Table of contents for Measuring changes in service costs to meet the requirements of the 2002 National Defense Authorization Act / Chad Shirley, John Ausink, Laura H. Baldwin.


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CONTENTS
Preface		iii
Figure		vii
Tables		ix
Summary		xi
Acknowledgments		xv
Acronyms		xvii
Chapter One
INTRODUCTION		1
Chapter Two
METHODOLOGY TO MEASURE CHANGES IN COSTS
OVER TIME		7
Step 1: Defining the Universe of Services		8
Data on Obligations: The DD350		9
Base-Year Cost Calculation		10
Step 2: Measuring Changes in Service Costs over Time		10
Scope		11
Quantity		12
Quality		14
Data on Current-Year Costs		16
Step 3: Calculating Following-Year Costs		16
Data on Future Expenditures		17
Translating Planning Data into Service Cost 
Estimates		17
Step 4: Calculating That Which "Would Otherwise Be 
Expended"		18
Step 5: Determining if the Savings Goal Has Been Achieved		21
An Illustrative Example of Savings Calculations		21
Improving Savings Measurement Accuracy by Capturing 
Changes in the Cost of Unstable Services		22
Chapter Three
SUMMARY AND CONCLUSIONS		25
Postscript		27
Appendix
PLANNING DATA; THE PLANNING, PROGRAMMING, 
AND BUDGETING SYSTEM (PPBS)		29
REFERENCES		33
FIGURE
	A.1.	POM Year Schedule		31
TABLES
	S.1.	Summary of Reporting Requirements and 
Recommendations		xiii
	1.1.	Steps to Estimate Service Cost Savings		4
	2.1.	Recommendations for Step 1		11
	2.2.	Recommendations for Step 2		16
	2.3.	Recommendations for Step 3		19
	2.4.	Recommendations for Step 4		20
	2.5.	Sample Savings Calculation		22
	2.6.	Recommendations for Step 5		22
	2.7.	Illustrative Example of the Importance of Unstable Services 
for Productivity Savings Estimates		24
	3.1.	Summary of Recommendations		26
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SUMMARY
The National Defense Authorization Act for Fiscal Year 2002 
sets forth a series of goals for the Department of Defense to 
reduce the cost of the services it buys over a ten-year period 
through changes in contracting practices and improvements in 
management techniques. This study investigates ways to 
measure whether the Air Force is achieving these cost-reduction 
goals and discusses the most important steps in the measurement 
process. 
Successfully estimating changes in service costs over time first 
requires establishing a baseline, i.e., expenditures that occurred 
in the base year, for a clear universe of services that permits a 
consistent comparison of service purchases over time. The 
second step in the process is to estimate the expenditures on 
these services for the current fiscal year. A fundamental part of 
constructing the current-year expenditures is to control for any 
changes in the nature of services purchased over time, including 
changes in the scope of services, and, to the extent possible, 
changes in quantity and quality. The next step is to apply an 
appropriate measure of inflation to the baseline expenditures to 
estimate what those services would have cost in the current year 
in the absence of changes in contracting practices and 
management techniques. After the baseline, current year, and 
without-management-change costs have been estimated, the 
final step is to calculate the savings achieved and compare them 
with the goals.
Reporting requirements of the Act necessitate that the savings 
measurements not only include historical expenditures but that 
they also forecast future expenditures. In fact, what is most 
difficult about satisfying the requirements of the Act is that 
forecasted expenditures are more important than historical 
expenditures: the final report required by the Act in March 2006 
is supposed to estimate savings five years into the future, but it 
need not address whether the savings goals of earlier fiscal years 
were achieved. 
Existing data sources offer either a detailed accounting of past 
service purchases or a more general forecast of future purchases, 
but no single source is sufficient for the entire task without 
further work or linkage. 
Table S.1 presents each element of the legislative requirement, 
the potential source(s) of data to meet the requirement, and 
summarizes our recommendations on how best to implement 
each element.
While this research recognizes the difficulties inherent in 
systematically tracking and analyzing the effects of changes in 
practices on service costs, it highlights a general need for 
improvements in Air Force data collection and processing to 
better provide such capability. Other RAND research is 
exploring the adequacy of the DD350 data to identify a stable 
set of services over time and robustly characterize the Air 
Force's service expenditures.
