**COST AS AN INDEPENDENT VARIABLE (CAIV)**

PRINCIPLES AND IMPLEMENTATION

Colonel Michael A. Kaye (USAF)

Chief, Acquisition Support Team

Space and Missile Systems Center

Los Angeles Air Force Base, CA

Lieutenant Colonel Mark S. Sobota (USAF)

Central Acquisition Support Team

HQ Air Force Materiel Command

Wright Patterson Air Force Base, OH

David R. Graham

Program Analyst

Office of Deputy Assistant Secretary of the Air Force (Program
Integration)

Pentagon, Washington, D.C.

Allen L. Gotwald

Central Acquisition Support Team

HQ Air Force Materiel Command

Wright Patterson Air Force Base, OH

####### Abstract

![](media/image1.wmf)CAIV is a key tool in the thrust to reduce Total
Ownership Cost (TOC) for Defense systems. While the need for CAIV is
driven by cost constraints, success relies upon identification and use
of viable performance, cost, schedule, and risk "Trade Space". Five
principles are critical to identifying and using the "Trade Space":
Capabilities-Based Requirements, Partnering, TOC Focus, Risk-Based
Management, and Measurement. Application of each of the principles
changes through the acquisition cycle. The Air Force has integrated CAIV
concepts with those in the Reduction in TOC (R-TOC) program, and has
published a comprehensive Guidebook for better understanding. The
authors are currently working with the other Services and OSD to
incorporate these CAIV concepts into all appropriate DoD training
programs. The authors are also working with Industry for better CAIV
understanding and implementation.

### Introduction

The Defense System Affordability Council (DSAC) Strategic Plan
established Goal 2 to lower the Total Ownership Cost (TOC) of Defense
products. The Plan further established separate, aggressive objectives
under that goal for systems in acquisition and fielded systems. These
goals are further emphasized in the draft new DoD 5000.1 and 2. To
provide a focal point on all reduction in TOC (R-TOC) efforts,
encompassing weapon system, infrastructure, and indirect dimensions, the
Air Force established an R-TOC program office (SAF/AQXT). SAF/AQXT and
the authors collaborated to publish the R-TOC Guidebook, which
integrated CAIV and a comprehensive R-TOC Process for fielded
systems.[^1] The R-TOC Process relies on baselining operating and
support costs, identifying TOC drivers, and identifying R-TOC
opportunities. CAIV drives system design decisions by providing
comprehensive information on alternatives and impacts. Whereas CAIV and
the R-TOC Process have many principles in common, CAIV exerts the most
leverage when it influences system design and the R-TOC Process is most
effective on fielded systems. The relationship is shown in Fig 1.

**Fig 1: R-TOC/CAIV Effectiveness**

### CAIV Construct

CAIV is a key strategy for implementing R-TOC in the acquisition
process, and is particularly effective during system development. Air
Force Instruction (AFI) 10-601, 1 October 1998, defined CAIV: "The
process of using better business practices, allowing trade space for
industry to meet user requirements, and considering operations and
maintenance costs early in requirements definition in order to procure
systems smarter and more efficiently." CAIV is founded upon two primary
principles:

-   **System Costs Are Constrained**. Whereas some programs do obtain
    additional funding when needed, such funding is often at the expense
    of other programs or future modernization.

-   **Trade Space Is The Foundation For Smart Decisions**. "Trade Space"
    is the range of alternatives available to decision-makers. It is
    four-dimensional, comprised of performance, cost (TOC), schedule,
    and risk impacts.

    The Air Force established a set of tenets that are core to CAIV
    implementation. The concept of well-understood Trade Space is the
    capstone tenet that enables decisions critical to meeting User needs
    while reducing TOC. The remaining five tenets are the pillars that
    enable Trade Space to be defined and exploited. Figure 2, the CAIV
    Model, depicts the relationship of the CAIV tenets.

    ![](media/image2.wmf)![](media/image3.wmf)**Figure 2: CAIV Model**

## 

## [Trade Space]{.underline}

CAIV provides better support for critical decisions by identifying
viable performance, schedule, cost (TOC), and risk Trade Space.
Identification and use of viable Trade Space, or the range of
alternatives, with full knowledge of real and potential impacts, is
essential for making the right decisions to meet User needs while
reducing TOC. CAIV employs a hierarchy of cost reduction opportunities
and trade-offs to meet aggressive cost targets, first looking to improve
acquisition and sustainment efficiencies, then scrutinizing non-critical
requirements. Trade-offs of critical performance requirements are only
to be addressed as a last resort, with the agreement of the Milestone
Decision Authority and User.

