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Reduction of Total Ownership Cost

30 September 2003 

by

Michael W. Boudreau 

Brad R. Naegle 

Approved for public release, distribution unlimited. 

Prepared for: Naval Sea Systems Command and 

Naval Postgraduate School, Monterey, California 93943 
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Monterey, California

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The Acquisition Chair, Graduate School of Business & Public Policy, Naval 

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________________________________ 

Michael W. Boudreau, Senior Lecturer 

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Brad R. Naegle, Lecturer 

Graduate School of Business & Public Policy

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Final – 1 July – 30 September 2003 

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REDUCTION OF TOTAL OWNERSHIP COST

5. FUNDING

6. AUTHOR (S) 

MICHAEL W. BOUDREAU 

BRAD R.NAEGLE

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NAVAL POSTGRADUATE SCHOOL 

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NPS-GSBPP-03-004

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13. ABSTRACT (Maximum 200 words.) 

Total Ownership Cost (TOC) is the current initiative to manage costs over the entire life cycle of a 

weapon system. There are several major categories of costs that contribute to Total Ownership Cost but 

the principal categories are (1) R&D, (2) Production, (3) Operating and Support, and (4) Disposal. 

System TOC is the same as Life Cycle Cost (LCC) and has implications for Cost As an Independent 

Variable (CAIV), cost-performance tradeoffs, affordability, and cost to achieve required operational 

availability. The Program Manager (PM) is responsible for developing and managing system TOC, with 

input from key stakeholders, such as the sponsor and users. This paper addresses incentives that can 

be employed to encourage life cycle cost perspective. It examines the critical issues associated with 

understanding and implementing the TOC concept and provides recommendations to assist PMs to 

knowledgeably execute a TOC plan. Metrics necessary to ensure appropriate implementation are 

explored. Various methods of controlling and reducing TOC are evaluated, including communication 

among stakeholders, CAIV documentation, tradeoff analysis, Reliability-Centered Maintenance (RCM); 

Performance-Based Logistics (PBL), Commercial Operations & Support Savings Initiative (COSSI), 

Earned Value Management System (EVMS), Activity-Based Costing (ABC), Value Engineering, and 

lessons from R-TOC Pilots.

14. SUBJECT TERMS 

Total Ownership Cost; Cost as an Independent Variable; Reduction of Total Ownership Cost; Life Cycle Cost; 

Performance-Based Logistics; Commercial Operations and Support Savings Initiative, Earned Value 

Management System; Activity-Based Costing; Reliability-Centered Maintenance; Program Management; Value 

Engineering

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NSN 7540-01-280-5800 Standard Form 298 (Rev. 2-89) 

Prescribed by ANSI Std 239-18 
ABSTRACT 

Total Ownership Cost (TOC) is the current initiative to manage costs over the 

entire life cycle of a weapon system. There are several major categories of costs that 

contribute to Total Ownership Cost but the principal categories are (1) R&D, (2) 

Production, (3) Operating and Support, and (4) Disposal. System TOC is the same as 

Life Cycle Cost (LCC) and has implications for Cost As an Independent Variable (CAIV), 

cost-performance tradeoffs, affordability, and cost to achieve required operational 

availability. The Program Manager (PM) is responsible for developing and managing

system TOC, with input from key stakeholders, such as the sponsor and users. This 

paper addresses incentives that can be employed to encourage life cycle cost 

perspective. It examines the critical issues associated with understanding and 

implementing the TOC concept and provides recommendations to assist PMs to 

knowledgeably execute a TOC plan. Metrics necessary to ensure appropriate 

implementation are explored. Various methods of controlling and reducing TOC are 

evaluated, including communication among stakeholders, CAIV documentation, tradeoff 

analysis, Reliability-Centered Maintenance (RCM); Performance-Based Logistics (PBL), 

Commercial Operations & Support Savings Initiative (COSSI), Earned Value 

Management System (EVMS), Activity-Based Costing (ABC), Value Engineering, and 

lessons from R-TOC Pilots. 

- i - 
ACKNOWLEDGEMENTS 

Many thanks to RADM (Ret) Jim Greene who obtained sponsor funding for 

acquisition research and later provided very helpful insights to make the report more 

useful. Special thanks to Dr. David Lamm who went out of his way to help get the 

process started. Both RADM Greene and Dr. Lamm provided us great encouragement 

to venture into unfamiliar territory and do practitioner-based research. 

Our sincere thanks to Mr. Ozzie Watterson, who contributed valuable insights

into Total Ownership Cost Reduction from his former position as Technical Program 

Manager during SEAWOLF’s early acquisition milestones and development. Our thanks 

also go to Mr. Larry Rogers of NAVSEA, and Messrs. Duane Embree, Matt Craig, 

Eugene Dutkowski, and Kip Hoffer, of Crane Naval Surface Warfare Center who 

provided information describing the highly successful cost reduction effort on the AEGIS 

Crossed-Field Amplifier. 

Finally, our thanks and appreciation to Ms. Karey Shaffer for her work in 

formatting this report to improve its organization, appearance, and readability. 

- ii - 
ABOUT THE AUTHORS 

Michael W. Boudreau, Colonel, US Army (Ret), has been a senior lecturer at 

the Naval Postgraduate School since 1995. While an active duty Army Officer, he was 

the Project Manager, Family of Medium Tactical Vehicles, 1992-1995. He commanded 

the Materiel Support Center, Korea, 1989-1991 and the Detroit Arsenal Tank Plant, 

1982-1984. COL Boudreau is a graduate of the Industrial College of the Armed Forces; 

Defense Systems Management College; Army Command and General Staff College; 

Long Armour-Infantry Course, Royal Armoured Corps Centre, United Kingdom; and 

Ordnance Officer Basic and Advanced courses. He holds a Bachelor of Mechanical 

Engineering degree and Master of Business degree from Santa Clara University, 

California. 

Brad R. Naegle, Lieutenant Colonel, US Army Retired, is a Lecturer and 

Academic Associate for Program Management Curricula at the Naval Post Graduate 

School, Monterey California. While on active duty, LTC (ret) Naegle was assigned as 

the Product Manager for the 2 1⁄2 Ton Extended Service Program (ESP) from 1994 to 

1996 and the Deputy Project Manager for Light Tactical Vehicles from 1996 to 1997. 

He was the 7th Infantry Division (Light) Division Materiel Officer from 1990 to 1993 and 

the 34th Support Group Director of Security, Plans and Operations from 1986 to 1987. 

Prior to that, LTC (ret) Naegle held positions in Test and Evaluations and Logistics 

fields. He earned a Master’s Degree in Systems Acquisition Management (with 

Distinction) from the Naval Postgraduate School and an undergraduate degree from 

Weber State University in Economics. He is a graduate of the Command and General 

Staff College, Combined Arms and Services Staff School, and Ordnance Corps 

Advanced and Basic Courses. 

- iii - 
TABLE OF CONTENTS 

CHAPTER I: INTRODUCTION .............................................................................. 1 

A. Definitions ............................................................................................... 1 

B. Scope of this Study................................................................................. 2 

C. TOC Processes: CAIV and R-TOC......................................................... 2 

D. TOC Obstacles ....................................................................................... 4 

E. Management of TOC .............................................................................. 7 

CHAPTER II: METHODOLOGY............................................................................. 9 

CHAPTER III: LITERATURE REVIEW ................................................................ 10 

CHAPTER IV: DATA AND ANALYSIS................................................................. 12 

A. Overview............................................................................................... 12 

B. Leadership, Motivation, and Stakeholder Involvement ......................... 12 

C. Documents ........................................................................................... 17 

D. Tradeoff Analysis through AoAs, CPIPTs, and other IPTs.................... 21 

E. Metrics .................................................................................................. 22 

F. Databases and Data Collection............................................................. 32 

G. Activities and Tools that Support CAIV and R-TOC ............................. 34 

H. Risk Management................................................................................. 41 

I. Why we may have Difficulty Seeing and Proving TOC Reduction.......... 44 

J. Activity During the Various Phases ....................................................... 46 

CHAPTER V: CONSIDERATIONS OF TOTAL OWNERSHIP COST RELATED TO 

SPECIFIC PHASES ............................................................................................ 47 

Part 1: Concept Refinement and Technology Development Phases.............. 48 

A. Overview of the Two Phases ................................................................ 48 

B. Leadership, Motivation, and Stakeholder Involvement ......................... 49 

C. Documents ........................................................................................... 52 

D. Tradeoff Analysis through AoAs, CPIPTs and other IPTs..................... 52 

E. Metrics .................................................................................................. 55 

F. Database & Data Collection.................................................................. 56 

G. Activities and Tools that Support CAIV and R-TOC ............................. 56 

H. Risk Management................................................................................. 57 

I. Summary................................................................................................ 58 

- iv - 
Part 2: System Development and Demonstration ......................................... 60 

A. Overview of the Phase.......................................................................... 60 

B. Leadership Focus Motivation and Stakeholder Involvement................. 60 

C. Documents ........................................................................................... 63 

D. Tradeoff Analysis through CPIPTs and other IPTs ............................... 64 

E. Metrics .................................................................................................. 65 

F. Database and Data Collection .............................................................. 66 

G. Activities and Tools that Support CAIV and R-TOC ............................. 66 

H. Risk Management................................................................................. 68 

Part 3: Risks Production Phase and Deployment to the Field or Fleet.......... 69 

A. Overview of the Phase.......................................................................... 69 

B. Leadership Focus Motivation and Stakeholder Involvement................. 70 

C. Documents ........................................................................................... 71 

D. Tradeoff Analysis through CPIPTs and other IPTs ............................... 72 

E. Metrics .................................................................................................. 72 

F. Database and Data Collection .............................................................. 73 

G. Activities and Tools that Support CAIV and R-TOC ............................. 73 

H. Risk Management................................................................................. 75 

Part 4: Sustainment Phase............................................................................ 77 

A. Overview of the Phase.......................................................................... 77 

B. Leadership Focus Motivation and Stakeholder Involvement................. 77 

C. Documents ........................................................................................... 77 

D. Tradeoff Analysis through Teams......................................................... 77 

E. Metrics .................................................................................................. 78 

F. Database and Data Collection .............................................................. 78 

G. Activities and Tools that Support CAIV and R-TOC ............................. 79 

H. Risk Management................................................................................. 79 

CHAPTER VI: FINDINGS AND CONCLUSIONS................................................. 80 

APPENDICES...................................................................................................... 84 

ACRONYM LIST.......................................................................................... 84 

CROSSWALK BETWEEN CJCSI 3170.01C AND CJCSI 3170.01B ........... 88 

DODI 5000.2 SPECIFIC GUIDANCE RELATED TO OWNERSHIP COST . 90 

REFERENCE LIST ...................................................................................... 91 

- v - 
NPS-GSBPP-03-004 

Reduction of Total Ownership Cost 

30 September 2003 

by

Michael W. Boudreau 

Brad R. Naegle 

Disclaimer: The views represented in this report are those of the author and do not reflect the official policy position of

the Navy, the Department of Defense, or the Federal Government.

- vi - 
Intentionally left blank 

- vii - 
CHAPTER I: INTRODUCTION 

A. Definitions 

Total Ownership Cost (TOC) has two definitions; the first is very broad, looking 

from the DoD or service perspective. 

DoD TOC is the sum of all financial resources necessary to organize, 

equip, train, sustain, and operate military forces sufficient to meet national 

goals in compliance with all laws, all policies applicable to DoD, all 

standards in effect for readiness, safety, and quality of life, and all other 

official measures of performance for DoD and its Components. DoD TOC 

is comprised of costs to research, develop, acquire, own, operate, and 

dispose of weapon and support systems, other equipment and real 

property, the costs to recruit, train, retain, separate and otherwise support 

military and civilian personnel, and all other costs of business operations 

of the DoD.1

Much of the activity described in this definition is beyond the capability of a 

weapon system Program Manager to influence. However, it is deliberately broad in 

scope to include the many different possibilities for various stakeholders to reduce 

ownership cost. 

The second definition is deliberately written from the vantage point of the 

program manager of the warfighting system. 

Defense Systems TOC is defined as Life Cycle Cost (LCC). LCC (per DoD 

5000.4M) includes not only acquisition program direct costs, but also the 

indirect costs attributable to the acquisition program (i.e., costs that would 

not occur if the program did not exist). For example, indirect costs would 

include the infrastructure that plans, manages, and executes a program 

over its full life and common support items and systems. The 

responsibility of program managers in support of reducing DoD TOC is the 

continuous reduction of LCC for their systems.2

 

1

 Gansler, Jacques S. Memorandum: Definition of Total Ownership Cost (TOC), Life Cycle Cost, and the 

Responsibilities of Program Managers. Office of the Secretary of Defense. 13 November 1998. 

2

 Ibid. 

- 1 - 
As Dr. Gansler said in his 1998 memorandum from which the above definitions 

were extracted, the program manager’s job, in trying to reduce TOC, is a very difficult 

one and that Program Managers should seek help wherever they can to reduce 

ownership costs. 

B. Scope of this Study 

This study will examine TOC from the perspective of the program manager of the 

warfighting system, but occasionally will extend that perspective to suggest the 

possibility of affecting TOC within the broader definition. 

C. TOC Processes: CAIV and R-TOC 

Pursuit of Total Ownership Cost reduction at the level of the warfighting system 

may be separated into two major approaches that are connected, end-to-end, along a 

life cycle time line. During the developmental phases, the effort or process is called 

Cost As an Independent Variable, (CAIV). For systems in the field or fleet, the process 

or goal becomes Reduction of Total Ownership Cost (R-TOC). The chart at figure 1 is a 

typical depiction of the CAIV/R-TOC relationship. 

 

Figure 1. CAIV / R-TOC Relationship3

 

3

 Kaye, Michael A., Mark S. Sobota, David R. Graham, and Allen L. Gotwald. “Cost As An Independent 

Variable: Principles and Implementation.” Acquisition Review Quarterly. Fall 2000. 

- 2 - 
The first approach, Cost As an Independent Variable (CAIV) addresses Total 

Ownership Cost during the warfighting system’s developmental phases, beginning with 

the Concept Refinement phase. The focus of CAIV is to establish cost targets based on 

affordability and requirements and then to manage to those targets, thereby controlling 

TOC. CAIV includes consideration of costs for development, production, operations 

and support, and disposal. An example of the CAIV process would be to set specific 

cost and reliability targets for each subsystem or component of a weapon system in 

development, such that the warfighting system will be able to achieve the required 

operational availability (AO) at the specified cost. 

Employing the CAIV concept early in the developmental process offers, 

potentially, the greatest opportunity for TOC reduction at the lowest possible investment 

cost. As an example, the TOC impacts of using two different power plants presents an 

opportunity to use the CAIV evaluation technique to estimate the TOC impact and make 

a best-value decision. For illustrative purposes, consider a standard internal 

combustion engine at a cost of $7,500 versus a hybrid-electric power plant costing 

$19,000. The impact to the acquisition cost is evident, but excludes the cost savings 

associated with fuel consumption over the life of the system. If the system's operational 

mode indicates an average usage of 15,000 miles per year and an Economic Useful 

Life (EUL) of 20 years, the total miles expected is 300,000. If the standard engine in our 

comparison is estimated at 10 miles per gallon and the hybrid engine is estimated at 25 

miles per gallon, the estimated fuel saved by the hybrid-powered system would be 

18,000 gallons. Even at a conservative estimate of $1.00 per gallon, the TOC impact is 

$22,500 per system ($11,000 less expensive than the standard engine) and there are 

other reductions in fuel supply assets and attendant personnel that apply. 

The second approach to TOC is the Reduction of Total Ownership Cost (R-TOC) 

and focuses on the reduction of average procurement unit cost (APUC) and weapon 

system sustainment cost, that is, operating & support (O&S) costs. R-TOC is employed 

as the warfighting system is produced and placed in service. Examples of R-TOC 

would be a value engineering change proposal (VECP) to reduce the cost of 

manufacturing a component by improving the process yield (the percentage the 

- 3 - 
manufactured item that are defect-free) or a VECP to reduce the operating and support 

cost by improving the reliability of an expensive subsystem or component. Often there 

are the secondary benefits of enhanced performance (i.e., improved reliability and 

operational availability), but the forcing function is the reduction of operating and 

support costs, the largest constituent of TOC. 

D. TOC Obstacles 

Someone who is not involved with program management might wonder what is 

especially difficult about containing and controlling TOC. In truth, there are many 

difficulties. Below, is a description of some of the obstacles that get in the way of 

controlling or reducing Total Ownership Cost. All of these are well known but are 

entrenched and difficult to overcome. 

