From: aws@iti.org (Allen W. Sherzer)
Subject: Re: Stupid Shut Cost arguements
Organization: Evil Geniuses for a Better Tomorrow
Distribution: sci
Date: Mon, 28 Dec 1992 18:07:32 GMT

In article <BzzAGI.5v4.1@cs.cmu.edu> ssi!lfa@uunet.UU.NET ("Louis F. Adornato") writes:

>>>In military procurement, the development costs are charged against
>>>the prototypes, X, Y, etc, and the operational vehicles of the procurement
>>>are charged at "flyaway" cost.

>>Which I suspect is done largely to hide the true cost. I point out that if
>>the contractors in question ran their accounts this way they would all be
>>in jail and out of buisness.

>Wrong.  Many major corporations consider research and/or development a
>"sunk" cost - it's something that's considered part of the cost of
>staying in business, 

Sure, but that is not what we are talking about here. Research and some
conceptual development are part of overhead. However, when a decision
is made to productize something, it always gets a separate account and
costs are charged to that. These costs are amortized over the expected
life of the product.

Boeing, for example, is currently designing the 777. There is a section
on it in the corporate budget and costs associated with it WILL be 
specifically included in costing the product. If they didn't, then they
couldn't be sure they where recouping development costs and thus would
go out of buisness.

Can you name a product ever made by a successful company which DIDN'T
keep track of product development costs (as opposed to pure research)
and assign those costs to the product? Outside government, you won't.

>>But why should we follow that model?

>Because NASA paid for the design and development work (and precious
>little research) up front, and doesn't have to pay anyone back for
>those costs.  

I wouldn't say nobody. There is after all, the taxpayers. I think they
would like to see their money spent wisely.

The other issue is what we want from space. If your happy with a few
Shuttle launches a year then your all set. On the other hand, if you
want an active space program you need commercial involvement which
you won't get by forcing them to amortize development costs when the
government competition doesn't need to.


>>                                     Hiding costs like you advocate only
>>encourages waste and inefficiency.

>On the contrary, by keeping development and operational costs separate,
>there's less opportunity for waste and inefficency in one phase to get
>buried in the lifecycle costs.  

Of course, that 'waste and inefficiency' also tells you that you simply
can't build the product so it should be cancled. That is very useful
information which is suppressed under government procurement systems. It
also encourages designers to take the short view and minimize design
costs which tends to maximize operations cost.

I have worked on more than one project where the company decided that
development costs couldn't be made back with the product. In these cases
they cancel the project so they can invest it in other products which
CAN recoup costs.

>Besides, development and operations are
>two completely different kinds of costs, so drawing a clean line
>between the two also provides better historical information for
>budgeting, forecasting, and cost control on the next project.

Of course. Such a clean line is indeed drawn. There is a development
line item and an operations (or manufacturing) line item.

>Of course, amortizing the development costs does have one real
>advantage; it ensures that the shuttle's per-flight costs will always
>be astronomical, 

The advantage sir, is the realization that we are spending too much for
a system which doesn't work very well. I consider realizing that fact
(helped by reasonable cost accounting) a good thing since it allows us
to spend our money more wisely.

Why doesn't it bother you that we are spending (in your words) 'astronomical'
amounts of money for launch services? Are you so carefree with your own
money? If not, why are you so carefree here?

>while allowing the DC program to hide it's own
>development costs behind a vaporware figure of useful lifespan.  

If you have some specific technical justification for this, please post
it. If not then it must fall under Gary's 'is doesn't exsit so it won't
work' line of arguement.

I am happy to compare DC (or existing expendables) to Shuttle. No matter
what rules you pick, Shuttle looses.

We simply aren't going to get into space by shoveling money under a
SSME and waching it burn.

  Allen

-- 
+---------------------------------------------------------------------------+
| Allen W. Sherzer | "A great man is one who does nothing but leaves        |
|  aws@iti.org     |  nothing undone"                                       |
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