Trade Space is commonly defined by alternatives in terms of the
performance, cost, and schedule impacts that each alternative presents.
However, risk must also be included in two ways. First, risk is a fourth
dimension in the Trade Space, recognizing that critical decisions may be
driven by the risks of certain alternatives. Second, risk actually
"discounts" the anticipated performance, cost, and schedule options; in
other words, it lessens the Trade Space to ensure a decision maker does
not trade away something that may not be attainable. For example, assume
you have a system with anticipated range of 2000 miles verses a
requirements threshold of 1500 miles. You could trade away up to 500
miles of range for a fully tested, validated system and still meet
threshold. However, you definitely would not trade away 500 miles of
range at the beginning of Program Definition and Risk Reduction (PDRR),
when there are potential weight growths, fuel consumption increases,
etc.

Figure 3 portrays the cost-performance Trade Space for a Key Performance
Parameter (KPP) characterized by threshold and objective values. Note
that Fig 3 shows a "risk reserve" line to depict the amount that the
Trade Space is restricted to prevent trading away what is not yet
realized.

Figure 3: Cost-Performance Trade Space

The "Solution Set" line represents the optimum cost-performance
combinations: points in the shaded region are solutions, but for any
given point, either more performance for the same cost or the same
performance for less cost are possible. The Trade Space is, of course,
multi-dimensional corresponding to the number of KPPs. Tradeoffs can be
performed at many levels. In the example above, where a KPP is involved,
the User [must]{.underline} agree to the tradeoff. When a contractor has
configuration control below the "A Spec", then the contractor can make
tradeoff decisions as long as the "A Spec is met. The key is that the
decision-maker must fully understand impacts on the other elements,
especially cost (TOC), in the Trade Space.

## [Capabilities-Based Requirements]{.underline}

![](media/image4.wmf)CAIV relies upon capability-based requirements.
Implementation requires the User to define capability-based
requirements, stating "what" the system needs to do instead of "how" to
build the system and how subsystem allocations are made. Such definition
allows the system development team flexibility to define a best value
system meeting User requirements. This requires the development of
operationally oriented performance requirements with a minimum number of
KPPs. Requirements-setting authorities must take special efforts to
exclude requirements not directly contributing to User needs.
Prioritizing requirements helps exclude non-essential requirements while
helping system developers maximize use of the Trade Space by focusing on
characteristics contributing most to mission accomplishment.

The Requirements Process specifies that system requirements be reviewed
at each milestone and revised as needed. However, system performance
thresholds defined at Milestone I (MS I), (prior to Phase I trade
studies), may be difficult to change in later reviews. That is the most
important reason for introducing the cost dimension into the
requirements-setting process as early as possible. Beginning with
realistic and feasible levels of requirements, within the best available
measures of cost estimation, provides the ability to identify a
realistic performance requirements baseline. Through CAIV trades, the
program can take advantage of alternative approaches and designs to
achieve higher levels of performance at the same or lower levels of cost
as more information allows cost estimates to become more refined and
accurate. Keeping flexible in the finalization of requirements is
important, as emphasized in the draft new DoD 5000.1 and 2. Operational
Requirements Document (ORD) I should identify system characteristics and
define threshold ranges required for User effectiveness and be treated
as interim vs final. Warfighters/Users utilize mission effectiveness and
cost performance analyses as key parts of the Analysis of Alternatives
(AoA). When the preferred approach is identified, Users employ mission
effectiveness analysis and CAIV principles to set initial weapon system
requirements, based on the best insight available to TOC. As a result,
ORD I should include TOC objectives. Phase I trade studies should
provide requirements-setters sufficient insight to TOC/LCC impacts for
them to set specific threshold levels that ensure both mission
effectiveness and affordability. During Phase I, the weapon system IPT
uses CAIV to define TOC impacts and conduct trade studies focused on
design and sustainment. The derived data enables Users to refine and
definitize requirements. The IPT ensures continued ability to meet
baseline requirements while adapting to requirements evolutions that
drive system modifications. Finalization of requirements from the ranges
defined in ORD I should occur at this time. Both the Joint Strike
Fighter (JFS) and Advanced Amphibious Assault Vehicle (AAAV) have
employed this evolutionary approach.