Competing interests of users, developers, prime contractors, subcontractors, 

Office of the Secretary of Defense (OSD), service headquarters, maintainers, buying 

commands, and Congress may negatively impact Total Ownership Cost. The “user” 

who establishes requirements for a new system may be transfixed by the technical 

performance and may not clearly establish requirements for ownership cost to achieve 

specified system availability. Materiel developers may be too focused on acquisition 

cost and schedule (a typical complaint from the user community) and ignore future 

logistics support issues. Prime contractors may concentrate on production costs, with 

less regard for system sustainment costs, particularly if their contract directs them 

toward reduction in production costs or they sense that their customer is not interested 

in sustainment issues. OSD and Service headquarters may encourage poor TOC 

decisions through funding instability and failure to demand life-cycle affordable 

solutions. Maintainers may contribute to poor R-TOC by failing to speak out loudly on 

lessons-learned from previous systems. Buying commands may contribute to increased 

ownership costs by failing to look aggressively for cost drivers that need to be 

redesigned for lower cost of operation and improved reliability. The Congress may 

restrict R-TOC by constraining the choices of cost-effective sustainment approaches. 

- 4 - 
Balancing Total Ownership Cost Goals That Are Conflicting - Successful program 

management includes the ability to achieve balance within a program. Indeed, program 

managers are directed by DoDD 5000.1 to manage their programs in a balanced way.4

 

Facets and perspectives that need to be balanced are manifold. Four elements of TOC 

that require balancing are development costs, procurement costs, operating and 

support costs, and disposal costs. Development costs, the expenditure of resources 

during system development, may pay off in terms of reduced production and / or 

sustainment costs; producibility studies may save significant manufacturing costs, and 

reliability testing early in a program may avoid sustainment costs over the service life of 

the weapon system. Occasionally, procurement or production cost constraints may 

conflict with sustainment cost targets; for example, heavy pressure to reduce production 

costs may lead to the selection of components that are inexpensive but not reliable. 

Such choices would reduce production cost but increase sustainment costs and very 

possibly result in an increase of Total Ownership Cost. When such cost goals conflict, a 

reasonable metric for maintaining balance would appear to be minimization of Total 

Ownership Cost, i.e., life-cycle cost, but often, TOC is sub-optimized due to these 

competing pressures. 

Balancing Cost, Schedule, System Performance, Sustainment, Quality, and RiskIn the same way that ownership cost goals must be balanced and harmonized, system 

solutions must be found that balance Total Ownership Costs against procurement cost 

goals, program schedule goals, system technical performance, equipment quality, ease 

of maintenance, and availability. 

DoD is relying on sophisticated, software-intensive systems to improve 

survivability and lethality, but software is susceptible to high TOC. Software is difficult 

to accurately estimate, sensitive to changing requirements, and its complexity, interface 

 

4

 Department of Defense. “The Defense Acquisition System.” DoD Directive 5000.1. May 12, 2003. 

- 5 - 
requirements, and relative ease in adding capability tend to make it maintenanceintensive.5

During each life cycle phase, the approach to TOC reduction and the 

methodology may change somewhat, while ownership cost goals and targets become 

more refined. For example, tradeoff processes used in Concept Refinement may be 

beneficial during that phase but be inadequate for the System Design and 

Demonstration (SDD) phase without the inclusion of specific contractor incentives. 

Materiel Developer Instability - Key members of the materiel developer team 

change over time. For example, the program manager during System Integration would 

be unlikely to remain in that position through the Production and Fielding phase. As key 

personnel — program managers, chief engineers, senior logisticians, business-financial 

managers — change, program emphasis shifts, at least subtly. These personnel 

changes, which are a “fact of life,” may reflect in program missteps, including missed 

TOC targets. 

Funding Instability - Resources tend to be unstable and subject to unanticipated, 

unexpected changes. Funding instability is also a “fact of life” in Government 

acquisition programs. Each time that funding is cut from a program, decision-makers 

adjust the program by postponing or eliminating some activity or system attribute. 

Decisions are made that will keep the program viable, and often the choice is to omit a 

system feature or a near-term activity that won’t reflect negatively on TOC until later. 

Easing back on O&S cost targets is a tempting sacrifice when program funding gets cut. 

For example, reliability-centered maintenance studies cut to reduce cost during SDD 

would not affect the program noticeably until later on, when operational systems are in 

the fleet; the associated effect to Total Ownership Cost might be substantial. 

Eliminating onboard diagnostics / prognostics would certainly help meet funding cuts 

during the procurement phase, but would likely be extremely costly in terms of 

 

5

 Humphrey, Watts S. Managing the Software Process. Addison-Wesley Publishing Company. 1990. 

- 6 - 
maintainer training, diagnostics time, erroneous fault isolation, errant parts ordering, and

associated maintenance man-hours, for the life of the system. 

Sticker Shock - The fact that a system’s TOC “price tag” is extremely high when 

compared to its contract unit price may tend to keep the stakeholders from discussing 

TOC in any open forum, fearing that “sticker shock” might cause an adverse reaction 

from a decision-maker or politically powerful individual accustomed to seeing much 

lower cost figures. As an example, consider a system with an average procurement unit 

cost (APUC) of $1.5 million and a program acquisition cost of $2 million.6

 Typically, 

program acquisition cost would represent only about 28 percent of each individual 

system’s TOC, with the remaining 72% representing O&S and disposal costs of about 

$5 million: for a TOC of $7 million per each weapon system. With an acquisition 

objective of 2,000 systems, the total procurement cost would be $3 billion, with a Total 

Ownership Cost estimate of approximately $14 billion. If unfamiliar with TOC estimates 

and without a readily available basis for comparison, a decision-maker might mistakenly 

conclude that the system would be unaffordable and cancel the program. Concern for 

such a scenario may create an impediment to widespread use of TOC goals. 

E. Management of TOC 

There is a wide body of knowledge related to the control of TOC. There have 

been “flagship programs” and “pilot programs” designated to lead the way to the Total 

Ownership Cost reduction and stave off the “death spiral.”7

 Every program manager 

 

6

 APUC is the total procurement cost divided by the total procurement quantity. Program acquisition cost 

includes APUC, facilities, RDT&E, and other procurement costs. These terms are discussed in more 

detail, beginning on page 24. 

7

 Gansler, Jacques S. “The Revolution in Business Affairs—The Need to Act Now.” Program Manager. 

September-October 1998. Reprinted from a speech given by Dr. Gansler to the Association of the United 

States Army, Falls Church. VA. September 2, 1998. 

- 7 - 
tries different approaches to reduce costs. Additionally, commercial best practices have 

been recognized and suggested for use within the Department of Defense.8

The purpose of this working paper is to gather together the various approaches 

for controlling and reducing Total Ownership Cost, to describe tools and methods to 

assist PMs in addressing TOC more effectively, and to identify the various approaches 

appropriate for each life cycle phase. 

 

8

 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 8 - 
CHAPTER II: METHODOLOGY 

Library Research 

This technical paper is a library research effort. Data is collected through a 

literature review and is arranged and analyzed as follows. 

The practices and approaches are compiled in a logical order, in an array that is

user-friendly to PMs, systems command personnel, users, and contractors. User 

personnel, acquisition practitioners, and other stakeholders should be able to use 

this paper to suggest possible approaches to control TOC, whatever the life-cycle 

stage of a warfighting system. 

•

•

•

Mechanisms for use in managing TOC are described, analyzed, and synthesized. 

Flaws in our acquisition system that may present or permit obstacles to effective 

control and management of TOC are highlighted. 

• Conclusions are drawn regarding the control of TOC within the Department of 

Defense. 

- 9 - 
CHAPTER III: LITERATURE REVIEW 

Regulatory Guidance, Including DOD and the Services 

There is a body of mandatory and discretionary guidance published by the Office 

of the Secretary of Defense and by each of the Services. Much of this material is 

available on the Legacy Defense Acquisition Deskbook website, 

http://legacydeskbook.dau.mil/; some of these materials may be out-of-date, because 

the Deskbook is no longer being maintained. Nevertheless, the site provides a 

Calendar Year 2000 view of the guidance on CAIV and R-TOC and includes some best 

practices. The Defense Acquisition University (DAU) operates the AT&L Knowledge 

Sharing System, http://deskbook.dau.mil/jsp/default.jsp, for the Under Secretary of 

Defense (Acquisition, Technology and Logistics), USD(AT&L). The site provides 

current web-based materials on TOC and also provides a portal to the Legacy Defense 

Acquisition Deskbook.

Published Materials: Books, Journals, Periodicals, Government 

Documents, Reports, Best Practices, Theses, Studies, Speeches,

and Briefs 

Much has been written on the subjects of Life-Cycle Cost (LCC), Total 

Ownership Cost, Cost As an Independent Variable (CAIV), Reduction of Total 

Ownership Cost (R-TOC), procurement unit costs, and operating and support costs 

(O&S). There are numerous reports on Flagship Programs and Pilot Programs that are,

or were, experimenting in cost reduction methodologies. Students at the Naval 

Postgraduate School have accomplished considerable research and published 

numerous Master’s theses related to management of Total Ownership Cost. The 

General Accounting Office has published significant work comparing commercial best 

practices to DoD acquisition. 

The Defense Acquisition University has developed educational materials on Total 

Ownership Cost (TOC) and Cost As an Independent Variable (CAIV) best practices 

- 10 - 
(http://pmcop.dau.mil/simplify/ev.php?URL_ID=1205&URL_DO=DO_TOPIC&URL_SEC

TION=201&reload=1034872330). 

This site may also be reached from the AT&L Knowledge Sharing System

website, by selecting “Total Ownership Cost CoP,” identified under “Business Practice” 

located in the “Communities and Sharing” box. 

The Institute for Defense Analysis (IDA) maintains an informative website, 

“Reduction of Total Ownership Costs,” that has collected the lessons-learned and best 

practices garnered from the R-TOC Pilot programs (http://rtoc.ida.org/rtoc/rtoc.html). 

- 11 - 
CHAPTER IV: DATA AND ANALYSIS 

A. Overview 

There are numerous possible ways to array and analyze the collection of 

materials on the subject of Total Ownership Cost. This report establishes a framework 

for the data and analysis and maintains it during discussion of TOC for each of the life 

cycle phases, discussed in Chapter V. The arrangement of material in this chapter is 

congruent with the discussion of each acquisition phase, presented in Chapter V; the 

intent is that the reader be able easily to go back-and-forth between the general 

discussion and the discussion specific to a life cycle phase. The basic template used in 

this paper is depicted as follows:

• Leadership, Motivation, and Stakeholder Involvement 

•

•

•

•

•

Documents 

Tradeoff Analysis through AoAs, CPIPTs, and Other IPTs 

Metrics 

Data Collection and Databases 

Activities and Tools that Support CAIV and R-TOC 

• Risk Management 

B. Leadership, Motivation, and Stakeholder Involvement 

Leadership - DoD leadership sets the policies and establishes the environment 

and culture wherein the workforce operates. Control of costs has long been the policy 

of the Department of Defense; within the acquisition community, program offices have 

worked hard to control the cost of programs. However, in the past, the overriding focus 

toward acquisition of new programs has been on system capability or performance, not 

on the cost. In a severely resource constrained environment, such as the one we are 

currently operating in and anticipate for the foreseeable future, the focus on minimizing 

TOC has never been greater and, indeed, R-TOC and CAIV are manifestations of the 

attempt to address these resource constraints. 

- 12 - 
Senior leaders within OSD and the Services have influence over the 

developmental process and can bring attention to Total Ownership Cost from their 

collective positions of influence. A recent GAO report criticizes DoD because there are 

too many different organizational participants.

9

 This criticism could be attenuated if the 

leadership would speak with one voice on the requirement for reduction in Total 

Ownership Cost. 

Those who establish weapon system requirements, together with those who 

acquire, operate, and sustain those systems, recognize the need for TOC reduction and 

need to synchronize their efforts to that end. Part of that combined effort is to speak 

with one voice to articulate the affordability limits and then “lead from the front” to stay 

within those limits. When the leadership embarks on the process to obtain a new 

system capability, the process needs always to include the establishment of affordability 

constraints; those constraints are stated as Total Ownership Cost goals, and the 

leadership needs to insist that those goals and the associated follow-on cost targets be 

established and then adhered to. 

Leadership determination and follow-up is demonstrated by asking the cost and 

readiness questions. After establishing O&S cost targets that are needed to achieve a 

specific readiness or reliability level, the Service and OSD leadership must be resolute 

in making sponsors and materiel developers answerable for achieving the stated cost 

goals or targets. The program management offices and user representatives are adept 

at reading and following the leadership focus and guidance. If the leadership is 

interested in TOC, the workforce will be interested. 

The leadership in sustainment organizations has a major part to play in reduction 

of TOC. Determination in controlling the size of supporting organizations, consistent 

with the work to be accomplished, is a continual leadership responsibility, which is 

necessary to control the indirect costs of weapon system sustainment. Even though it is 

 

9

 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 13 - 
gut-wrenching activity, the leadership of sustaining organizations must vigorously 

control the size of workforce, consistent with the size of the workload. Prime Vendor 

(PV) support or other venues that shift the workload for improved efficiency may leave 

large pockets of employees not fully employed. For example, software-intensive 

systems are rapidly replacing hardware systems and software is typically supported 

through a Contractor Logistics Support arrangement. Resultant overstaffing of 

supporting organizations must be recognized as a drain on scarce resources, and as 

difficult as it must certainly be, leaders must act to correct the condition. These actions 

are beyond the control of program offices, yet they influence a weapon system’s TOC. 

Other Motivation - Besides the encouragement of DoD senior leaders to bring 

attention to TOC, there are other incentives that are needed to motivate different 

stakeholders to reduce TOC. The DoD acquisition community has used an array of 

incentives for many years. The basic approach is to try to align personal and 

organizational objectives, as described below. 

Materiel Developer - Materiel developer practitioners need to be personally and 

organizationally aligned with the goals of the DoD and the Service; typically, this is 

accomplished by synchronizing organizational and personal goals and objectives with 

those of the Department and the Service. An example of this is Management By 

Objectives (MBO), in which organizational goals are pushed down through succeeding 

layers, all the way to the performance objectives of the individual. A manifestation of 

MBO is the Acquisition Program Baseline (APB), wherein the Service objectives are 

established specifically for a program. Achieving or failing to achieve APB goals can 

impact the individual performance appraisal of members of the program office, including 

the program manager. There is also a need to extend MBO to participants who are 

assigned to supporting organizations; MBO can effectively connect the goals of 

separate organizations, but only if there is leadership agreement on common goals. 

Government Employees - In the instance of acquisition practitioners who are 

Government civilians, monetary awards may be given for achievement of particular 

warfighting system performance. For military officers, military awards may be given for 

- 14 - 
achieving or surpassing the required level of system performance within the established 

cost target. Beyond awards, successful performance in program offices often leads to 

promotion in rank and assignment to jobs of higher responsibility. Promotion and career 

enhancing assignments can be powerful motivators. 

A significant motivator for the program office is being able to recoup the savings 

and use those funds where needed elsewhere within the program. This has been an 

area of discussion during the R-TOC Pilot quarterly meetings, but as late as April 2003, 

the formal process for retention of savings remains undefined.10 As the funding saved is 

returned to the US Treasury, the program rarely sees the benefit of its hard work and 

this serves as a disincentive for R-TOC initiatives. 

It has often been said that PMs and responsible personnel within PM offices 

should be rewarded, based on actual life-cycle performance and cost. However, life 

cycle cost plays out over many years and, unfortunately, no practical scheme of metrics 

and payments (or collections) has been instituted to date to reward or penalize program 

managers or key staff. In lieu of motivation for LCC effective systems, other, more 

measurable incentives tend to motivate PMs and their key personnel. For instance, all 

PM offices are incentivized by the clearly stated program schedule and procurement 

cost goals outlined in the APB. These APB goals may become more important to the 

PM than TOC goals that will not be realized until long after the PM has departed for a 

new assignment or retired. If PMs and their key personnel sacrifice TOC-improving 

actions and features to procure more systems, the effect is the Service procures more 

systems that will be more expensive to operate and maintain, while rewarding the PM 

for that same action. 

Contractors - Contractor organizations may be incentivized through their 

Government contracts in numerous ways that might reduce TOC. One of the expected 

approaches might be to offer monetary incentive to the contractor in response for his 

 

10 Sullivan, Robert. “Precision Fires Rocket and Missile System Pilot Update (FOUO).” Briefing to 14th RTOC Quarterly Pilot Program Forum. 29-30 April 2003. 