Table S.1
Summary of Reporting Requirements and Recommendations
Steps to Estimate Service 
Cost Savings
Potential 
Data 
Source(s)
Implementation Recommendations
1.	Establish FY00 cost savings 
baseline for procurement of 
services
DD350
A.	Clearly define the universe of services 
governed by the Act; choose a set of 
services for which PBSAa and other 
management innovations are appropriate.
B.	Sum FY00 expenditures for chosen 
services.
	(See p. 7)
2.	Estimate the amount that 
will be expended for 
procurement of services in 
the current FY
DD350
ABIDESb
A.	Adjust for changes in scope. 
B.	Where possible, adjust for changes in the 
quantity of services purchased.
C.	Assume that the quality remains constant 
instead of attempting to adjust prices for 
quality changes.
	(See p. 10)
3.	Estimate the amount that 
will be expended for 
procurement of services in 
the following FYc
ABIDES
A.	Establish a link between PSC/NAICSd 
codes in DD350 and EEICe codes in 
ABIDES.
B.	Use most current forecast for next FY 
expenditures for chosen services, 
adjusted as described above.
	(See p. 16)
4.	Establish the "hypothetical" 
expenditures for the current 
and following FYs (the 
amount that "otherwise 
would have been spent")
DD350 
OSD O&Mf 
Price Index
BLSg 
National 
Service 
Wage Index
A.	Establish the hypothetical cost for the 
current year by adjusting the base year 
expenditures to current year dollars 
through the chosen inflation index.
B.	Do the same for the following FY.
	(See p. 18)
Table S.1; continued
5.	Estimate the amount of 
savings in the current FY 
and following FY that result 
from improved management 
practices
A.	Subtract expected expenditures for the 
current FY from the hypothetical for the 
current FY.
B.	Do the same for the following FY.
	(See p. 21)
a Performance-Based Services Acquisition.
bAutomatic Budget Interactive Data Environment System.
c For the final report, the forecast is for five years into the future. 
dProduct Service Code/North American Industry Classification System.
e Element of Expense/Investment Code.
f Office of the Secretary of Defense Operation and Maintenance.
g Bureau of Labor Statistics.
DO NOT DELETE THIS PARAGRAPH MARK!
ACKNOWLEDGMENTS
We wish to acknowledge Col Robert Winiecki and Ms. Betsy 
Matich of SAF/AQCP for their direction in formulating the 
scope of this work; David McNicol of OSD/PA&E for his 
insightful comments at the 2002 Western Economics 
Association Meetings in Seattle; and the members of the Office 
of the Secretary of Defense Integrated Process Team for their 
thoughts and reactions to an earlier version of this work.
We also wish to thank our RAND colleagues: Gary Massey and 
Jack Graser for their assistance with understanding ABIDES; 
Bob Roll for his insights on the PPBS process and for 
encouraging us to broaden the methodology to include unstable 
services; and participants in the Payday seminar series.
Finally, we thank our RAND colleague Lloyd Dixon and Chip 
Franck of the Naval Postgraduate School for their helpful 
reviews of an early draft of this report. 
DO NOT DELETE THIS PARAGRAPH MARK!
ACRONYMS
A&AS
Advisory and Assistance Services
ABES
Amended Budget Estimation Submission
ABIDES
Automatic Budget Interactive Data Environment System
APB
Amended President's Budget
BES
Budget Estimation Submission
BLS
Bureau of Labor Statistics
CFR
Code of Federal Regulations
DD350
Department of Defense Form 350
DEPPS
Defense Employment and Purchase Projection System
DoD
Department of Defense
DRU
Direct Reporting Unit
EEIC
Element of Expense/Investment Code
F&FP
Force and Financial Plan
FOA
Forward Operating Agency
FY
Fiscal Year
FYDP
Future Years Defense Program
FAR
Federal Acquisition Regulations
GAO
General Accounting Office
GDP
Gross Domestic Product
IPT
Integrated Process Team
MAJCOM
Major Command
NAICS
North American Industry Classification System
O&M
Operation and Maintenance
OSD
Office of the Secretary of Defense
PB
President's Budget
PBSA
Performance-Based Services Acquisition
PPBS
Planning, Programming, and Budgeting System
POM
Program Objective Memorandum
PSC
Product Service Code
SCA
Service Contract Act




Library of Congress Subject Headings for this publication: Defense contracts United States, United States, Dept, of Defense Appropriations and expenditures