## [Partnering]{.underline}

We can no longer allow the sequential, isolated approach to developing
systems! CAIV relies on Partnered Management of the Trade Space between
the User, Acquirer, and Industry participants, including strong
involvement from the Sustainment experts in each of the three
communities.

##### 

##### Fig 4: Partnering

In the past, the all-too common process flow was sequential with limited
partnering. Under CAIV, The User defines system requirements, with
comprehensive input from Sustainers. In addition, the Acquirer and
Industry partners support the User by identifying and quantifying the
major risks and TOC drivers, thereby enabling better informed decisions.
The Acquirer leads system development, with strong User and Sustainer
involvement on potential trades identified by the Acquirer and/or
Industry. Industry, under contractual incentives, allocates requirements
and designs systems for minimized TOC, seeks lower cost and equally
capable alternatives for system elements under their control, and makes
trade study-based recommendations for elements not under their control.

A key element in CAIV success will be the Cost Performance Integrated
Product Team (CPIPT). The CPIPT will complete cost-performance-schedule
tradeoffs leading to CAIV-based cost, performance, and schedule
objectives. The CPIPT, to include the User, must work closely together
to agree on final threshold and objective values for cost, performance,
and schedule parameters in preparation for the milestone decision and
completion of key documentation. CAIV-based threshold and objectives for
KPPs, life cycle cost targets, and critical milestones become the core
drivers for the subsequent program. These core parameters must be
consistent across the ORD, Acquisition Program baseline (APB),
Acquisition Strategy, and Test and Evaluation Master Plan (TEMP) that
come together beginning with MS I. The IPT and CPIPT remain active
throughout the program life cycle up through Phase III, Production,
Fielding/Deployment, and Operational Support. The CPIPT is the cognizant
group to continue CAIV-based cost-performance-schedule tradeoffs, to
establish cost range objectives for production and sustainment, and to
revise performance, cost, and schedule objectives prior to each
milestone decision.

After MS I, the contractor should be a major contributor for CAIV-based
analyses and tradeoffs. Solicitations need to address life cycle cost
and performance objectives and request industry's approach for
implementing and managing the CAIV process. The contractor and
government managers should give consideration to establishing a
co-chaired hierarchy IPT structure. Working level IPTs, formed around
critical subsystems, report to a management IPT through systems
integration IPT. The core of the CAIV process is tradeoffs conducted by
the working level IPTs. Working level IPTs should be given a cost target
and chartered to conduct cost-performance tradeoffs to reduce subsystem
cost drivers. Cost-performance tradeoffs at the system level depend
directly on subsystem level cost and performance tradeoffs. The number
and focus of IPTs will change as the program matures from development
into production and operation/sustainment.

CAIV relies on acceptance of higher risk to aggressively pursue a "best
value" system for the User. Contractors and IPTs should be incentivized
to conduct effective and meaningful cost performance tradeoffs. The
contractor is key in cost/performance trades. The contractor/Government
partnership, where the customer employs prudent risk management and
participates fully in the development of the confidence needed to
entrust weapon system development, ensures the success of the
contractor's cost/performance trades. This partnership is the natural
evolution of the insight/oversight paradigm. Promotions and assignment
policies must recognize and reward successes and best efforts. Cost-type
contracts should include an award fee clause that shares cost savings
between the government and contractor. Incentives were a key ingredient
in the PEACE SHIELD program's[^2] total success in meeting aggressive
schedule and performance requirements. The contractor shared 40% of a
\$50M incentive bonus with employees. The incentive, combined with an
integrated earned value- metrics-schedule system, superb partnering with
the acquisition office and customer, and aggressive software management,
overcame an early schedule deficit to deliver a validated system six
months early.

There are many tools available to motivate and incentivize contractors:
competitions between primes, competition at the component breakout
level, award fees, award terms, performance bonuses, value engineering
opportunities, and multi-year or sole source awards. Acquisition offices
should address incentives as part of the CAIV plan included in the
Acquisition Strategy. Contractors must be encouraged to meet and exceed
life cycle cost reduction targets, not just near term cost objectives.
In order to address life cycle costs up-front and early, for example,
continuation of a multi-year contract can be tied to reaching or
exceeding interim life cycle cost targets. The contractor could receive
a larger percentage of the next production lot or could be awarded the
next phase if production unit costs meet or exceed a cost reduction
profile. The objective should be to tie life cycle cost targets and
contractor performance together through innovative and aggressive
incentives.

