production, a sole-source award, and substantial future quantities. An overhead review examines indirect costs, normally to negotiate a forward pricing rate agreement.

Who keeps the savings, and what GAO found

A joint memorandum of the same date, from Carter and Under Secretary of Defense (Comptroller) Robert F. Hale, set the savings rule. A Service Acquisition Executive declares savings achieved, the Service's financial management assistant secretary validates them, and the Service generally keeps them for its highest priorities. The exception is a Secretary of Defense decision that department-wide needs, such as Joint Urgent Operational Needs, require them.

The Government Accountability Office (GAO) tracked results through program questionnaires. In its March 2014 assessment, 32 of 38 current programs had done a should-cost analysis, and 31 reported about $24 billion in fiscal year 2014 dollars realized or expected. About 41 percent, $9.9 billion, was realized. The KC-46 tanker reported $6.8 billion, nearly $6.4 billion of it realized. In the March 2016 assessment, 39 of 43 programs had done one, and 26 reported $21.2 billion realized: $3.4 billion in development, $17.6 billion in procurement, and $0.2 billion other. Programs kept $6 billion, sent $5.6 billion to Service priorities and $2.4 billion outside their Service, and could not account for roughly a third. GAO noted that programs may lack incentives to report savings that end up funding other priorities.

What to check

• Is the figure called should-cost a management target, or is it being used as a budget or acquisition program baseline, which the 2011 memorandum rules out?
• Is each should-cost reduction a discrete, measurable action tied to the program of record rather than an arbitrary cut?
• Does a negotiation target rest on a reasonable expectation of successful contractor performance, as 10 U.S.C. 3226 and DoDI 5000.85 require?
• For a sole-source production buy, was a program should-cost review under 15.405-4 considered?
• Are reported savings realized, as on a negotiated firm-fixed-price contract, or only expected?
• Where did realized savings go? GAO found programs could not account for about a third.

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Sources

1. 1Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending · Under Secretary of Defense for Acquisition, Technology and Logistics, September 14, 2010
2. 2Implementation of Will-Cost and Should-Cost Management · Under Secretary of Defense for Acquisition, Technology and Logistics, April 22, 2011
3. 3Joint Memorandum on Savings Related to 'Should Cost' · USD(AT&L) and USD(Comptroller), April 22, 2011
4. 4DoD Instruction 5000.85, Major Capability Acquisition, August 6, 2020, Change 1 November 4, 2021 · Office of the Under Secretary of Defense for Acquisition and Sustainment
5. 5United States Code, 2024 Edition, Title 10, Section 3226 - Estimates for program baseline and analyses and targets for contract negotiation purposes · U.S. Government Publishing Office
6. 6FAR Overhaul - Part 15 · Acquisition.gov, FAR Overhaul
7. 7GAO-14-340SP, Defense Acquisitions: Assessments of Selected Weapon Programs · U.S. Government Accountability Office, March 2014
8. 8GAO-16-329SP, Defense Acquisitions: Assessments of Selected Weapon Programs · U.S. Government Accountability Office, March 2016

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