- 15 - 
control of life-cycle costs. If shared procurement cost savings are part of the contractor 

incentive package and TOC related features and functions are not incentivized, there is 

a strong motivation to reduce the cost of procurement; this choice would occur at the 

expense of desirable, but not required, TOC attributes, such as high reliability, 

diagnostic function, design for maintainability, or other valued attribute. Another way 

that contractors may be motivated is through share arrangements, such as Value 

Engineering or the sharing of technology. Contractors may also be incentivized through 

use of award fees, which are a typical way of rewarding innovation where direct, 

objective measurement of the desired result is not feasible. Occasionally, incentive 

arrangements are set up in such a way that part of the monetary incentive flows through 

the company directly to the responsible employees or subcontractors / vendors. Finally, 

an enormously strong contractor incentive is competition for future work; no doubt this 

motivator might also influence company employees and subcontractors / vendors as 

well. 

Weapon System Sponsor and Users - The sponsor and user are important 

stakeholders with the potential to influence Total Ownership Cost. These participants 

can be agents for affordable operating and support cost by specifying TOC-related 

thresholds and goals in the Initial Concept Document (ICD) and subsequent 

requirements documents. If motivated to “lobby” for manageable O&S costs, they could 

make a substantial difference. Their participation depends on being motivated by their 

leadership and having specific cost and readiness goals that they are willing to “buy 

into.” 

Sustaining Organizations - “Wholesale” and “retail” support organizations should 

be invited to participate in the developmental process, because they will eventually 

become responsible for sustainment of the warfighting system. Representatives of the 

various sustaining organizations, together with the Program Manager, can organize 

responsive, competitive, and innovative support systems capable of efficiently and 

effectively supporting the warfighting system. The sustaining organizations may not be 

motivated to establish affordable sustainment that meets readiness requirements, 

because most are funded through the volume of sales or transactions processed by 

- 16 - 
their organizations and improving efficiency or subsystem reliability may negatively 

impact their flow of funding, workforce level, or capacity used. Their expected bias is to 

be reluctant to try innovative approaches that would take business away from their 

existing organizations. However, effective sustainment must take precedence over 

other organizational considerations if scarce defense dollars are to be used to the 

maximum value. The second step, the decisions on how to achieve that sustainment 

most affordably then should be addressed through analysis of competitive alternatives 

and basing the decision on best value, i.e., choosing the best combination of readiness 

within target O&S cost. 

Buy-in from the various stakeholders is an important ingredient for success; 

failure to achieve “buy-in” will likely result in entrenched organizational resistance to 

change. Difficulty in achieving “buy-in” is an R-TOC Pilot lesson learned.11 The 

stakeholders who participate in cost reduction initiatives are more apt to support 

unpopular downstream actions and work toward their success. Strong leadership 

support over a long period, can contribute to the buy-in process, but participant buy-in 

stems from involvement in the process itself. A useful forum for stakeholder 

participation is the Cost-Performance IPT, or CPIPT, discussed below. 

C. Documents 

Documents that are most important to Total Ownership Cost are the capability

documents prepared by the sponsor, the program manager’s acquisition strategy, the 

Acquisition Program Baseline, and the contracting documents, which task the contractor 

for certain deliverables. Each of these is relevant to TOC reduction because these are 

documents that describe rationale: that is, what the sponsor thinks is important (the 

capabilities documents), which are translated into the program manager’s strategy and 

what he agrees to accomplish (the acquisition strategy and acquisition program 

baseline), and what the contractor is told needs to be done (the RFP and contract). 

 

11 Sullivan, Robert. “Precision Fires Rocket and Missile System Pilot Update (FOUO).” Briefing to 14th RTOC Quarterly Pilot Program Forum. 29-30 April 2003. 

- 17 - 
These will be amplified below and then further addressed as they pertain to each life 

cycle phase. 

Capability Documents - Key performance parameters (KPP) are identified within 

the weapon system’s capabilities documents. KPP are those minimum attributes or 

characteristics considered most essential for an effective military capability. They may 

be validated by the Joint Requirements Oversight Council, the Functional Capabilities 

Board, and the DoD Component. Key performance parameters that appear in the 

Capabilities Development Document (CDD) or Capability Production Document (CPD) 

are included verbatim in the acquisition program baseline (APB). 

There is a choice here. If Cost As an Independent Variable (CAIV) is critical 

within DoD, then a forceful way to express its importance is to designate Total 

Ownership Cost limits as a KPP. The GAO has recommended this as a way to mirror 

commercial best practice.12 Yet OSD does not require making LCC, or TOC, a KPP. To 

be more precise, CJCSI 3170.01C, by their definition of KPP, appears to allow LCC to 

be a KPP, but does not require it.13 There will be additional discussion of capabilities 

documents in Part 1 of Chapter V, as these documents pertain to the Concept

Refinement and Technology Development phases. 

The Joint Strike Fighter (JSF) provides an example of KPPs that address Total 

Ownership Cost. JSF has six KPPs; three of the six address supportability / 

affordability.

14 (1) Mission reliability directly impacts O&S cost for parts replacement and 

the associated expenditure of maintenance man-hours. (2) Logistics footprint 

influences both program acquisition cost and O&S cost; the smaller the footprint, the 

smaller the acquisition cost and the less expensive to transport and maintain. (3) Sortie 

 

12 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

13 Office of the Joint Chiefs of Staff. “Joint Capabilities Integration and Development System.” Chairman 

of the Joint Chiefs of Staff Instruction 3170.01C. 24 June 2003. page A-10 and A-11 

14 Hudson, Jack (Major General, USAF). Briefing: “JSF Program Update.” Program Executive Officer, 

Joint Strike Fighter. October 2003. 

- 18 - 
generation rate depends on maintenance man-hours per operating hour and heavily 

influences design-for-maintainability. These three KPPs have brought about the use of 

autonomics, which includes on-board diagnostics / prognostics and improves the cost 

effectiveness of maintenance. The KPPs all impact affordability and could be at least 

partially re-defined in terms of Average Procurement Unit Cost (APUC) and Operating 

and Support (O&S) costs. 

Acquisition Program Baseline (APB) - An Acquisition Program Baseline is 

required first to be prepared during Technology Development to support a Milestone B 

decision and is updated throughout the acquisition phases. DoDI 5000.2 guidance 

pertaining to the APB is as follows: “Each program or increment shall also have an 

Acquisition Program Baseline establishing program goals—thresholds and objectives—

for the minimum number of cost, schedule, and performance parameters that describe 

the program over its life cycle.” The cost parameters that describe the program over its 

life are its life-cycle costs (LCC), otherwise referred to as TOC. Placing TOC in the 

Acquisition Program Baseline effectively makes TOC part of the “contract” between the 

program manager, his Service, and OSD. 

Acquisition Strategy - The acquisition strategy describes how the program will go 

about acquiring its new weapon system. More specifically, the acquisition strategy 

offers an opportunity to emphasize the importance of TOC and how it will be woven into 

the plans and processes of the acquisition, such as contracting, test and evaluation, 

logistics support, production, risk management, funding / affordability, and strategy for 

tradeoff analysis. The acquisition strategy is required at “Program Initiation for Ships” 

(as early as Milestone A), and for all weapon systems at Milestones B, C, and the Full 

Rate Production DR [Decision Review].”15

Request For Proposal (RFP) - The RFP, which includes the Statement of Work, 

Instructions to Offerors, and Selection Criteria, offers written insights to the contractor 

 

15 Department of Defense. “Operation of the Defense Acquisition System.” DoD Instruction 5000.2. May 

12, 2003. 

- 19 - 
specifying those areas of a future contract that the Government considers very 

important. These particular parts of the RFP do not focus on the product itself, but 

rather, how to perform the contract satisfactorily. Through these parts of the RFP, DoD 

can reinforce the importance of facets that impact TOC, such as the need for 

producibility studies, O&S cost analysis, reliability-centered maintenance analysis, 

innovative sustainment support planning, or aggressive value engineering. 

Supportability Planning Documents - Numerous supportability planning 

documents help define and shape a system’s TOC attributes, and a few key documents 

will be discussed here. Beginning with an in-depth Supportability Analysis (SA), these 

documents play a key role in integrating the supportability concepts into systems 

development and are most effective when used in conjunction with the Systems 

Engineering Process. The SA is critical within the evolutionary development concept as 

the numerous system configurations likely to result will challenge DoD in keeping the 

TOC low in view of the need for user / maintainer training on all configurations, software 

updates, supply stockage on differing models, etc. 

The Post-Production Support Plan helps manage the system supportability 

through the critical time period between the end of production and system disposal. 

While in production, there is generally no lack of engineering expertise or vendors for 

critical parts supporting the system. After production, engineering expertise and 

vendors may rapidly move to other projects and products, creating an ever-expanding 

situation DoD calls Diminishing Manufacturing Sources and Material Shortages 

(DMSMS). A properly designed Post-Production Support Plan identifies potential 

DMSMS situations and attempts to create a supportability strategy that effectively 

addresses DMSMS concerns over the system life cycle. As software is likely to be 

updated much more often than hardware components and requires software engineers 

as “maintainers,” managing the ongoing engineering support is particularly critical. 

Without extensive planning, software-intensive systems are susceptible to 

significant Operating and Support costs due to their inherent complexity (requiring 

patches, new version releases, and other “fixes”), integration requirements, and their 

- 20 - 
relative ease in upgrading capabilities.16 Numerous documents help manage the 

software supportability including the SA, the Post Deployment Software Support 

Concept Document (PDSS CD), Computer Resources Life Cycle Management Plan 

(CRLCMP), and the Computer Resources Integrated Support Document (CRISD).17

D. Tradeoff Analysis Through AoAs, CPIPTs, and other IPTs 

Weapon system programs need to be managed in accordance with both cost and 

performance targets; CPIPTs are a commonly recommended structure to balance cost

and performance variables.18 

Technical Performance aspects that are addressed by CPIPTs encompass an 

array of possibilities, to include specific, measurable logistics attributes, such as 

operational availability (AO) (i.e., the probability that a system or equipment, when used 

under stated conditions in an actual operational environment, will operate satisfactorily 

when called upon.), 19 reliability (mean time between failure, MTBF), and average cost of 

operation (average dollars per mile or some other measure indicative of cost of usage). 

Maintenance hours per operating hour is a meaningful performance metric. Readiness 

rates (i.e., percentage of the time that a system is fully mission capable (FMC), mission 

capable (MC), and non-mission capable (NMC)) are suitable performance metrics for 

use in cost-performance analysis.20 The various choices (tradeoffs) that must be made 

during the systems engineering process depend on the inclusion of cost analysts and 

functional experts, including logisticians. CPIPTs have the potential to be a potent force 

in controlling costs while achieving the required level of performance: but only if the 

 

16 Humphrey, Watts S. Managing the Software Process. Addison-Wesley Publishing Company. 1990. 

17 Department of the Air Force. Software Technology Support Center. “Guidelines for Successful

Acquisition and Management of Software-Intensive Systems: Weapon Systems, Command and Control 

Systems, Management Information Systems.” Version 3.0. May 2000. 

18 Kaminski, Paul. Memorandum: “Reducing Life Cycle Costs for New and Fielded Systems (with CAIV 

Working Group Report attached). Office of the Secretary of Defense. December 4, 1995. 

19 Blanchard, Benjamin S. Logistics Engineering and Management, 5th ed. Prentice Hall. 1998. 

20 Gansler, Jacques S. “Moving Toward a Market-Based Government: The Changing Role of Government 

as the Provider.” IBM Endowment for The Business of Government. University of Maryland. 2003. 

- 21 - 
team is properly constituted. At the subsystem or component levels deep within the 

work breakdown structure, most cost-performance decisions are the domain of the 

subordinate IPT that probably does not have the luxury of a full-time cost analyst or 

logistician. Nevertheless, the decisions must include O&S cost analysis and logistics 

perspective, albeit obtained on a part time basis and probably accomplished by 

contractor personnel.

Tradeoff analysis is performed to balance technical performance, cost, and 

schedule, within acceptable risk levels. Tradeoff analysis is an essential function within 

the System Balance and Control functions that are performed as part of the Systems 

Engineering Process; tradeoff analyses are implemented through Integrated Product 

Teams (IPTs). Successful tradeoff analysis requires that major stakeholders participate 

in the tradeoff process. CPIPTs are central to tradeoff analyses that address cost 

versus technical performance and are discussed above. A Cost-Benefit Analysis, which 

is similar in that it compares cost and performance, supports the preparation of the 

Initial Capabilities Document (ICD), leading up to the Concept Decision. The tradeoff 

referred to as analysis of alternatives (AoA) occurs in the pre-acquisition phase to 

compare the estimated costs, suitability, effectiveness, advantages, and disadvantages 

of the various alternative systems. This is germane to Concept Refinement and 

Technology Development phases and is further discussed in Appendix 1 to this working 

paper. 

Risk management is discussed elsewhere in this paper. However, it is an 

important aspect of tradeoff analysis, because perceived levels of risk should shape 

choices. If the potential consequences of decisions are recognized at the time that 

decisions are made, not only might the identification of risk influence the tradeoff choice, 

but it might also initiate risk management activity appropriate to the circumstances. 

E. Metrics 

Program offices establish and track numerous metrics throughout the 

developmental process. Many of these metrics eventually transition into the acquisition 

Program Baseline (APB), which forms a “contract” between the program manager and 

- 22 - 
his leadership in his Service and OSD. APB metrics include measures of technical 

performance, cost, and schedule. Some of metrics have special significance. For 

example, certain cost and schedule metrics are of such importance that major 

deviations (breaches) in performance must be reported to the Congress. Another 

classification of metrics that takes on special significance is key performance 

parameters (KPPs), mentioned briefly in the leadership section, above. KPPs are 

specified by the sponsor in capability documents and are, by definition, of such 

significance that the failure to meet a KPP requires an assessment of military utility and 

may possibly cause an examination of whether the program should be terminated. 

When costs are designated a key performance parameter, they reach the necessary 

level of importance where cost growth beyond the threshold requires PM action. 

Control of cost must be made unavoidable, such as is accomplished by KPP 

designation. DoD has “talked the talk” about CAIV for many years but has, to a large 

extent, avoided “walking the walk.” Designating TOC a KPP would improve cost 

discipline and help avoid tradeoffs that favor the procurement cost, but might incur a 

much higher associated life cycle cost. 

Total Ownership Cost metrics are discussed throughout this paper. Cost 

treatment can be made congruent with other requirements addressed within the 

Systems Engineering Process: that is, first setting the top level cost requirements, then 

decomposing larger requirements into smaller cost elements, and then managing the 

work to achieve the required cost objectives. Considering cost as part of the Systems 

Engineering Process makes sense because cost metrics should not be considered in a 

vacuum. Rather, cost has relevance when coupled with what it is able to ”buy.” In DoD 

acquisition, discussion of cost is relevant when hinged to warfighting system 

performance. Hence the term, “Bang for the buck.” That is, how much performance 

can be bought for a specified cost? The “bang” is measured in terms of specific 

performance requirements. The warfighting requirements, or “bang,” typically are given 

attention during testing to be sure they can be met by the weapon system. However, a 

facet that affects warfighting ability but sometimes does not receive enough attention 

during test and evaluation is the amount of resources required to keep the weapon 

system in operation or quickly return it to operation; these resources can be measured 

- 23 - 
in terms of cost to achieve the required operational availability, AO. A major portion of 

Total Ownership Cost is devoted to keeping a weapon system in operation and, 

therefore, it makes sense to connect readiness metrics to a particular TOC metric, O&S 

cost. 

Another TOC metric is average procurement unit cost (APUC). There needs to 

be a metric that guides the cost of production, which is certainly not a trivial cost. APUC 

is the total procurement cost divided by the total procurement quantity. This metric can 

be calculated for the whole program or can be separately calculated for each production

lot.21

 

PROGRAM

ACQUISITION 

COST PLUS

• Operating &

Support 

• Mil Personnel

• Modifications

PROCUREMENT 

COST PLUS

• Facilities 

• RDT&E 

• Other

Procurement

• Recurring 

Flyaway 

• Material

• Labor

• Nonrecurring

Flyaway 

• Material

• Labor

FLYAWAY

COST PLUS

• Tech Data

• Publications

• Support 

Equipment 

• Training

Equipment 

• Contractor

Service

• Other Gov’t 

Costs

WEAPON SYSTEM COST

PROGRAM ACQUISITION COST

LIFE CYCLE COST

•Disposal

WEAPON

SYSTEM

COST

PLUS

• Initial

Spares 

• MRSP*

PROCUREMENT COST

*Mobility Readiness Spares Package

Figure 2, Life Cycle Cost Composition22

 

21 Rush, Benjamin C. “Cost as an Independent Variable: Concepts and Risks.” Acquisition Review

Quarterly. Spring 1997. 