###### TOC/LCC Focus

CAIV requires all team members maintain focus on TOC/LCC. Fiscal
constraint is a reality that all Air Force stakeholders must recognize.
Based on the determination of resource availability, stakeholders must
set an aggressive but realistic TOC target for the system. At each
milestone, decision-makers will review targets and progress toward
verifying they will be met. Cost targets shall be addressed in the
Acquisition Strategy and will be included and tracked in the Acquisition
Program Baseline (APB). CAIV-based cost targets should be included in
Request For Proposals (RFPs) and contractors incentivized to achieve
cost targets. Also, all personnel must constantly be cognizant of the
need to identify cost reduction opportunities and tradeoffs.

Typical targets for procurement and sustainment are Average Unit
Procurement Cost (AUPC = total procurement funding/total quantity) and
Average Unit O&S Cost (AUO&SC = unit cost per flight hour, etc.). Each
of these metrics can be tailored to the specific system. Procurement
targets can be expressed as a cost profile; for example, AUPC versus
production lot number. Sustainment targets may be expressed as a
percentage reduction relative to O&S costs of a similar system.
Confidence limits for development, procurement, and sustainment cost
targets will vary with the phase of the program as well as system
complexity and degree it is pushing the "state of the art". At MS I, for
example, development cost estimates should be more accurate than
estimates for O&S costs. Estimating TOC/LCC poses a significant
challenge early in the program, especially for cutting-edge programs. In
addition, Government and Industry have sometimes had large variances in
cost estimates, leading to program start complications. SAF/AQ has
sponsored a Cost Estimating Reinvention Team to address some of these
challenges.

Unfortunately, TOC/LCC Focus may well be the weakest link in the CAIV
process. The reality is that instant year dollars are politically and
practically the driving factor in program decisions. It is easy to say
decision-makers must make decisions based on TOC considerations, but a
lot harder to manage real programs that way. When we see high payoff
investments rejected in our programs, it seems we often manage by the
"modified Wimpie philosophy": not, "I will gladly pay you on Tuesday for
a hamburger today," but "I will gladly pay you for three hamburgers on
Tuesday for a hamburger today!" While we may bemoan such an approach, we
must realize that without the hamburger today, we may starve and not
reach Tuesday! The only way we can overcome this malady is with more
accurate, believable tradeoff data, so that decision-makers will have a
better picture of the true impacts.

## [Risk-Based Management]{.underline}

Risk Management is an integral part of CAIV. It recognizes we cannot
afford to avoid all risk, but rather must manage the critical risks. A
comprehensive, disciplined, Risk Management program throughout a
program's life cycle is critical to effective management to meet cost,
performance, and schedule. As established by DoD 5000.2-R[^3] and AFMCP
63-101[^4], the Risk Management program identifies and tracks risk
drivers, generates risk-handling plans, and provides for monitoring to
track risk "retirement" or growth. Risk reduction measures are included
in cost-performance trade-offs, where applicable. Program partners must
jointly identify, analyze, and prioritize critical program risks, then
periodically review handling plan progress. Handling approaches can run
the gamut from developing alternate designs for critical components to
simple monitoring to ensure a risk does not take root and grow. A
commonly used tool for identifying and prioritizing risks is shown in
Fig 5.

##### ![](media/image5.wmf)Fig 5: Risk Matrix

The Risk Matrix helps identify the risks that **[must]{.underline}** be
addressed: those that have high probability of occurrence and potential
high impact. Risk Management is **[not]{.underline}** just an
engineering function! The team must address programmatic risks and all
functions must be involved in the handling plans as appropriate. In
fact, any program element associated with cost, schedule, and/or
performance has a direct interface with the Risk Management process.

It is important to remember that Risk Management is employed throughout
a program's life cycle. A Risk Management plan should be part of the
early CAIV strategy. Several programs have reaped benefits by conducting
Government/Industry risk brainstorming and prioritization sessions that
directly influenced the request for proposal (RFP) (e.g., Space Lift
Range Modernization and Satellite Control Network Programs). RFPs should
require offerors to identify their risk management approach, risks
inherent in their design, and risk handling plans.

