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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 (/toc> 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