Do These Costs Make Any Sense? The Use and Abuse of Costs in Defense Acquisition Analyses

In 1991, the Department of Defense revised its instructions governing defense acquisition management. The role of Cost and Operational Effectiveness Analyses (COEAs) was spelled out at length. COEAs must be completed and presented to the acquisition decision executives at key decision milestones. For major acquisition programs, the analyses undergo extensive review within the military departments and in the Office of the Secretary of Defense. Thus, COEAs are primary--although not the only--means by which the decision authorities become informed about a program's advantages and disadvantages. Since 1991, CNA has provided leadership and staffing for a number of COEAs for the Navy and Marine Corps. Moreover, CNA has conducted COEA-like studies for various components of the Department of the Navy for many years. This paper, which draws from the collective experience of that work as well as from longer-standing principles of defense systems analysis, identifies and discusses certain issues that appear to be common to all COEAs. Each issue relates in some way to the use or misuse of cost information in the analysis. We begin with an overview of the role of COEAs in the acquisition process and a general discussion of the objectives of these studies and how they are put together. We then focus on the following issues: system versus decision alternatives; integrating cost and effectiveness results; wartime costs; discounting; risk and uncertainty analysis; and affordability.