## [Measurement]{.underline}

Setting realistic but aggressive goals for cost and performance is a key
element of program management. Measuring progress toward attaining those
goals is a challenging but critical element of CAIV implementation.
Proper metrics will add value by aiding decision-making rather than
simply reporting status. Metrics measure a wide range of parameters,
including health of critical processes, effectiveness of cost saving
initiatives, and status of the "value stream".

Earned Value Management System (EVMS) and Technical Performance
Measurements (TPMs) provide particularly useful metrics.

-   A contractor needs an EVMS to manage complex tasks. Proper
    partnering will provide Government offices insight into the EVMS.

-   TPMs are product design and performance assessments that estimate
    values of essential performance parameters of the current design.
    TPMs assist in determining the potential impacts of differences
    between planned and actual values

Other useful metrics/tools are shown in Table 1.

+-----------------------------+----------------------------------------+
| -   Are cost objectives     | -   Out-year resources identified?     |
|     defined and consistent  |     (\$)                               |
|     with requirements       |                                        |
|     programmed and          | -   Production and O&S cost objectives |
|     projected fiscal        |     included in the RFP?               |
|     resources?              |                                        |
|                             | -   Key tradeoff issues                |
|                             |     addressed?(e.g., in AoA)           |
+-----------------------------+----------------------------------------+
| -   Is the government       | -   RFP contains a strict minimum      |
|     managing to achieve     |     number of performance              |
|     cost objectives?        |     specifications? (#)                |
|                             |                                        |
|                             | -   CPIPT functioning, tradeoff space  |
|                             |     identified in program baseline and |
|                             |     RFP?                               |
|                             |                                        |
|                             | -   Risks to achieve cost objectives   |
|                             |     identified and program steps to    |
|                             |     address these defined? (risk plan  |
|                             |     )                                  |
|                             |                                        |
|                             | -   Incentives for achieving life      |
|                             |     cycle cost objectives included in  |
|                             |     the RFP and contract? ( % relative |
|                             |     total contract \$'s ; Period of    |
|                             |     performance tied to life cycle     |
|                             |     cost target profile)               |
|                             |                                        |
|                             | -   Mechanism for contractor           |
|                             |     suggestions to reduce production   |
|                             |     and O&S costs in place and         |
|                             |     operating? (Value Engineering      |
|                             |     Clause)                            |
|                             |                                        |
|                             | -   Allocation of cost objectives      |
|                             |     provided to IPTs and key suppliers |
|                             |                                        |
|                             | -   Measurement and estimation of      |
|                             |     reliability and maintainability    |
|                             |                                        |
|                             | -   Robust contractor incentives plan  |
|                             |     in place?                          |
+-----------------------------+----------------------------------------+
| -   Are contractors         | -   Provide appropriate tools for      |
|     managing to achieve     |     cost-performance tradeoffs         |
|     cost objectives?        |     (including incentives) and         |
|                             |     participate in cost-performance    |
|                             |     tradeoff process (Hierarchy IPT    |
|                             |     structure; Award fee flow down to  |
|                             |     IPT members)                       |
|                             |                                        |
|                             | -   Identifies and implements new      |
|                             |     technologies and manufacturing     |
|                             |     processes that can reduce costs    |
|                             |                                        |
|                             | -   Identifies procedural/process      |
|                             |     impediments to cost reduction      |
|                             |     measures                           |
|                             |                                        |
|                             | -   Establishes strong relationship    |
|                             |     with vendor base, including sound  |
|                             |     incentives structure               |
+-----------------------------+----------------------------------------+

Table 1: Illustrative CAIV Metrics and Features

These examples reflect the degree to which a program is structured for
CAIV success. They provide important and observable tools that assist in
setting aggressive production and Operating and Support (O&S) cost
objectives and management of the program. In some cases, quantitative
metrics can be defined as indicated by the parentheses at the end of a
process step.

## [CAIV Evolution Through The Life Cycle]{.underline}

CAIV is initiated at the beginning of a program and evolves through the
life cycle. As an acquisition methodology, the application of CAIV
varies between each acquisition phase as performance requirements,
initially established as a range between required thresholds and desired
objectives, narrow as a program migrates toward production. Let's
briefly examine the application of CAIV across an acquisition life cycle
using the CAIV tenets:

**[Phase 0]{.underline}**

In Phase 0, CAIV supports the Analysis of Alternatives (AOA) by focusing
on KPPs and cost drivers. The R-TOC Process provides essential tools
with data from existing systems and techniques for baselining cost
drivers. At the end of this phase the ORD is established with threshold
and objective ranges, funding is assigned for development (where
necessary), and a maintenance strategy is proposed to minimize long term
O&S. Unfortunately, current practice provides a detailed ORD, usually
based on mission effectiveness analysis, without adequate assessment of
TOC impacts.