22 Kaminski, Paul. Memorandum: “Reducing Life Cycle Costs for New and Fielded Systems (with CAIV 

Working Group Report attached). Office of the Secretary of Defense. December 4, 1995. 

- 24 - 
A Little History about cost metrics to illustrate a point - Over the past thirty years, 

cost metrics have been selected based on particular interests of the time. During the 

1970s one of the cost metrics was design to unit production cost (DTUPC). Over 

roughly the same time period, acquisition cost metrics have included Flyaway Cost, 

Weapon System Cost, Procurement Cost, Program Acquisition Cost, and Life Cycle 

Cost. The component structure of these costs is described in the CAIV Working Group 

Paper and an adaptation from the referenced document is provided in figure 2.23 More 

complete definitions of the various costs are provided in DoD 5000.4-M.24 More recently 

cost metrics have included average procurement unit costs (APUC), an important 

component of TOC.25 However, reliance on only one of the cost metrics depicted in the 

chart, except for Life Cycle Cost, falls short. That is, except for the LCC metric, each 

one, looked at individually, provides an incomplete picture of the Total Ownership Cost. 

Acquisition cost, traditionally the most relevant cost for a PM, represents only about 

twenty-eight percent of the TOC (See figure 3). TOC needs to be considered 

holistically, because as is apparent, it is the sum of numerous different costs. Each of 

the different costs can be reduced individually, but sometimes reducing one component 

of TOC can cause the aggregate cost to rise. However, the real goal is to reduce the 

aggregate cost, that is, the Total Ownership Cost. 

 

23 Ibid. 

24 Assistant Secretary of Defense (Program Analysis and Evaluation). “Cost Analysis Guidance and 

Procedures.” Department of Defense. DoD 5000.4-M. December 1992. 

25 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 25 - 
Figure 3: Nominal Life-Cycle Cost of Typical DoD Acquisition Program with a Thirty-Year Service Life 26

Major cost categories are briefly discussed below, with generic suggestions 

where cost might be wrung out, shrinking the aggregate Total Ownership Cost. Of 

course, Total Ownership Cost (the largest components of which are APUC and O&S 

costs) should be a central concern in any tradeoff analysis. For this to routinely occur, 

the program manager and other senior and executive leaders must relentlessly stress 

TOC and ask their questions in terms of impact of TOC. 

Research, Development, Test & Evaluation (RDT&E) - This category of costs

pays for the program management during development, design and testing of the 

system, including at least a portion of low rate initial production. It also includes inservice engineering, which covers redesign work to correct O&S cost drivers, and 

accomplish other redesign while the system is in service. Evolutionary Acquisition 

modifications to the core capability “shall be funded, developed, and tested in 

manageable increments.” RDT&E funds the developmental portion of each increment. 27

During the developmental phases, the opportunities to reduce Total Ownership 

Cost by reducing RDT&E depend on carefully managing costs within the design effort, 

 

26 Ibid. 

27 Department of Defense. “Operation of the Defense Acquisition System.” DoD Instruction 5000.2. May 

12, 2003. pg 3. 

- 26 - 
possibly via use of Earned Value Management. Sometimes it is possible to gain 

efficiency in testing, reducing cost through concurrent testing although this dramatically 

increases risk. Ironically, RDT&E expenditures may open the door to overall reduction 

in Total Ownership Cost, because use of RDT&E in redesign initiatives may result in 

more producible and/or more reliable subsystems or components. From this 

perspective, RDT&E is a very scarce resource that, when expended with the proper 

focus, may reduce TOC overall. The R-TOC Pilots including CVN-68 Class Aircraft 

Carrier, CG-47 Class Aegis Cruiser, LPD-17, and AAAV provide excellent examples of 

RDT&E expenditures that are expected to result in large cost savings or avoidance at 

such time as the new systems or modified components are placed in operational 

service. 

Procurement - Procurement funding pays for production as well as initial spares, 

special tools, and test equipment. 

In rough terms, the nominal cost of production is about 20% of total ownership 

cost. Average procurement unit cost (APUC) offers a metric that can be used for 

control of production cost. The APUC metric may be used to control the cost of 

procuring the entire system or procurement of each production lot. At the weapon 

system level, APUC is included in the APB, and is also reported in a program’s Selected 

Acquisition Report (SAR). 

One of the most effective means to control procurement costs is through 

competition. Although it is not always possible to use competitive methods, production 

should be competed, if possible. Where competition is not feasible at the prime contract 

level, competition at the subcontractor or vendor level may also drive costs down and 

sometimes it can be encouraged by component breakout. 

“Should-cost” or “must-cost” studies may also achieve reductions in procurement 

cost, but are time consuming to perform. Government should-cost analysis prior to 

entry into a new contract adds discipline to cost control. If the cost architecture has 

been tightly controlled throughout the development process, should-cost analysis would 

seem a logical extension of the effort. Government should-cost analysis would further 

- 27 - 
seem an appropriate activity to cement the understanding of cost between the 

customer, i.e., the Government, and the contractor.28

Use of Activity-Based Costing (ABC) has the potential to drive down 

inappropriately applied overhead costs by helping to control overhead, both in 

contractor and Government organizations. Applied correctly, ABC shows the amount of 

indirect costs consumed by an activity, for example, a warfighting system. In the hands 

of competent managers, it is a tool that assists in applying indirect costs logically, 

statistically, and equitably. At such time as the business base changes, ABC has the 

potential to identify management actions to control indirect costs applicable to the new 

base. More specifically, ABC should allow managers to recognize when overhead is 

too large and needs to be trimmed resulting from a change in level of work. 

Operating and support costs - O&S pays for most sustainment costs and 

administration during the weapon system’s sustainment phase, e.g., repair parts or the 

labor cost associated with an engine repair. It includes uniformed personnel and civilian 

labor costs. Operations and Maintenance (O&M) appropriations pay a large part of 

O&S costs. O&M funds also pay for disposal costs.29

Operating and support costs may be dramatically reduced by identifying O&S 

cost drivers and correcting them, often, but not always, through redesign. The most 

efficient time to accomplish this is during the pre-acquisition and development phases, 

while the system is only a paper design and may be changed relatively inexpensively. 

However, cost drivers that are discovered during the production and sustainment 

phases also may lead to redesign or other actions that can save or avoid significant 

expenditures. DoD Pilot programs exhibit many useful examples of R-TOC, such as 

Abrams Tank engine (PROSE), the SH-60 Affordable Readiness Initiatives, Aviation 

 

28 Forsberg, Kevin, Hal Mooz, and Howard Cotterman. Visualizing Project Management: A Model for 

Business and Technical Success. 2nd Edition. John Wiley & Sons, Inc. 2000. p 33.

29 Department of Defense. “Operation of the Defense Acquisition System.” DoD Instruction 5000.2. May 

12, 2003. 

- 28 - 
Support Equipment reliability improvement initiatives, the EA-6B Inertial Navigation 

System, and SLAM-ER Data Link Pod. 

The AEGIS system provides an example of a very successful R-TOC effort. 

Each ship requires microwave-producing equipment that includes a device called a 

Crossed-Field Amplifier (CFA). Early in AEGIS deployment, the CFA proved to be a 

cost driver with relatively expensive failures attributable to an arcing condition between 

the cathode and anode in the microwave tube. This arcing caused the CFA to fail at 

about 6,000 hours Mean Time Before Failure (MTBF). A change to anode metallurgy, 

along with other minor changes, reduced arcing and increased MTBF to between 

40,000 and 45,000 hours, which drastically reduced the frequency of corrective 

maintenance, maintenance man-hours, and stockage level requirements, while 

simultaneously improving the reliability and availability of the microwave system. This 

dramatic improvement was the result of a team effort among the AEGIS Program Office, 

Communications and Power Industries (CPI, the vendor that provided the CFA, was 

formerly part of Varian), Crane Naval Surface Warfare Center (the Navy In-Service 

Engineering Agent for AEGIS microwave tubes), the Navy MANTECH Office, and 

Raytheon (the prime contractor, located in Sudbury, MA). This TOC reduction affects 

twenty-seven AEGIS Cruisers, each of which has 76 CFAs and forty AEGIS Destroyers, 

equipped with 38 CFAs. In 2002 dollars, the annual cost avoidance averages about 

$1.9 million per AEGIS Cruiser and $950 thousand per AEGIS Destroyer. Eventually, 

TOC reduction will benefit an additional twenty-two AEGIS destroyers that are yet to be 

completed and deployed, each of which will have thirty-two CFAs. 

Another O&S cost driver example applies to the M1 Abrams Tank, a TOC Pilot 

Program, second only to Apache Helicopter in Army system O&S cost. The AGT-1500 

tank engine is the obvious cost driver, resulting from both fuel consumption and 

maintenance. The engine was recognized from the outset as fuel inefficient, but was 

selected anyway because it was relatively lighter weight than the alternative 1500 

horsepower diesels and the resultant weight savings could be applied to additional 

armor protection. In the field, AGT-1500 components demonstrated lower reliability 

than had been expected. Currently there are short-term and long-term initiatives to 

- 29 - 
reduce this cost driver. In the short term, the Government and contractor have entered 

into a partnership to overhaul engine components, using contractor-provided parts and 

technical support along with Government skilled-labor and facilities; this partnership is 

called PROSE, the Partnership to Reduce O&S Costs, Engine initiative. Long-term, the 

LV100-5 engine program will replace the old AGT-1500 and is expected to reduce 

engine O&S cost by two-thirds, to reduce fuel consumption by about one-third, and to 

provide easier access and maintenance. The LV100-5 is a Honeywell and General 

Electric partnership effort.30 

Sometimes O&S economies may be achieved by contracting for repair parts in 

conjunction with production contracts.31 This approach may be able to take advantage 

of economies of scale, buying repair parts and production parts at the same time. This 

creative initiative, highlighted in an article by Michael Bogner et al., requires thorough 

understanding of component failures for a new weapon system, analysis of the 

economies of scale that are offered by the contractor, and the storage costs for the 

repair parts. 

O&S funds may be saved, while at the same time effecting better support by 

competitively sourcing sustainment support. This approach opens the door for choosing 

the best value sustainment support: organic, depot, commercial, or some combination 

thereof. Software support, in the form of software engineers / programmers, is mainly 

available through commercial sources, but can be planned for in a similar manner. Pilot 

programs that have used creative approaches to sustainment support are Common 

Ship, LPD-17 Class Amphibious Transport Dock Ship, F-117 Nighthawk, TOW 

 

30 Hoffer, Kip. E-mail and telephonic correspondence. Crane Naval Surface Warfare Center, In-Service 

Agent for AEGIS Microwave Tubes. November 17-19, 2003. 

31 Bogner, Michael, Chuck Wong, and Bernie Price. “Quantity Discounts/Economic Order Quantity: New 

Quantity Discount Analysis Tool Lets DoD Buyers Save on Total Cost and Receive More Goods.” 

Program Manager. September-October 2002. 

- 30 - 
Improved Target Acquisition System (ITAS), and Abrams Tank. Discussion of their 

initiatives is available on the IDA website for R-TOC.32

Service Life Extension Programs may offer significant opportunity for cost 

savings or avoidance. Although not proven to save cost in all instances, there are 

recognized and validated instances where O&S cost savings are of such a magnitude, 

that the cost avoidance generates a significant portion of the funding for replacement 

systems. Cost analysis needs to be done cautiously, and validated by an independent 

cost estimate to be sure that the expected savings or avoidances are real.33 R-TOC 

Pilot programs that have used this approach are Heavy Expanded Mobility Tactical 

Truck (HEMTT), AH-64 Apache Helicopter, and CH-47 Chinook Cargo Helicopter.34

The Army’s 2 1⁄2 Ton Truck Extended Service Program (ESP) is an example of a 

program specifically designed to reduce O&S costs through reengineering of an existing 

platform. The ESP goals were to provide a modernized tactical wheeled platform that 

could be inexpensively procured, add 20 years to the life of the truck, perform at least 

60 percent of the new replacement tactical wheeled vehicle requirements, and 

significantly reduce O&S costs to the field. Key Performance Parameters (KPPs) 

included a mean-time-between-hardware-mission-failure (MTBHMF) of 2,400 miles – an 

improvement factor of 2.4 over the existing system, eight miles per gallon (MPG) fuel 

efficiency – a fuel consumption decrease of 20 percent, and mean-time-to-repair 

(MTTR) of one hour per thousand miles of operation – one half of the MTTR achieved 

by the existing platform. With several Key Performance Parameters focused on TOC 

efficiencies, system trade-offs served to improve the TOC attributes of the ESP. The 

results of this TOC focus is evident in the ESP’s achieved results: The achieved 

MTBHMF was 11,300 miles – over four times the KPP threshold and a factor of 11 

 

32 Institute for Defense Analysis. Website: “Reduction of Total Ownership Costs.” 

http://rtoc.ida.org/rtoc/rtoc.html. n.d. 

33 Congressional Budget Office. “The Effects of Aging on Costs of Operating and Maintaining Military 

Equipment.” August 2001.

34 Institute for Defense Analysis. Website: “Reduction of Total Ownership Costs.” 

http://rtoc.ida.org/rtoc/rtoc.html. n.d. 

- 31 - 
times greater than the existing platform, fuel economy was 10 mpg – a 25 percent 

improvement over the threshold and a 67 percent improvement over the existing 

system, and the MTTR was reduced to 0.65 hours per thousand miles – a 35 percent 

improvement over the threshold and a 300 percent improvement over the existing 

system. 

Disposal - costs are paid out of O&M funds. In some cases, disposal costs may 

be avoided by making the system available to an ally through Foreign Military Sales or 

Military Assistance Program (MAP). There is the potential for recouping funding into the 

same procurement appropriation line that may then be applied toward funding a 

replacement system. 

More generally, items must be disposed of through Defense Reutilization and 

Marketing Office (DRMO). Disposal may be a significant expense, depending on 

whether the weapon system contains hazardous materials. HAZMAT content can be 

controlled during the development phases and should be considered as part of tradeoff 

analysis. 

According to DoD 5000.4-M, disposal costs, such as demilitarization, 

detoxification, and long-term storage of hazardous materials are included in cost 

estimates. One would expect that the costs to de-fuel nuclear power plants are 

significant and should be a planned O&M expenditure. 

F. Databases and Data Collection 

Tools for data collection are still evolving. Multiple databases provide data that 

are then used for analysis and decision-making. A Congressional Budget Office Report 

published in August 2001 described anomalies in the data that called the utility of the 

data into question.35

 

35 Congressional Budget Office. “The Effects of Aging on Costs of Operating and Maintaining Military 

Equipment.” August 2001.

- 32 - 
Software estimation, both in terms of system software resources (throughput, 

processor speed, storage media, etc.) and in terms of supportability resources (the 

number of software engineers needed to perform critical sustainment functions) have 

traditionally been very difficult to estimate.36 The software size, number of function 

points, and need for support engineers / programmers may or may not be comparable 

to other similar systems, making it very difficult to use existing databases to accurately 

estimate a new system’s requirements. 

Utility for Cost Estimation. Data pulled from multiple databases provide the basis 

for cost estimation that feeds tradeoff analyses and other decision processes. It is 

obvious that cost databases provide a critical function and effort should be expended to 

ensure that they achieve acceptable levels of accuracy and functionality. Part of the 

database problem is “garbage in, garbage out.” But additionally, data to support cost 

models and cost estimating needs to be fully accessible and integrated. This is a cost 

of doing business for CAIV and R-TOC. Library research indicates that there is 

considerable work going on to clean up the data and/or make the data easier to extract 

and analyze.37 The Navy VAMOSC database, an important contributor of O&S cost 

information, has undergone considerable clean-up effort. The Air Force system is 

AFTOC and has been updated.38 Contractor database work includes the Air Force’s 

JSTARS Cost and Performance System (JCAPS) a database and analysis tool, which is

being developed by Northrop Grumman. The Marine Corps AAAV is using a system 

called the O&S Cost Analysis Model (OSCAM) that is also being used by the Navy and

Air Force.39

 

36 Humphrey, Watts S. Managing the Software Process. Addison-Wesley Publishing Company. 1990. 

37 Kunc, Wendy. Naval Cost Analysis Division. “VAMOSC Program Update” Briefing to Third Annual 

Naval VAMOSC User Conference. 9 July 2003; Bowles, Jennifer. NAVAIR. “Example Uses of VAMOSC 

Data.” Briefing to Third Annual Naval VAMOSC User Conference. 9 July 2003; and Stoll, Lawrence. 

NAVAIR. “Applications of VAMOSC at NAVAIR: A User Perspective on VAMOSC-MAMSR Databases.” 

Briefing to Third Annual Naval VAMOSC User Conference. 9 July 2003. 