[Requirements]{.underline}: The highest AF levels ensure defense system
effectiveness is optimized within constraints of available and projected
resources. Also, Warfighters/Users utilize mission effectiveness and
cost performance analyses as key parts of the Analysis of Alternatives
(AoA). When the preferred approach is identified, Users employ mission
effectiveness analysis and CAIV principles to set initial weapon system
requirements, based on the best insight available to Total Ownership
Cost (TOC). As a result, ORD I should include TOC objectives.

[Partnering:]{.underline} The Warfighter/User leads requirements
definition efforts, and should have Acquirer support if an existing
program office or a Development Planning core team is assigned.

[TOC Focus:]{.underline} The Phase 0 IPT focuses on the life-cycle
aspects of a program by developing and recommending an operation and
sustainment (O&S) strategy that will optimize the elements of
reliability and maintainability. TOC focus recognizes that the majority
of life cycle cost is in the O&S phase, and the resulting strategy will
reflect a system that both maximizes system reliability and requires
minimum downtime to fault isolate and repair problems.

[Risk-Based Management:]{.underline} As much Acquirer involvement as
possible is desirable to support the User in gaining an early
understanding of potential risks and handling alternatives. In
preparation for Milestone 1, the acquisition strategy must identify the
key risk areas within the proposed solution. These will become
integrated into the CAIV strategy and, ultimately, the Request for
Proposal.

[Measurement:]{.underline} Objective TOC should be set in the ORD. The
requirements "owner" should estimate which requirements are likely to be
cost drivers and for each such driver track whether adequate TOC insight
has been gained. This is hard! For that reason it is essential that
Users work with financial experts within acquiring agencies to best
estimate total ownership costs.

### Phase I

Maximum leverage for CAIV efforts exists in Phase I, since system design
has not yet been finalized.

[Requirements:]{.underline} During Phase I, the weapon system IPT uses
CAIV to define TOC impacts and conduct trade studies focused on design,
particularly as influenced by O&S. Tradeoff data enables
Warfighters/Users to refine and definitize requirements.

[Partnering]{.underline}: The team now typically includes an acquisition
program office and at least one contractor. The Acquirer will have the
lead for completing PDRR, but must ensure close coordination with the
User. Using CAIV, the team should baseline expectations through the
following steps:

-   Identify common and unilateral objectives to ensure concerted,
    focused effort.

-   Define all interdependencies and organize, plan, and commit to act
    to meet them. Central to this aspect is analysis of the contractor's
    network/critical path and Integrated Master Plan (IMP). Based on
    this analysis, the Government should build its' own IMP to ensure
    government action meets timelines expected by the contractor and
    does not give any cause for contractor claims.

-   Generate a unified risk handling plan:

-   Develop a concept of operations (CONOPS) to define management and
    working level interaction, metrics, etc.

[TOC Focus:]{.underline} With a funded and manned program, adequate
effort can now be expended to identify TOC and risk impacts from design
and sustainment trade studies.

[Risk-Based Management:]{.underline} The team should generate a unified
risk-handling plan to address high and moderate risk areas:

a\) consolidate previous risk analyses

b\) conduct further brainstorming

c\) prioritize risks

d\) allocate risk handling responsibilities

e\) regularly review status

Implementation may include provisions in acquisition strategies,
contracts, or parallel efforts. As a minimum, the contract should
require the contractor to conduct trade studies to identify "Trade
Space".

[Measurement:]{.underline} The team must continue to track TOC estimates
to TOC objectives. In addition, requirements "owners" should continue to
track degree of insight to TOC impact for each identified cost driver.
The team should track risk "draw-down" per the handling plans with
metrics tied to specific risk reduction accomplishments. Use of
technical performance measurements (TPMs) can be very effective for such
effort.

### Phase II

Early in Phase II, system design freeze limits the ability of CAIV to
generate further substantial cost savings. However, focus on
producibility and O&S may still yield benefits.

[Requirements:]{.underline} The IPT uses CAIV to ensure requirements are
met at minimum TOC.

[Partnering:]{.underline} The team may expand to include other
organizations (e.g., AFOTEC). The same principles of teaming apply as
applied in Phase I.

[TOC Focus:]{.underline} Tradeoff studies will focus on manufacturing
and sustainment impacts on TOC and risk. A mature design and testing of
components and prototypes should enable more accurate estimates of O&S
impacts on TOC.

[Risk-Based Management:]{.underline} The contract again requires trade
studies to identify the "Trade Space", although the ability to make
substantive changes decreases as the design matures. The team should
employ the same type of risk program definition as described in Phase I.

[Measurement:]{.underline} The team continues to track TOC estimates to
TOC objectives and risk "draw-down" through TPMs. In addition, the
contractor EVMS, in conjunction with the Integrated Master Plan (IMP)
and Integrated Master Schedule (IMS), provide accurate status for
completion of development as well as visibility to any potential
problems before they get out of hand. Data from prototype and component
builds and testing will support production cost estimates. The team will
have determined the availability and visibility of such metrics during
their Partnering sessions.

### Phase III

In Phase III, CAIV can generate TOC savings through production
improvements prior to delivery of finished systems to the User. For
fielded systems, the R-TOC process is primary in identifying cost saving
opportunities, but the CAIV process really starts all over again in
support of system modifications.

[Requirements:]{.underline} The IPT ensures continued ability to meet
baseline requirements while adapting to requirements evolutions that
drive system modifications.

[Partnering:]{.underline} Though some partners may have changed from
earlier phases (especially if major modifications are in process), the
same principles apply.

[TOC Focus:]{.underline} With an eye on reducing immediate costs,
contractors are incentivized in production contracts to streamline
manufacturing processes to reduce the cost of producing systems.
Additionally, all members of the IPT, especially maintainers work to
ensure proposed sustainment processes and practices maximize system
availability and minimize cost.

[Risk-Based Management:]{.underline} For steady-state systems, teams
should focus on risks that may upset the steady state. Risk occurs in
all phases of acquisition and it is constantly monitored and re-examined
to ensure old risks are managed and new risks are identified.

[Measurement:]{.underline} As in previous phases, a well functioning
EVMS along with manufacturing IMP and IMS provide the IPT the necessary
information to assess program progress and status.

###  "Hybrids"

Most acquisition programs consist of modifications and/or ACAT III
acquisition efforts. One of the most innovative aspects of the revised
acquisition regulations is the recognition that these systems do not
need to go through the classic Phase 0, I, II sequence before being
fielded. In such cases, the IPT should review the above guidance and
synthesize/tailor to the program at hand. As part of the CAIV process,
IPTs are encouraged to minimize acquisition times and costs by
streamlining the acquisition processes wherever and whenever possible.

**[Conclusion]{.underline}**

CAIV is a viable concept for attaining R-TOC objectives. CAIV and the
Air Force R-TOC Process go hand-in-hand: CAIV primarily applying to
systems in acquisition and the R-TOC Process applying to fielded
systems. Much of the CAIV construct described here is not new. Parts of
it have been applied in numerous programs. The authors, and many other
program managers, really used key elements of CAIV before they knew it
was "CAIV". However, the construct presented here offers a more
integrated, definitive CAIV implementation description than has
previously been available. In fact, the CAIV construct presented is more
a program management construct than focusing just on pure "CAIV".

There are still challenges to realizing the benefits that CAIV offers.
The greatest challenge is the need to make decisions based on future
impacts to break the paradigm of continuously mortgaging the future when
faced with the reality of the critical exigencies of today. That
paradigm leads to Dr Gansler's "Death Spiral"[^5]. Improved
understanding and believable quantification of TOC impacts is critical
to overcoming the "Spiral". The key targets to enable better information
for our decision-makers fall along the lines of the CAIV tenets:

-   Improved requirements process to focus on capabilities-based
    requirements supported by TOC impact data.

-   Improved partnered management of the Trade Space.

-   Recognition by every member of the User, Acquirer, and Contractor
    team that they have an R-TOC role. In addition, improved cost
    estimating capabilities in Government and Industry.

-   Improved understanding and implementation of risk management

-   Better metrics

-   Integrating all CAIV aspects for effective program management

-   Training Users, Acquirers, and Contractors at all levels on CAIV
    implementation so that CAIV becomes ingrained in the culture.