38 McNutt, Gary. “Air Force Total Ownership Cost (AFTOC) (FOUO).” Briefing to R-TOC Pilot Programs,

7th Quarterly Forum. 25 July 2001. 

39 Griffith, Sean, and Bruce McKinney. “Advance Amphibious Assault Vehicle: Operations and Support 

Cost Analysis Model.” Briefing to R-TOC Pilot Programs, 15th Quarterly Forum. 5 August 2003. 

- 33 - 
One of the tests for cost databases and analysis tools is their ability to support 

cost-performance trades at the subsystem or component level. IPTs need to be able to 

access component cost data that includes procurement cost, O&S cost, and inherent 

reliability. 

G. Activities and Tools that Support CAIV and R-TOC 

Leadership interest - Leadership sets the policy and then motivates personnel to 

meet the requirements set. Workers do best what the boss checks. If leaders 

vigorously insist on searching out and reducing cost drivers, then the workforce will 

react to that guidance. By their questions, leaders can change the culture, one 

opportunity at a time. Focus on cost drivers should achieve a good effect on the 

relevant warfighting system, but the greater gain is in changing the culture of the 

acquisition workforce to one of continually searching for and attacking cost drivers—no 

matter what phase of the program. 

Sustainment Through Competitive Sourcing Decisions - As a weapon system 

develops, there must be a determination made of the support system that will provide 

the best value. This is an important decision when measured in terms of readiness, 

military labor expended, and in terms of the resources over the system’s life cycle. All 

the possibilities need to be searched out and then the best value selected that meets 

the required operational readiness and flexibility at an affordable cost. This is a difficult 

process, as said elsewhere in this paper, due to the “rice bowls” involved and the 

concern for operational flexibility, particularly during wartime or contingencies. 

Activity-Based Costing - ABC provides a way to equitably attribute indirect costs 

to the product or organization that consumed it in a manner that is logical and statistical. 

ABC clarifies the amount of overhead burden that a product or weapon system is 

carrying, such that cost-based business decisions can be made more accurately. In 

development and production, costs may be incorrectly charged, particularly in the case 

of a shifting business base. An example of this in DoD is the increasing surcharges 

levied on repair parts, resulting from a shrinking business base. ABC makes clear to 

managers what their indirect burden rates are, and pressures them to make the 

- 34 - 
necessary adjustments in excess capacity to avoid increasing a customer’s burden rate. 

ABC is applicable to both Government organizations and defense contractors. 

In principle, Activity Based Costing ought to provide utility for DoD organizations. 

However, care must be taken in where to use ABC and where it is unlikely to be 

successful. Activity drivers that must be used in ABC may not always be simple; in 

some cases, multiple activity drivers are necessary to provide accuracy. ABC is not 

likely to be successful in circumstances where the work being done is not repetitive; in 

such cases, accurate activity drivers are probably not possible to devise. Even if ABC 

should be found not to provide reliable distribution of overhead burden for a 

Government organization, it may, nevertheless, provide accurate treatment of indirect 

costs in contractor facilities. The successful application of ABC would appear to depend 

on whether or not the work activity is of a repetitive nature and whether accurate activity 

drivers can be devised. 

Earned Value Management - EVM is an accounting mechanism wherein specific 

activities are assigned along with resources and schedule required. In other words, an 

individual or group is assigned work to do and provided funding and a schedule for 

completion. EVM decomposes the work breakdown structure all the way down to the 

task, referred to as a work package, that might take a week to a month or possibly as 

long as several months to complete. If the organization has a real time or near real time 

cost accounting system, then managers, Government and contractor, by watching the 

dollar expenditures can determine which work is taking more resources than planned or 

time than scheduled. This is a very effective way to control expenditures both in SDD 

and in production. EVM is not required for fixed price contracts but high quality 

contractors should carefully manage expenditures; if the RFP spells out tight control of 

funds in sections L and M of the RFP and also in the performance-based SOW, 

conscientious contractors may be encouraged to choose EVM, required or not. 

Reliability-Centered Maintenance (RCM) - A useful tool for controlling cost is 

RCM, because one of the goals of RCM is accomplishing only maintenance activity that 

is value-added. Interestingly, some of the routine maintenance performed on 

- 35 - 
warfighting systems is not only unnecessary but also reduces the reliability of the 

system. For example, an unnecessary inspection may cause wear due to partial 

disassembly of components; reassembly may result in a defect such as a crossthreaded fastener. Besides eliminating unnecessary maintenance, another positive 

outcome of RCM might be the design of a higher reliability component that increases 

weapon system availability. 

The best time to perform RCM is probably early in the developmental cycle.40 

This might be during Technology Development or early in SDD. However, whatever the 

life cycle phase of a weapon system, RCM may be beneficially applied, even late in a 

system’s life. The use of RCM is consistent with maintaining system databases. RCM 

may be accomplished in IPTs. Surprisingly, RCM, although of a detailed nature, is not 

terribly expensive and should more than pay for itself. Finally, RCM should continue 

throughout a system’s life cycle with short reviews every nine to twelve months.41

The AAAV program embraced RCM in late 1999 and early 2000. Over two small 

contracts with the modest expenditure of about $400,000, the program trained about 60 

personnel, trained and certified five facilitators, and in less than a year, had an RCM 

program up and running. This effort occurred during the same period that the AAAV 

program was fabricating Program Definition and Risk Reduction (PDRR) prototypes. 

Program personnel indicated that AAAV actually would have benefited from embarking 

on RCM even earlier, at the time that the system specification was being written. The 

AAAV leadership team was sufficiently convinced of the benefit of RCM, that they 

requested the contractor to revise plans for the SDD Phase and to conduct RCM 

analysis in lieu of the previously planned Failure Modes and Effects Analysis (FMEA) / 

Failure Modes, Effects, and Criticality Analysis (FMECA).42

 

40 Moubray, John. Reliability-centered Maintenance. 2nd Edition. Industrial Press Inc. 1997. 

41 Ibid p284-286. 

42 Garza, Luis. Thesis: “A Case Study of the Application of Reliability Centered Maintenance (RCM) in the 

Acquisition of the Advanced Amphibious Assault Vehicle (AAAV).” Naval Postgraduate School. December 

2002. 

- 36 - 
Software Estimation - There are numerous software estimation tools designed to 

assist the materiel developer and the contractor assess the size, development 

schedule, manage requirements, and estimate software support personnel. All of these 

factors are significant cost drivers, with the software support personnel impacting O&S 

costs over the deployed life of a software-intensive system. As our systems continue to 

become more dependent upon large and complex software programs, software 

supportability will continue to grow as a driver of TOC and remain in the forefront of 

TOC reduction efforts. 

Lean Manufacturing - Since publication of The Machine That Changed the World 

in 1990, “lean” manufacturing has received increasing recognition as an approach for 

squeezing waste out of manufacturing processes, useful for prime contractors and 

vendors alike.43 Radical reengineering (kaikaku) and continuous process improvement 

(kaizen) both have a place in lean manufacturing. Lean manufacturing is not easy, but 

in numerous cases and in different industries, it has wrought dramatic improvement, 

both short- and long-term.44

An example of the effectiveness of lean manufacturing is Pratt & Whitney, whose 

business base dropped precipitously in 1991 as the result of the end of the Cold war 

and a world recession. Over several tumultuous years (1991-1995), Pratt made major 

strides by applying lean techniques. Pratt managers, guided by “lean” consultants 

called sensei, were able to reduce their manufacturing throughput time (cycle time) from 

eighteen months to six. Work-in-process and finished-goods inventories were driven 

down by 70%; this allowed a large central warehouse to be closed. Quality issues fell 

by more than half. Unit costs for manufactured parts typically dropped by 20%. All 

these reductions occurred during a business down-cycle when production volume fell by 

50%, which under normal circumstances would have caused unit costs of manufactured 

 

43 Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine That Changed The World. 

Rawson Associates, a Division of Macmillan Publishing Company. 1990. 

44 Womack, James P and Daniel T. Jones. Lean Thinking:Banish Waste and Create Wealth in Your 

Corporation. Simon and Schuster. 1996. 

- 37 - 
parts to increase by 30%.45 Although DoD is still learning about lean techniques, Pratt & 

Whitney experience suggests the potential for large reductions in the cost of defense 

products through lean production. 

Commercial Operations and Support Savings Initiative (COSSI) -

COSSI is a program jointly shared between the U.S. Army, Navy, and Air 

Force with the Office of Secretary of Defense (Director, Defense Research 

& Engineering) providing administrative oversight. COSSI's mission is to 

leverage private sector research and development by inserting leading 

edge commercial technologies into fielded military systems to reduce 

operations and support costs.46

COSSI, itself, is an adaptation of use of commercial items (CI), an acquisition 

reform initiative; however, COSSI more specifically develops technology to be inserted 

into existing systems. It is completely consistent with R-TOC, but is funded separately, 

in accordance with PL 105-85 Sec 203 (g) (FY 98 Authorization Act).47 Stage I funding 

comes from COSSI funding; Stage II funding is budgeted and provided by the program 

office. Successful COSSI is envisioned to take two to three-years in Stage I, followed 

by Stage II procurement of modification kits and installation. The opportunities are that 

funding from outside the program can be used to provide new systems or components 

that provide improved technology for better performance and/or reduced O&S costs. 

The apparent risks are in communications, contractor performance, and contracting 

methods. Poor communication between materiel developer and user may result in loss 

of customer interest or requirements creep. Poor communication between contractor 

and materiel developer may result in failure to achieve the desired technical 

improvement or necessitate a schedule slip.48

 

45 Ibid. 

46 Department of Defense. Office of Technology Transition. Commercial Operations and Support 

Initiatives website. http://www.acq.osd.mil/es/dut/index.htm. n.d. 

47 Ibid. 

48 Holland, Charles J. and Donna Richbourg. “Commercial Operations and Support Savings Initiative 

Handbook.” Office of the Under Secretary of Defense. 14 December 2001. 

- 38 - 
COSSI may benefit from high performing IPTs and clearly articulated contractual 

instruments. For Stage II, budgeting actions need to be carefully timed to avoid a 

schedule slip. Stage II contractual actions appear to require a J&A in most instances to 

retain the contractor who has previously done the Stage I developmental work.49 

Like any other acquisition activity, COSSI requires careful planning and close 

communications among materiel developer, customer, and contractor. In instances 

where there is commercial application, the contractor may enter into a sharing 

arrangement that reduces the cost to the DoD.50 Share arrangements have been 

simplified by the use of Other Transaction Authority (OTA). Unfortunately, there are 

regulatory and legal obstacles to the streamlined use of OTAs, part of which 

necessitates re-competition between Stage I and Stage II.51

An example of a COSSI success appears to be the USAF MILSTAR Antenna 

Program Electronic Systems Center. It replaces a high maintenance component, 

described as “the worst box in the MILSTAR Terminal” that was depleting available 

funds due to its excessive unscheduled demand for repairs. The mean time between 

failure (MTBF) for the old component was less than 1000 hours; the new design is 

predicted at 28,000 hours. Ordinarily, COSSI results in dual-use systems or 

components, but in this case the result is a unique military product employing 

commercial technology and commercial practices, manufactured in a commercial 

vendor’s plant; the original component was manufactured by Raytheon. As with other 

COSSI projects, this one required significant management attention, requiring 

experienced managers on both Government and contractor sides to bring in a 

successful result.52

 

49 Ibid. 

50 Ibid. 

51 DoD COSSI Independent Assessment Executive Roundtable. “An Evaluation and Assessment of the 

DoD Commercial Operations and Support Savings Initiative Program.” The National Center for Advanced 

Technologies Report Number 01-C01A. September 2001. 

52 Ibid. 

- 39 - 
Performance-Based Logistics (PBL) -

PBL is the output performance parameters to ensure a system-ready 

capability, the assignment of responsibilities and implementation of 

incentives for the attainment of the goals associated with these 

performance parameters, and the overall life-cycle management of system 

reliability and sustainment, and total ownership cost.53

[PBL is] a strategy for weapon system product support that employs the 

purchase of support as an integrated, affordable performance package 

designed to optimize system readiness. It meets performance goals for a 

weapon system through a support structure based on long-term 

performance agreements with clear lines of authority and responsibility54

PBL begins in Pre-Acquisition as the support concept is first considered. PBL is 

driven by specific warfighter support requirements; it is accommodated by innovative 

partnerships between DoD customers of logistics support, the DoD providers of that 

support, and commercial providers, leveraging the core competencies of each. PBL 

metrics are consistent with TOC metrics such as maintenance cost per operating hour 

or ton-mile. PBL suffers from the difficulty in tying databases together to measure 

support performance; this mirrors problems in obtaining TOC data. 

The USMC Medium Tactical Vehicle Replacement is an example of the 

innovative support envisioned by PBL. The Marine Corps maintains these trucks at the 

organizational support level. Intermediate and depot level support are provided by 

Oshkosh Truck Corporation (OTC); this contractor logistics support (CLS) includes both 

maintenance and supply, peacetime and wartime, and extends worldwide. Wartime 

operations have already been tested during Operation Iraqi Freedom. The support 

contract is firm-fixed price (FFP) and indefinite delivery-indefinite quantity (IDIQ); its 

duration is potentially 10 years, including a 3-year base period with seven option years. 

During the first three years, the contract dollars are bounded by maximum and minimum 

amounts in each year. Maintenance can be conducted on-site or at Oshkosh but must 

 

53 Defense Acquisition University. “Program Managers Tool Kit.” 12th Edition. December 2002. 

54 Kratz, Louis. “Developing a Performance-Based Strategy.” Briefing to PEO/SYSCOM Workshop. Spring 

2002. 

- 40 - 
meet time windows. Repair parts are a split responsibility with OTC providing about 

2500 different parts (again, within tight time guidelines) and Defense Logistics Agency 

supplying an additional 1000 common parts. The expected TOC reduction for MTVR is 

$546.6 million in cost avoidance.55

PBL is mandated by USD(ATL) memo, and is addressed in Defense Acquisition 

Guidebook (C.2.8.3) as the preferred approach for product support; FY 03-07 DPG 

requires PBL implementation planning for ACAT I & II fielded systems by March 2002; 

the Sep 01 QDR expected PBL to compress the supply chain and improve readiness. 

Availability of Cost Driver Data for New Technology - The better the available 

cost information pertaining to legacy systems, the better cost estimates that may be 

established for new systems in development. This data needs to be available at the 

subsystem or component level. In addition to the cost driver associated with past 

system software, an analysis of the tools, techniques, and software requirements must 

be accomplished, as the software development effort may be comparable or radically 

different from the previous like-system. Cost drivers at subsystem or component level 

for in-service weapon systems suggest the range of TOC for similar components on 

new weapon systems that are in development. Alternatively, if new technology is being 

planned for a developing system, then subsystem or component testing must be 

planned to verify reliability and cost of operation. This testing should be completed not 

later than Systems Integration phase of SDD in order that cost and RMA are understood 

and can influence tradeoff decisions. 

H. Risk Management 

During development, applying Cost As an Independent Variable introduces its 

own risks. From the outset, CAIV recognizes that there are limits to affordability. A 

primary risk is that a warfighting system might be cancelled because it becomes too 

expensive. This risk needs to be addressed as the Capability Development Document 

 

55 Lara, Luis F. Thesis: “Analysis of the Medium Tactical Vehicle Replacement (MTVR) Contractor 

Logistics Support (CLS) Contract.” Naval Postgraduate School. December 2001. 

- 41 - 
is being drafted. The weapon system capability must be synchronized with cost 

objectives, available resources, and required schedule. Cost objectives refined during 

pre-acquisition can logically result in a series of cost targets that serve to manage the 

risk of cost growth. 

Even though CAIV offers the possibility of large cost savings or avoidance, the 

program may increase the cost of analysis during the developmental phases, because 

of the additional cost tradeoffs that are required and expenditures to provide improved 

cost modeling. These cost risks should be expected at the outset and planned for. 

The principle challenge in applying CAIV is for weapon system cost to be 

allocated across the entire system in terms of cost metrics, such as average 

procurement unit cost (APUC), operating and support (O&S) cost, and, possibly, 

disposal cost. To simultaneously control these costs at the start of system 

development, DoD and contractor need to refine broad cost objectives into specific cost 

targets at a level that can be tracked and assessed. The SEAWOLF Class Submarine 

Combat Systems provided a model for breaking out cost and performance attributes 

that might still be applied today, as follows. The contractor allocates the specific cost 

targets through the System Development Work Breakdown Structure (WBS). In that 

way, every subsystem or component has its own budget for procurement cost and its 

slice of operating and support cost; these target costs can be managed within 

subordinate IPTs. This breakdown and allocation of cost objectives is typically part of 

the warfare system decomposition that is completed early in SDD and includes not only 

physical attributes and performance functions, but also includes procurement costs and 

O&S (ownership) costs. For tactical systems, a major driver of design/production and 

ownership costs is the Operational Availability (Ao) requirement for the system. The Ao

requirement drives system redundancy and complexity requirements and therefore cost. 

Right from the start of SDD, the process of establishing the architecture of a tactical 

system to meet these Availability requirements should be coupled with the Design to 

Cost (DTC) and Design to Affordability (DTA) efforts in the allocation of tactical and cost 

requirements to each subsystem and component. Typically, the opportunity of laying 

out the tactical weapon system architecture and system design with the DTC/DTA 

- 42 - 
objectives is an opportunity that occurs only at the start of a program. Once the 

Architecture and System Design are established, the ability to fully redesign the system 

is generally too costly. Occasionally a mid-life system upgrade may provide the 

opportunity to perform DTC/DTA cost engineering a second time at the system level. 56

Since all of these costs must be managed within CAIV, there is risk of not having 

cost estimation means that provides sufficient resolution and accuracy, even though 

estimation models do exist to support this degree of cost management. There is no 

doubt that this approach is demanding and rigorous, but the DoD routinely expects their 

contractors to manage this way. The R-TOC Pilot programs such as Advanced 

Amphibious Assault Program (AAAV), Joint STARS, AH-64 Apache Helicopter, and CH47 Chinook Helicopter programs are working on various cost modeling initiatives to 

better portray and understand O&S cost impacts to facilitate better decisions.57

Cost modeling requires supporting databases, capable of feeding data from 

legacy systems; there is risk that such data is not refined enough or may be inaccurate. 

Cost models presuppose the availability of accurate, representative cost data and, 

typically, some of this data necessarily comes from legacy systems. If the technology is 

new, or the design is radical, cost data must come from testing that takes place during 

development. 

The additional cost metrics, mentioned above, create additional complexity in the 

tradeoff process. Whereas it would be more convenient to use only one cost metric, 

this does not provide enough cost resolution. Costs must be “sliced and diced,” at least 

sufficiently to show their contribution to APUC and O&S cost. Then, the subordinate 

IPTs can use these cost parameters to guide their tradeoff decisions. Cost models have 

 

56 Watterson, Ozzie. Interview on development of SEAWOLF Class Submarine Combat Systems

(AN/BYS-2). Mr. Watterson held the position of Technical Program Manager during SEAWOLF’s early 

acquisition milestones and development. Conducted in Middleton, RI. 20 August 2003. 

57 Institute for Defense Analysis. Website: “Reduction of Total Ownership Costs.” 

http://rtoc.ida.org/rtoc/rtoc.html. n.d. 

- 43 - 
been recognized as an obstacle as recently as November 2002 by Dr. Spiros Pallas, the 

OSD R-TOC point-of-contact and by an R-TOC Pilot Program briefer in April 2003.58, 59

Schedule risk is not an especially obvious effect of CAIV but is worth highlighting. 

TOC analysis, itself, may sometimes put pressure on the program schedule. An 

example of this might be the should-cost analysis that considers not only procurement 

cost but also analyzes the O&S effects of production decisions. This would be much 

more complicated and take longer than the traditional should-cost analysis, which 

addresses only production-related costs. Schedule may need to be traded off in order 

to stay within resource constraints demanded by CAIV. Tradeoff analyses that impact 

the software component may result in significant schedule increase, which should be 

factored into the cost of the tradeoff being considered. Unfortunately, DoD pays dearly 

for schedule changes: both schedule compression and stretch-out. Schedule change is 

a political fact of life, but sometimes, is simply the result of poor planning, which may 

have been avoidable. 

I. Why We May Have Difficulty Seeing and Proving TOC Reduction 

A report prepared by the Congressional Budget Office on the cost impacts of 

aging military equipment, published in 2001 outlined some of the data anomalies within 

the Department of Defense.60 One could reasonably draw from that report that DoD 

cost reporting is murky and that, even if R-TOC efforts are successful, the department 

might have difficulty proving it. Without reliable system ownership cost data, any 

changes in the cost basis are impossible to capture. But there are other aspects that 

also may influence the results of TOC reduction efforts. 

 

58 Pallas, Spiros. “R-TOC in DoD Systems: Status Report.” Briefing to PEO/SYSCOM Commanders

Conference. 21 Nov 2002.

59 Institute for Defense Analysis. Website: “Reduction of Total Ownership Costs.” 

http://rtoc.ida.org/rtoc/rtoc.html. n.d. 

60 Congressional Budget Office. “The Effects of Aging on Costs of Operating and Maintaining Military 

Equipment.” August 2001.

- 44 - 
The Pilot TOC reduction efforts began with about ten programs and soon grew to 

thirty. These programs were at different life-cycle phases, with several programs early 

in their development phases. For those early programs such as AAAV and Comanche 

Helicopter, the real effects of Total Ownership Cost reduction initiatives will not be 

demonstrable until well after each system’s entry into operational service, which in 

some cases is still years away. Even with R-TOC applications on deployed systems 

such as CG-47 Class Aegis Cruisers and CVN-68 Class Aircraft Carriers, many of the 

cost reduction initiatives are still in development or being scheduled for implementation 

and the cost savings or avoidance are years away. By the time the funding is “saved,” it 

will be difficult, if not impossible, to recognize the savings and DoD will continue to be 

consumed by how much the warfighting system still costs to operate, regardless of past 

R-TOC successes. 

For those warfighting systems that are in-service, the demonstration of cost 

savings or avoidance hinges on cost databases and cost estimating techniques used to 

calculate the original costs and TOC baselines, along with the ability of the Service’s 

cost accounting systems to track actual costs. A recent study of DD 963 Spruance 

class ships that compared ship age to operational costs bears witness to some of the 

difficulties with available cost data.61 Not only did that study highlight evolutionary 

changes in the Visibility And Management of Operating and Support Costs (VAMOSC) 

database, but it also indicated that certain data was suspect, due to decisions regarding 

the level of maintenance effort that should be expended on aging ships that were about

to be retired from active service. Reading “between the lines” of the above-noted CBO 

report also suggests that command decisions on how to distribute scarce O&S funds 

may also skew actual weapon system O&S costs. 

Additionally, shifts in maintenance policies, such as the policy on overhaul 

intervals or criteria almost certainly will skew O&S cost data. 

 

61 Stranges, Bill, Coleen Adamson, Andrea Nowicki, and Deanna Ohwevwo. Briefing: “DD-963 Spruance 

Class Ship Aging Vs Maintenance Expenditures from FY91 to FY00” presented at the SCEA 2002 

National Conference. June 2002. 

- 45 - 
There are two important meta-messages related to cost databases. The first is

that each of the Services in DoD needs accurate cost information for use in identifying 

cost drivers and estimating the cost savings and avoidance resulting from TOC 

reduction actions. The second message is that the real world is not an accountant’s 

laboratory where variables can be tightly controlled to run an experiment. DoD operates 

in a world where policies frequently change, OPTEMPO fluctuates, maintenance actions 

are postponed or missed completely, data entry is sometimes neglected or done 

sloppily, and funding is diverted from one priority to another. These two messages, 

taken together, suggest that sample data collection might be a useful approach, 

somewhat less ambitious, but more accurate and better understood than other 

approaches. That is, sample data does not chronicle the whole population; rather, it 

samples selected slices of the population, accumulated by data collectors whose fulltime job is to obtain accurate data. 

J. Activity During the Various Life Cycle Phases 

Cost As an Independent Variable (CAIV) and Reduction in Total Ownership Cost 

(R-TOC) comprise a significant number of different initiatives that are applied at 

appropriate periods within a weapon system’s life cycle. Virtually all of these initiatives 

have been addressed in this chapter, but Chapter V will provide additional perspective 

and emphasis, against the backdrop of the life-cycle phases. 

- 46 - 
CHAPTER V: CONSIDERATIONS OF TOTAL 

OWNERSHIP COST RELATED TO SPECIFIC PHASES 

The purpose of this chapter is to focus on Total Ownership Cost initiatives, phase 

by phase. This intent is to assist the practitioner or stakeholder by suggesting TOC 

facets relevant to the phase for which they have specific interest. To that end, the 

chapter is divided into four parts, as follows:

• Part 1. Pre-Acquisition: Concept Refinement and Technology Development Phases 

•

•

•

Part 2. System Development and Demonstration Phase 

Part 3. Production Phase and Deployment to the Field or Fleet 

Part 4. Sustainment Phase 

- 47 - 
PART 1: PRE-ACQUISITION: CONCEPT REFINEMENT 

AND TECHNOLOGY DEVELOPMENT 

A. Overview of the Two Phases 

Concept Refinement and Technology Development have been separated into 

two separate phases in the DoDI 5000.2, dated 12 May 2003. For the purposes of this 

discussion, they are being combined, because both phases are “pre-acquisition” and 

much of the focus is on the evolution of the capability documents, prepared under the 

direction of the user community during both periods. 

CAIV Up-Front and Early - It is an axiom of acquisition management that the 

essential requirements of a new warfighting system need to be established early in the 

program. This is part of the underlying foundation of the Systems Engineering Process. 

It has long been recognized that adding requirements later in a program’s development 

is expensive and sometimes infeasible. To maximize the success of Reduction in Total 

Ownership Cost, the effort must “begin at the beginning.” That is, Cost As an 

Independent Variable (CAIV) begins in the premise that a cost objective or constraint is 

established at the outset and that weapon system capabilities are developed within the 

cost constraint.62 It is important to note that CAIV is intended as an analysis tool for 

TOC, but can be inappropriately manipulated to tradeoff activities or system features to 

meet a procurement cost goal, while improperly failing to address the impacts on longterm operating and support cost. 

There is a school of thought that successful programs begin by carefully 

balancing technology, requirements (now capabilities), resources, and schedule.63 This 

 

62 Kaye, Michael A., Mark S. Sobota, David R. Graham, and Allen L. Gotwald. “Cost As An Independent 

Variable: Principles and Implementation.” Acquisition Review Quarterly. Fall 2000. 

63 U.S. General Accounting Office. “Best Practices: Better Matching of Needs and Resources Will Lead to 

Better Weapon System Outcomes.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-01-288. March 2001. And, Forsberg, Kevin, 

Hal Mooz, and Howard Cotterman. Visualizing Project Management: A Model for Business and Technical 

Success. 2nd Edition. John Wiley & Sons, Inc. 2000. 

- 48 - 
is accomplished through the tradeoff process, beginning with the analysis of 

alternatives, which will be briefly discussed later. 

B. Leadership, Motivation, and Stakeholder Involvement 

JROC - The Vice Chairman, Joint Chiefs of Staff chairs the Joint Requirements 

Oversight Council, referred to as the JROC. It is the JROC that oversees the 

capabilities development of a new warfighting system on behalf of the Chairman, Joint 

Chiefs of Staff. It is within the purview of the JROC to reinforce the need for specific 

affordability constraints on any new program, prior to validation and approval of

capability documents. DoDI 5000.2, published 12 May 2003, mandates that affordability 

be a consideration during preparation for the Initial Capabilities Document (ICD).64 

However, CJCSI 3170.01C, published 24 June 2003, specifies that preparation of the 

ICD include an analysis of relative cost, but the instruction does not specify that 

affordability determinations be performed in conjunction with the Initial Capabilities 

Document; it does require that affordability determinations be prepared later, during 

preparation of Capability Development Documents, which occurs during Technology 

Development Phase. Ignoring the apparent minor disparity between the two 

regulations, which does need to be rationalized, JROC attention toward affordability 

clearly would show the way for DoD leadership to speak with one voice on the matter of 

Total Ownership Cost. 

Milestone Decision Authority (MDA) - The MDA has the authority to demand 

affordability information at each milestone decision point, including the Concept 

Decision, which initiates the Concept Refinement Phase. Insofar as the MDA asks very 

focused, pointed affordability questions during milestone reviews, it brings attention to 

ownership costs as the developing weapon system progresses toward its next 

milestone decision point. This could be an effective way to focus attention on life cycle 

cost and create a CAIV culture. 

 

64 Department of Defense. “Operation of the Defense Acquisition System.” DoD Instruction 5000.2. May 

12, 2003. para 3.4.1 

- 49 - 
Sponsor - The sponsor of a warfighting system has the opportunity and, 

eventually, the responsibility to establish cost constraints during the development of the 

ICD and the CDD. The sponsor can be a proactive adherent and reinforce interest in 

Total Ownership Cost through insistence on weapon system affordability. The sponsor 

can even make affordability consideration inevitable by designating an O&S cost cap as 

a key performance parameter (KPP). 

The sponsor of a new warfighting system is a vital partner throughout the 

developmental phases and beyond. There are several periods in the life cycle during 

which the sponsor could have a major impact on Total Ownership Cost. The first period 

is as the capabilities are being identified and refined. Insofar as the sponsor specifies a 

cost envelope to achieve the required capability, this initiates the cost constraint, within 

which the tradeoff process may then be performed. 

Setting Cost as a key performance parameter (KPP) is a leadership issue. A 

measure of the importance of warfighting system requirements is the manner in which 

they are described. The term “key performance parameters” is defined as those 

minimum attributes or characteristics considered most essential for an effective military 

capability. Reduction in threshold KPP performance requires an assessment of the 

military utility of the reduced capability and, possibly, a reexamination of the program to 

determine if an alternative solution should be adopted.65 If system Total Ownership 

Cost (TOC) or a subset such as operating and support cost (O&S) is designated as a 

key performance parameter, it sends a clear signal that the O&S cost to achieve a 

stated level of affordable readiness or reliability is of the utmost importance and must be 

vigorously pursued. This is the intent of CAIV, but it has not been rigorously enforced to 

the extent of being a designated KPP.66,67 A start point might be to establish the 

 

65 Office of the Joint Chiefs of Staff. “Joint Capabilities Integration and Development System.” Chairman 

of the Joint Chiefs of Staff Instruction 3170.01C. 24 June 2003. 

66 Kaminski, Paul. Memorandum: “Reducing Life Cycle Costs for New and Fielded Systems (with CAIV 

Working Group Report attached). Office of the Secretary of Defense. December 4, 1995. 

67 Department of Defense. “Mandatory Procedures for MDAPS and MAIS Acquisition Programs.” DoD 

5000.2-R (including Change 4). Part 3.3.4.1. 1999. 

- 50 - 
affordability of large acquisition programs in terms of a set percentage of the funding of 

the applicable aggregate Military Force Program (MFP), or Mission Area, estimated 

over the new system’s expected life cycle. 

Materiel Developer - The materiel developer is a participant, but not the lead, 

during Concept Refinement and Technology Development phases. However, the senior 

designated materiel developer can influence the interest in TOC by contributing cost 

data on existing systems along with cost estimates for new technology, and by 

requesting that the sponsor establish TOC constraints on behalf of the user community. 

The materiel developer also contributes to system affordability by holding the 

contractor to the stated TOC goals, including the often-controversial reliability growth 

projections that have a major impact on O&S costs if the growth projections are not 

realized. 

Stakeholder Involvement - Putting together the Initial Capabilities Document 

(ICD) and, later, the Capabilities Development Document (CDD), most of the emphasis 

has traditionally been placed on the performance capabilities (the warfighting aspects) 

with less vigorous attention to O&S costs and sustainment aspects.68 To bring attention 

to cost and support issues, logistics personnel representing using organizations, the 

materiel developer, sustaining activities, and contractor organizations must be 

recognized and engaged as full participants in capability integration and development. 

Without this representation and full participation, the old ways of ignoring TOC are 

unlikely to change and there would be little reason to expect that O&S costs would 

avoid the “death spiral.”69

Contractor participants are also value-added, and may be able to offer supporting 

data on technology and sustainment costs for their products or within their commodity 

 

68 Kratz, Louis. “Developing a Performance-Based Strategy.” Briefing to PEO/SYSCOM Workshop. Spring 

2002. 

69 Jacques S. Gansler, “The Revolution in Business Affairs—The Need to Act Now.” Program Manager. 

September-October 1998. Reprinted from a speech given by Dr. Gansler to the Association of the United 

States Army, Falls Church. VA. September 2, 1998. 

- 51 - 
areas, especially when offered incentives to do so. They may also offer an avenue for 

fresh thinking, market awareness, and the potential for commercial logistics solutions 

that might have utility in military applications. Insofar as they understand an emerging 

system’s TOC constraints and are invited and incentivized to participate in the early 

tradeoff processes, they may be major contributors in providing cost-effective solutions 

to achieve the required operational availability.