Finally, CAIV as a term of art should disappear in the future\--but
everyone should do it! In 1991, a senior level Government/Industry team
addressed the problem of excessive engineering change proposals (ECP) in
development by defining Clear Accountability in Design (CAID). CAID
determined that the Government would not take configuration control
below the "A Spec" until generally after physical configuration audit
(PCA). Most people in acquisition today cannot identify CAID, but it is
the standard. The term "CAIV" should go the same way.

**[Bibliography]{.underline}**

-   [R-TOC: Reduction in Total Ownership Cost]{.underline}, CAIV/TOC
    Guidebook, 27 May 1999, SAF/AQCT, Washington, D.C.

-   DoD Directive 5000.2-R, [Mandatory Procedures for Major Defense
    Acquisition Programs (MDAPs) and Major Automated Information System
    (MAIS)]{.underline} [Acquisition Programs]{.underline}, 23 Mar 1998,
    Section 3.3.3.

-   Draft New DoD Directive 5000.2-R, [Mandatory Procedures for Major
    Defense Acquisition Programs (MDAPs) and Major Automated Information
    System (MAIS)]{.underline} [Acquisition Programs]{.underline}, Mar
    2000, Section 1.3; 1.4

-   AFMCP 63-101, [Acquisition Risk Management Guide]{.underline}

-   [The Revolution in Business Affairs]{.underline}: The Need to Act
    Now. Remarks by The Honorable Jacque S. Gansler, Under Secretary of
    Defense (Acquisition and Technology), Association of the U.S. Army,
    Falls Church, Virginia, 2 September 1998.

**[APPENDIX]{.underline}**

**[Risk Management Approach]{.underline}**

Let us consider an example of a potential risk management approach.
Typically, system weight is a critical parameter that will impact total
system performance. Assume that keeping weight under the allocated
threshold is particularly vital, as it usually is. Numerous studies have
also shown that weight typically grows through development of a system.
Fig 6 shows an allocated threshold along with "uncertainty bands" that
narrow as the design matures. Clearly, a tested, validated system at
Milestone (MS) III should be distinctly characterized. However, at
Milestone I, a "paper design" only estimates system weight. Assuming the
weight Technical Performance Measure (TPM) will be regularly tracked, we
can define four regions on the chart that the TPM may be in.

I: Weight well below threshold; high confidence system will meet
threshold at MS III.

II: Weight below threshold; the closer to the threshold, the more active
efforts must be to contain growth.

III: Weight above threshold; need aggressive weight reduction program.

![](media/image6.wmf)IV: Weight well above threshold; low probability to
meet threshold even with aggressive program.

##### Fig 6: Managing Risk

### Cost Driver Calculation

Fig 7 is a simplistic view of a "Comb Chart" analysis of cost drivers
for a system. The costs are divided into RDT&E, procurement and O&S.
Each is further subdivided into WBS elements. Such subdivision should go
down as far as practicable. For each element, dollar estimates and
percentages of TOC are generated. This analysis will provide a baseline
against which R-TOC efforts are compared. Currently, SAF/AQCT is
coordinating 10 Air Force pilot programs using this methodology to
generate R-TOC plans and associated objectives. We anticipate that this
procedure will be directed on almost all programs in the future.

Directions for conducting such analysis are in the R-TOC Guidebook
previously cited.

![](media/image7.wmf)Fig 7: Cost Drivers

[^1]: R-TOC: Reduction in Total Ownership Cost, CAIV/TOC Guidebook, 27
    May 1999, SAF/AQCT, Washington, D.C.

[^2]: The contract cited was a \$1.1B effort for control software,
    integration, test, and operational activation of the \$5B command,
    control, and communications system for integrated air defense of
    Saudi Arabia.

[^3]: DoD Directive 5000.2-R, "Mandatory Procedures for Major Defense
    Acquisition Programs (MDAPs) and Major Automated Information System
    (MAIS) Acquisition Programs," 23 Mar 1998, Section 3.3.3.

[^4]: AFMCP 63-101, 'Acquisition Risk Management Guide"

[^5]: The Revolution in Business Affairs: The Need to Act Now. Remarks
    by The Honorable Jacque S. Gansler, Under Secretary of Defense
    (Acquisition and Technology), Association of the U.S. Army, Falls
    Church, Virginia, 2 September 1998.