C. Documents 

The relevant documents during Concept Refinement and Technology 

Development phases are the Initial Capabilities Document, which is prepared prior to 

Concept Decision, and the Capability Development Document, completed during 

Technology Development. An analysis of alternatives supports the CDD. Each of these 

documents needs to include direction on TOC and readiness or availability. 

At the completion of Technology Development, additional documentation must be 

developed to support Milestone B decision. Included are the acquisition strategy and 

Acquisition Program Baseline, and various cost and affordability documents. All of 

these documents should reflect TOC system readiness targets or objectives. 

Other supporting documentation such as the Test and Evaluation Master Plan 

(TEMP) also need to reflect cost and readiness guidance, because O&S cost should be 

tested. 

Notionally, the materiel developer puts an RFP out on the street and the 

contracting activity is brought to the point of contract award. Therefore, the RFP must 

be consistent with the cost and readiness requirements that are contained in the ICD 

and CDD. 

D. Tradeoff Analysis Through AoAs, CPIPTs and other IPTs 

Cost-Performance trades enjoy the greatest impact during these early phases. 

During the AoA process, which now occurs during the Technology Development Phase, 

performance capabilities must be determined, eventually culminating in the Capabilities 

- 52 - 
Development Document (CDD). Logistics representatives and cost analysts are valued 

participants during that tradeoff process for systems seeking effective TOC solutions. 

This is the best time to establish the parameters that will govern the weapon system 

development. If logistics support and TOC metrics are not established during the AoA 

that leads to the CDD, achieving the same effect later will be more expensive, less 

efficient, and sometimes might not get done at all. 

Figure 4, below, is taken from the GAO report on best practices in ownership 

cost reduction. GAO attributes the chart to DAU, and clearly, it reflects the widely held 

view within DoD that about 90% of the Total Ownership Cost is locked-in by the time 

that the requirements are set. In the revised CJCSI 3170.01C and DoDI 5000.2 

guidance, this would occur by completion of the Capability Development Document 

(CDD). 

Figure 4. Design Decisions vs. Expenditure of Funds70

 

70 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 53 - 
Analysis of alternatives is conducted by the sponsor as the CDD is developed. 

Cost and affordability are integral to the AoA and attention to total ownership cost 

should be clearly articulated in the AoA plan.

Two reasonable premises to use as a start point for tradeoff analyses are that (1) 

costs are constrained and (2) that tradeoff analysis is a good way of finding the best 

solution.71 This hardly requires a leap of faith and both premises are addressed in 

CJCSI 3170.01C, at least implicitly. Constrained budgets are a fact of life. CAIV and RTOC initiatives recognize that costs must be controlled, to stay within constraints. In 

preparation of the ICD, the Director, PA&E may provide specific guidance, which would 

likely address issues of cost and affordability.

72 Additionally, the sponsor is expected to 

perform cost analysis that is sufficient to make an affordability determination. The 

strength and clarity of the sponsor’s cost guidance during the Concept Refinement and 

Technology Development phases may have a dramatic impact on the TOC in the 

tradeoff process, as will be discussed later. 

Tradeoff analysis is deeply ingrained in Concept Refinement, formerly called 

Concept Exploration. Prior to Acquisition Reform, the tradeoff analysis in Concept 

Exploration was called cost and operational effectiveness analysis (COEA), and with the 

DoD 5000 series revisions of the mid- and late-1990s became analysis of alternatives 

(AoA). Both COEA and AoA (which is now accomplished during Technology 

Development phase) recognize the importance of getting the best “bang for the buck.” 

However, even though a worthy objective, the “bang for the buck” mantra is not 

sufficient to ensure the proper management and control of costs. Rather, weapon 

system affordability requires rigorous cost and system availability metrics, which should 

take shape during preparation of the CDD. 

 

71 Kaye, Michael A., Mark S. Sobota, David R. Graham, and Allen L. Gotwald. “Cost As An Independent 

Variable: Principles and Implementation.” Acquisition Review Quarterly. Fall 2000. 

72 Office of the Joint Chiefs of Staff. “Joint Capabilities Integration and Development System.” Chairman 

of the Joint Chiefs of Staff Instruction 3170.01C. 24 June 2003. p. A-8. 

- 54 - 
E. Metrics 

Weapon system metrics are described in the CDD. Cost and readiness metrics 

belong in those documents, possibly even shown as KPP. As the process nears 

Milestone B, the most important metrics, KPP, automatically become part of the APB. 

TOC and readiness metrics should be prominent in the APB, whether or not they are 

KPP. 

Best Commercial Practice is that TOC metrics are tightly defined very early in 

development. This practice corresponds to early phase documentation that is discussed 

above. Yet, historically and even currently, DoD does not do this with the same rigor as 

commercial exemplars, such as United Airlines, FED-EX, and Polar Tanker (a 

subsidiary of ConocoPhillips Marine). A recent GAO report has cited those companies 

as clearly establishing metrics that would influence LCC during development of their 

systems. GAO specifically identified the United 777 aircraft, developed by Boeing; the 

FED-EX 70-cubic foot van, developed by Freightliner; and Polar double-hulled tanker 

ships, developed by Litton Avondale. In all three cases, each a proven success, the 

customer worked with the developer to establish specific O&S cost metrics that would 

control design decisions for those systems. They were able to establish metrics in part 

because they had cost, reliability, and maintenance records to guide them.73

Since the advent of CAIV in 1995, DoD has clearly recognized the constraint on 

TOC funds and said that cost will be the independent variable, constraining the amount 

of military capability that is acquired. The question then becomes what cost metric to 

choose. In the past, the preference for acquisition cost metrics has been that they be 

relatively near-term, because the near-term can be estimated more accurately than 

longer-term costs, and were more palatable than TOC (considering the possible 

negative aspects of TOC discussed in Chapter I of this paper). However, this has been 

found to be shortsighted; life cycle cost (LCC), also referred to as system Total 

 

73 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 55 - 
Ownership Cost (TOC), is a more inclusive metric, even though it comprises costs that 

stretch over the life of the weapon system. Although somewhat difficult to determine 

initially, life cycle cost metrics are useful and provide a means for managers to balance 

and control the constituent parts of TOC. 

One difficulty with using TOC as a metric is that one constituent portion, 

operating and support (O&S), occurs many years in the future and, therefore, may not 

be estimated very accurately during pre-acquisition and developmental phases. 

Whereas this is a problem, it should not be permitted to become an overwhelming 

obstacle to establishing cost constraints. One of the challenges, then, is to develop 

TOC metrics (i.e., affordability metrics) that represent both near- and long-term system 

costs, which would be useful during analysis of alternatives. 

F. Database & Data Collection 

During pre-acquisition, a complete cost database is not available, unless the 

system being acquired is a commercial or non-developmental item. Less complete 

databases might include predecessor systems, from which preliminary costs can be 

estimated, realizing, however, that the past software effort may not be a good basis of 

estimate for a new system. When new technology is being developed in support of a 

new weapon system, production and O&S costs should be obtained as part of the 

developmental process. O&S costs can be gathered during testing, if such information 

is recognized as being important. 

G. Activities and Tools that Support CAIV and R-TOC 

Matching capabilities (requirements), technologies, schedules, costs, and 

acceptable risk is a rational approach during pre-acquisition. It is consistent with 

management of TOC and the practice of IPPD; it fits the new DoD 5000 developmental 

phases. 

PBL begins in Pre-Acquisition as the support concepts are first considered. PBL 

is driven by specific warfighter support requirements. Once PBL is recognized as a 

requirement during pre-acquisition, provisions can be made for it. Of particular help are 

- 56 - 
logisticians at various levels and in different organizations who should be encouraged to 

work innovatively to forge partnerships between DoD support providers and commercial 

providers, leveraging the core competencies of each. PBL metrics are consistent with 

TOC metrics, such as maintenance cost per operating hour or ton-mile. 

H. Risk Management 

Risk and Trade Space - The use of CAIV clearly adds risk to Concept 

Refinement and also to later developmental phases. First, there is increased risk in the 

user selection of technologies that will go into new weapon systems. If a technology is 

immature, unexpected R&D costs and additional schedule may be necessary to bring 

the technology to the point where it can be used in the new system. Component or 

subsystem testing may be needed to be sure that the item performs properly and to 

quantify its reliability. Analysis of Technology Readiness Levels may be very helpful in 

guiding the selection of subsystems or components. A significant task during Concept 

Refinement is preparation of the Technology Development Strategy, which addresses 

technology risk for a new weapon system. If there is a misstep or hiccup in Technology 

Development, the approval of a program new start can be delayed, along with attendant 

risk that program funding may come apart and the funding stream diverted to other 

programs. 

The figure below depicts cost versus performance of a new technology. Risk is 

included in two ways. As shown in the figure, the risk dimension actually “discounts” the 

anticipated performance, and cost, options; in other words, it lessens the trade space to 

ensure a decision-maker does not trade away something that may not be attainable or 

affordable. Risk also may include dimensions of the trade space that are not depicted 

in the figure, and critical decisions may be driven by the particular risks of certain 

alternatives. Examples might be risk to schedule or manufacturability, for example, 

which are not facets of the cost- performance trade but are, nevertheless, components 

of trade space. 

- 57 - 
Figure 5. Cost-Performance Trade Space74

I. Summary of the Focus for Concept Refinement and Technology 

Development 

During these pre-acquisition phases, it is possible to get control of TOC by doing 

the following. 

•

•

 

Match requirements, technologies, schedules, resources, and acceptable risk during 

this pre-acquisition timeframe. If a program gets into trouble during its development, 

there is a high likelihood of an imbalance; i.e., one of these components that is not 

congruent with the others, such as use of a high-risk technology without enough time 

scheduled to bring it maturity. 

Assemble a team that includes cost analysts and logisticians along with the usual 

cast of warfighters and engineers.

74 Kaye, Michael A., Mark S. Sobota, David R. Graham, and Allen L. Gotwald. “Cost As An Independent 

Variable: Principles and Implementation.” Acquisition Review Quarterly. Fall 2000. 

- 58 - 
Establish LCC as a key performance parameter to emphasize the importance of 

cost. KPP automatically will roll into the Acquisition Program Baseline, even though 

cost goals my need to be refined as better cost information becomes available. 

•

• Include reliability testing and O&S cost in Technology Development. 

Solicit leadership involvement in discussions of TOC in milestone decision 

reviews and other venues to influence the outcome, i.e., the culture of acquisition. 

- 59 - 
PART 2: SYSTEM DEVELOPMENT AND 

DEMONSTRATION 

A. Overview of the Phase 

During System Development and System Integration, which in the aggregate 

comprise System Development and Demonstration (SDD) phase, the primary effort is 

handed off from the user community to the materiel developer. Although the materiel 

developer takes on major responsibilities and a heavy workload, the preponderance of 

effort shifts to the contractor during SDD. Since the mid-1990s, much of the effort has 

been accomplished through the use of multi-functional teams comprised of various 

Government and contractor stakeholders. 

The materiel developer takes much of his direction from the ICD, CDD, the 

approved acquisition strategy, the APB, and guidance from the milestone decision 

authority (MDA). PMs have strong motivation to stay within the constraints formed by 

those documents; the PM’s performance is graded, in large measure, by the degree to 

which he supports or meets the objectives in those documents. 

B. Leadership, Motivation, and Stakeholder Involvement 

Influencing outcomes and culture continue to be the principal domain of senior 

leaders. If leaders set the right standards and ask the right questions, they can help to 

shape the acquisition system outcomes and culture. 

Milestone Decision Authority - The MDA makes the decision whether or not to 

delay entry into SDD, if the technology is immature. He also determines whether to 

allow a program to advance to the next phase if the risk of failure is high, and may 

choose to delay unless there are overarching reasons and taking the risk is in the 

national interest. Both of these possibilities of delay seem, at first glance, unrelated to 

Total Ownership Cost. However, pushing the program ahead before it is ready may be 

a very expensive error that contributes to TOC. PMs are optimists as evidenced by the 

- 60 - 
preponderance of weapon programs that are over budget and behind schedule.75 The 

MDA needs to be a realist. 

Leaders within the sponsor and user communities need to minimize requirements 

and set cost goals or targets in balance with life-cycle resources. Cost goals or targets 

that have been identified as key performance parameters provide unambiguous 

direction. Clear cost constraints help to steady a program during the SDD Phase, when 

there is a normal user tendency to add to the requirements of the system. This 

phenomenon is called “requirements creep.” Strong leadership provides a 

counterbalance to control requirements creep. 

Program Executive Officers (PEOs) and Program Managers - PEOs and PMs 

need to set metrics that will keep the program in balance and then manage to those 

metrics. The PM must work with the sponsor to achieve an equilibrium point where the 

weapon system capabilities are achievable within the available resources and within 

reasonable risk. The resources include all the funding for the weapon system over its 

expected life. This is system Total Ownership Cost matched against total expected 

resources. 

PMs and Contracting Officers need to ensure that contract requirements cost and 

reliability / operational availability metrics are clearly stated and that contractors are 

incentivized to accomplish high quality, thorough TOC analysis and meet TOC goals 

and targets. 

IPT leads (whether contractor or Government) must manage in accordance with 

TOC targets as well as meet performance requirements. 

 

75 Fleming, Quentin W., and Joel M. Koppelman, Earned Value Project Management, 2nd Edition.

Program Management Institute, Inc. 2000. 

- 61 - 
Producibility and Logistics Stakeholders - One of the GAO criticisms of our 

former and current acquisition systems is the multiplicity (linearity) of stakeholders.76 

There are many interested parties and participants, representing different organizations, 

who need to be involved in the development, production, and logistics support of our 

new systems; each plays an indispensable role and contributes to the success of the 

program by providing his unique perspective. 

Producing organizations, including prime contractor and subcontractors need to 

be involved in producibility issues during SDD. The producibility effort during SDD pays 

off on the manufacturing floor, during the production and fielding phase. Producibility is 

accomplished component-by-component. The Government may contribute to 

producibility engineering by including it in the RFP and contract; producibility questions 

during engineering reviews reinforce interest and encourage the contractor’s efforts. 

User Juries - During System Development and Demonstration, users need to be 

involved as the system design evolves. This includes the system sponsor and the 

designated user representative, but that is not enough. Uniformed personnel who will 

operate the equipment, along with maintenance technicians who will fix it when it 

breaks, are stakeholders and need to be participants in development. User reviews 

must be structured within the developmental phases. There are creative opportunities 

for participation and may include contractor technical personnel visiting and observing 

operations or maintenance of existing systems in the field or fleet; similarly, operator 

and maintenance personnel benefit from visiting developmental facilities to interact with 

mockups, prototypes, or Engineering Development Models (EDM). Simulators, 3-D 

solid models, and virtual environments offer possible venues for displaying new designs

and getting user / maintainer feedback. User juries offer the potential to recognize the 

need for changes prior to production and also provide a useful forum for information 

about O&S cost drivers on the legacy systems. 

 

76 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

- 62 - 
Support organizations - User juries answer part of the need, but are unlikely to 

embrace all of the operations and support issues. Supporting organizations—those that 

supply the parts; store the parts, components or even the weapon system, itself; 

perform the various levels of maintenance; provide the in-service engineering; conduct 

the operational planning, plan and conduct training; and, doubtless, many other 

sustaining functions—need to participate in SDD at selected times and be given the 

opportunity for buy-in to the developmental process. 

Producibility and logistics design considerations are not necessarily congruent. 

Sometimes, producibility improvements interfere with system supportability. Part of the 

work of minimizing TOC is de-conflicting producibility and supportability. Subordinate 

IPTs working at the subsystem or component level may be chartered to de-conflict 

producibility and logistics facets. Building prototypes or Engineering Development 

Models and then operating and maintaining them presents very concretely the conflicts 

between producibility and supportability. The metrics by which the de-conflicted design 

solution must be measured include total ownership cost (TOC), reliability, and 

maintainability. 

C. Documents 

The following documents are relevant during this phase. 

•

•

•

 

CDD is considered a living document during the SDD phase. This may present an 

opportunity to sharpen the procurement (APUC) and O&S cost goals. 

The Capability Production Document (CPD) is prepared during SDD and finalized 

after the critical design review (Design Readiness Review). Any reduction in a key 

performance parameter (KPP) “requires an assessment of the military utility of the 

reduced capability and, possibly, a reexamination of the program to determine if an 

alternative materiel or nonmateriel solution should be adopted.”77

Acquisition Strategy. This document needs to be updated to reflect changes to the 

strategy for achieving readiness or affordability. 

77 Office of the Joint Chiefs of Staff. “Joint Capabilities Integration and Development System.” Chairman 

of the Joint Chiefs of Staff Instruction 3170.01C. 24 June 2003. p. A-10. 

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• RFP—Statement of Work, Instructions to Offerors, and Source Selection Criteria. 

The RFP establishes a formal dialog with the contractor to clarify what the 

Government expects the contractor to accomplish. 

D. Tradeoff Analysis through CPIPTs and SUB-IPTs 

Cost-Performance IPTs are a well-recognized approach to tradeoff analysis. 

CPIPTs have been part of the IPT landscape since the mid 1990s for the purpose of 

conducting cost-benefit analyses. These IPTs need to be supported by good cost data 

and analysis, and the strong voices of the user and the logistician. CPIPT decisions 

need to be “best value,” achieving acceptable performance metrics (including RMA) 

while staying within TOC goals. During SDD Phase, the CPIPT make-up should include 

the strong participation of the contractor. Besides the technical information that the 

contractor can provide, he may benefit from the exchange by learning where the 

customer’s values really lie; additionally, the CPIPT provides a forum to achieve 

contractor and customer buy-in. 

The materiel developer and contractor continues to balance capabilities, 

resources, and schedule throughout the developmental and production phases in the 

following ways. Preparation for each milestone requires an affordability assessment 

that is required at both milestones B (entry into SDD) and C (entry into Low Rate Initial 

Production). Additionally, the practice of IPPD and/or EVM calls for breakdown of work 

effort for management and control purposes. The materiel developer begins the 

process by establishing the first three levels of the WBS as part of the RFP. The 

contractor is then required to respond to the RFP with information several levels below 

the three provided. As the work effort begins, the contractor will need to divide the effort 

to the work package level, assuming that EVM is a requirement of the contract. Work 

packages are then assigned resources, schedule, and managers or work teams 

assume responsibility. In the same way that work effort and cost are divided all the way 

to the work package level, reliability and TOC objectives are set, as described in the 

metrics section, below.

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Performance-Based Logistics includes different mixes of Government-contractor 

involvement. At one end of the logistics pipeline is contractors and vendors, while at the 

other end is the operator. All the support “in-between” can be set up in the way that 

best serves the taxpayer and responds to the needs of the warfighter. The R-TOC 

Pilots Programs provide varied examples of support arrangements that include different 

stakeholders in partnership. Prime Vendor Delivery and Direct Vendor Delivery are 

both being used, as are contractor-Government partnerships. PBL should be a major 

tradeoff activity during SDD. 

E. Metrics 

Cost and Reliability Targets - Costs and reliability must be controlled down to the 

subsystem and component level. The Work Breakdown Structure provides a suitable 

framework. Every system component should be described by WBS element(s), 

including design cost, testing cost, procurement cost, O&S cost, and such other metrics 

as reliability and maintainability. These targets or objectives are set, then progress 

toward achieving them is monitored and management action taken consistent with the 

progress being shown. It is obvious that management at the level of each component is 

a daunting task, but it is a task that should be expected of subordinate IPTs that are 

responsible for the various components. Report roll-ups can be accomplished as 

necessary to satisfy the leadership levels—both Government and contractor. 

Subsystem or component development must be individually managed consistent with 

whether it is meeting its performance (including reliability & maintainability) and TOC 

metrics. The aggregated component reliabilities must achieve the warfighting system 

readiness or operational availability goals within the Total Ownership Cost of the 

weapon system. 

In the area of software, development and supportability metrics are critical in 

controlling costs in software-intensive systems. An uncontrolled software development 

process that is not keyed to supportability will prove disastrous in the acquisition phase, 

impacting cost, schedule and performance, and will be either extremely costly to 

support or totally unsupportable during the O&S phase.

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F. Database & Data Collection 

One of the impediments to effective TOC management may be that cost 

information on existing systems is inaccurate, incomplete, or difficult to obtain. Each of 

the Services has weapon system cost information, Visibility And Maintenance of 

Operating and Support Costs (VAMOSC),78 but each has experienced difficulty in 

providing complete and accurate cost information on legacy systems. Within the past 

several years, the available literature on the R-TOC Pilots and VAMOSC websites 

indicates that the all the Services have expended great effort in cleaning up their cost 

databases, so as to provide better historical cost information, more easily. 

Approach To Collecting Cost Metrics - There are different approaches to 

gathering cost and RMA data, in terms of sample data or continuous, contractorgathered or Service-gathered, choice of maintenance level for data collection, and the 

number of components that should be tracked. Data at the subsystem or component 

level should include such information as item cost, estimated inherent reliability, number 

of failures, modes of failure, actual MTBF, MTTR, and cost of repair. Whatever the 

choices related to data collection, the information is necessary for early CAIV decisions, 

as well as later R-TOC decisions. 

G. Activities and Tools that Support CAIV and R-TOC 

Reliability Testing Not Later Than System Integration (SI) Phase - The General 

Accounting Office, in comparing DoD developmental techniques to commercial best 

practices, points out that DoD systems often embrace cutting-edge technologies.79 

Good risk management practice suggests that subsystems and components need to 

demonstrate their required reliability not later than the SI phase.80 If technological 

maturity, including reliability, cannot be demonstrated by that time, then a lower risk 

 

78 Assistant Secretary of Defense (Program Analysis and Evaluation). “Cost Analysis Guidance and 

Procedures.” Department of Defense. DoD 5000.4-M. December 1992. 

79 U.S. General Accounting Office. “Best Practices: Setting Requirements Differently Could Reduce 

Weapon Systems’ Total Ownership Costs.” Report to the Subcommittee on Readiness and Management 

Support, Committee on Armed Services, U.S. Senate. GAO-03-57. February 2003. 

80 Ibid. 

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alternative would be to categorize the subsystem or component as a candidate for 

evolutionary upgrade, and use a more mature subsystem or component instead. If the 

new component is necessary to achieve a key performance parameter, then the whole 

development may need to be delayed. In the past, the program would likely move 

ahead, in hopes that an immature subsystem or component could catch up. However 

the newly released DoD 5000 series appears to have broken with past practice, as 

described below. 

The completion of System Integration is now formalized by a Design Readiness 

Review. As described in DODI 5000.2, this review provides an opportunity for the MDA 

to conduct a mid-phase assessment of design maturity and specifically includes 

“...system reliability based on demonstrated reliability rates.” The MDA determines the 

form and content of the review. 

Modeling and Simulation - During System Demonstration, modeling and 

simulation play a key role related to TOC. It is through these means that system O&S 

costs are estimated. Additionally, modeling and simulation help contractor and materiel 

developer to better understand system reliability. Often, modeling and simulation 

provide early indication of system reliability anomalies that will affect TOC. 

Intensive Management of the Cost drivers - As Engineering Development 

Models (EDMs) or prototypes go through testing, test data is generated that should be 

thoroughly scrubbed in search of cost drivers. These cost drivers may take different 

forms, such as high repair parts usage, immature diagnostic routines, extensive 

maintenance man-hours, slow repair cycle or turnaround times, high-cost repair part 

stocks, and large logistics footprint. Typically, program offices are focused on technical 

performance, and staying on schedule, and continuing on the glide path toward 

successful entry into production during this period. However, testing provides signals 

that require program attention to avert costly mistakes in production and sustainment 

phases. 

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H. Risk Management 

A well-crafted and well-run risk management program continually searches out 

the program uncertainties, and can be tuned to recognize and respond to issues that 

impact procurement cost and O&S cost. Several risks that attend TOC are as follows. 

First, developmental costs may exceed plans, due to the requirement for increased 

front-end analysis. Similar to the early development costs related to the use of IPTs, 

TOC analysis may increase the cost of early development. However, those costs 

should be recouped in cost savings or avoidance later. Second, there is always a 

temptation to make design decisions that reduce procurement costs, but increase O&S 

costs and aggregate system TOC. That is why cost decisions need always to consider 

reliability impact. Third, improvements in performance, including RMA, must be 

accompanied by affordability calculations. In sum, TOC and performance must always 

be kept in balance. 

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PART 3: PRODUCTION PHASE AND DEPLOYMENT TO

THE FIELD OR FLEET 

A. Overview of the Phase 

This is the point at which the efforts of designers, manufacturers, materiel 

developers, sustainers, testers, and users all come together. The design is actually 

manufactured, tested, issued to the warfighter, and then supported. All of the planning 

and coordination, literally over years, is focused on making production, deployment, and 

sustainment a success. However, the success or failure of a weapon system is not 

instantly determined and there are no perfect systems. For example, the M1 Abrams 

Tank system, more than 20 years after the first production in 1980, is recognized for its 

battlefield dominance during Operations Desert Storm and Iraqi Freedom, its agility over 

rough terrain, its ability to fire accurately “on the move,” and especially its armored 

protection of crewmembers. However, the M1 is also recognized for its poor engine 

reliability, limited strategic deployability, burdensome software support requirements, 

and enormous fuel cost. This warfighting system provides a wonderful example of 

where tradeoff analysis can leave a system, i.e., a great warfighting system that has 

difficulty getting to the battle and costs too much to operate. 

It is interesting to note that the M1 Tank had a cost constraint during its 

development: design to unit production cost (DTUPC), mandated by Congress. And, 

M1 stayed within that constraint. DTUPC was an important metric but not the best 

choice of metric. Better metrics would have more completely addressed TOC (to 

include DTUPC along with O&S cost) and operational availability. Observation of cost 

and availability statistics during testing told the stakeholders that M1 was a very 

expensive warfighting system to operate, but during the height of the Cold War, the 

present-day CAIV approach would have been considered reckless within DoD. 

The message in the M1 Tank story is that stakeholders need to pay attention to 

the lessons that come out of testing. Logistics lessons from testing include inherent 

reliability of components, diagnostic and repair procedures, logistics footprint, and 

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stockage levels, and the O&S costs that are required to meet required availability. The 

day-to-day workload for acquisition logisticians during this period and the inertia of the 

logistics systems provide a ready-made excuse to ignore the logistics lessons that show 

up in testing or postpone implementation of the necessary corrective actions. However, 

taking aggressive action on the logistics lessons learned serves the user and maintainer 

better. 

Accomplishing logistics support through a contract can result in the capture of 

better information and also provide a more flexible logistics response than would be 

attained by a Government-only logistics system. Especially during the transition period 

when DoD is just learning to operate and support a new warfighting system, buying 

support from the contractor can help smooth the transitional rough spots; however, use 

of contractor personnel needs to be synchronized with Service practices. For example, 

establishing a worldwide help desk to provide expert contractor assistance on 

diagnostics for a particular ship system might be preferable to having contractor

personnel physically aboard ship. 

B. Leadership, Motivation, and Stakeholder Involvement 

Continual Leadership Attention - The leadership can help out by asking for 

feedback related to Operating and Support cost and readiness. Leadership interest is 

particularly important during the Production and Deployment Phase, because early 

problems may cross organizational boundaries and involve personnel from different 

functional areas who are not familiar with and do not understand one another. 

Leadership involvement in readiness reviews and problem-solving meetings can help 

set the right tone. 

Customer Feedback - Rapid response to customer problems encourages crisp 

solutions, minimizing the cost of failures and impact on readiness. Rapid response can 

be encouraged by well-constructed contractor incentives and is further addressed 

below. 

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Value Engineering - Value engineering may be written into a contract as an 

incentive to the contractor to share cost savings or it can be contracted as a work effort 

that is directed by the Government. Good results from the VE program would seem to 

result from a highly motivated contractor; recent FAR changes that increase the 

contractor’s share of savings ought to encourage the contractor to look for production or

O&S cost drivers and offer corrections for poorly performing subsystems or 

components. 

Contractor Incentives Tied to Reliability or Operating & Support Costs - In 

addition to the incentives that attend Value Engineering, the contractor can also be 

motivated by carefully constructed warranty clauses. For example, Reliability 

Improvement Warranties offer incentive to the contractor to improve system reliability 

and thereby pocket savings on the extant contract. Availability guarantees or mean 

time between failure guarantees may also encourage the contractor to offer expeditious 

corrective action to fix poor performing components. Possibly, warranty can be 

combined with prime vendor support in such a way that it is cost-effective, responsive to 

the user, and at the same time minimally invasive to the end-user. 

The materiel developer, the user / sponsor, sustaining organizations, field or fleet 

representatives, and contractor representatives should meet regularly during 

deployment of a new warfighting system into service. Team play does not diminish in 

importance during the Production and Deployment phase; it only gets more intense. At 

the same time, the center of gravity shifts from the design effort, to testing, to 

production, to the operator and maintainer. Especially at this stage, aggressive team 

response to the inevitable problems will work much better than individuals or 

organizations casting blame on one another. 

C. Documents 

The following documents are relevant during this phase. 

Capability Development Documents (CDD) and Capability Production Documents 

(CPD) continue to be updated in the case of evolutionary or spiral development. 

This presents an opportunity for the sponsor to refine cost and readiness goals. 

•

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Acquisition strategies for evolutionary acquisitions should describe plans for 

improving TOC. 

•

• RFP (including the Statement of Work, Instructions to Offerors, and Source 

Selection Criteria) can be written to focus the contractor’s efforts toward meeting 

performance goals within Total Ownership Cost parameters. Follow-on support 

agreements can be competitively awarded, with the clear understanding that future 

work is tied to performance (whether contractor or Government). One technique that 

maintains competitive interest of the winning support contractor is the contract 

awarded for one or two years of support, but including a number of one-year options. 

With this form of contract, the support contractor knows that his future business is 

tied to his performance on the current contract. 

D. Tradeoff Analysis through CPIPTS and other IPTS 

During production and deployment, tradeoff analysis takes the form of detecting 

the cost drivers and determining the best ways to reduce them. The presentation of the 

trades begins to take the form of business case analyses (BCA). During this phase, 

seeking funding outside of the program is a competitive adventure, where the best 

business case analyses compete to attract the limited funds available. 

E. Metrics 

During this phase, average procurement unit costs evolve into “from actuals.” At 

first glance, it would seem that procurement costs would become locked-in over time. 

Yet, competition may help overcome the inertia: sometimes at the level of the prime 

contractor and sometimes with subcontractors and vendors. 

Average procurement unit cost (APUC) computed by lot is of historical interest 

because of trend information. However, manufacturing process improvement is 

probably better measured by the contractor’s improvement in man-hours per unit 

produced and reduction in the cost of work-in-process inventory. 

O&S costs can be refined during the phase, depending on the capability of the 

cost analysis system being used. Some of the R-TOC Pilot programs appear to be 

obtaining their cost analysis through their contractors. 

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Initially, it is important to look for “bad actors,” cost-drivers that may need 

corrective action. At the component level, emerging failure information may suggest a 

cost-driver. One of the operative questions is whether a component is meeting its 

reliability predictions. 

The contractor needs to be looking for cost-drivers, too, and depending on 

incentives in the contract will be more or less responsive to the need for failure analysis 

and corrective action. To the Service, the main issues are cost versus readiness. For 

the contractor, the key issues are profit and future business. Continuing dialog amongst 

the stakeholders is important to keep stakeholder objectives aligned and ensures 

continued cooperation.

Operational Availability or readiness is routinely tracked and a useful additional 

computation may be the cost per mile (or hour or round) at the required AO. This would 

be a good statistic to show trend against the original baseline. 

F. Database & Data Collection 

Databases and data analysis have been discussed in the body of this paper. 

Service databases are providing input to analytical models that calculate O&S costs; 

however, the use of different databases presents some anomalies that may be 

corrected over time. In some cases this analytical effort is being contracted out. 

Sample data collection offers an alternative source of information that can be used 

selectively; sample data collection is expensive, however, it may provide more accurate 

information in focused areas. 

G. Activities and Tools that Support CAIV and R-TOC 

Analysis of Emerging Data in Search of Cost drivers - is discussed above. 

Reliability-Centered Maintenance - Whether or not RCM was used in earlier 

phases of a program, it provides an orderly approach to maximize readiness and avoid 

wasteful maintenance efforts. This could be used selectively to analyze potential costdrivers. 

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Purchase of Spares in Conjunction with the Production Contract - Initial spares

are ordinarily part of the production contract, paid out of procurement funds. Follow-on 

spares are paid by Operating and Support funds and are usually contracted separately. 

Purchase of follow-on spares through ongoing production contracts offers the possibility 

of reduced prices if economic order quantities can be achieved.81

Earned Value Management - If the production contract is a cost type, earned 

value management is normally required. Often Government buying organizations do 

not understand EVM and do not recognize when cost or schedule goals are 

unrecoverable.82 If a fixed price contract is in force, then EVM is not required, but 

should still be encouraged as a method by which the conscientious contractor can 

manage more tightly. 

Aggressive Quality Management, Particularly Root Cause Analysis and 

Corrective Action - If the contractor reacts aggressively to quality defects and vigorously 

seeks corrective action, the result should be reduced cost to the Government. 

Incentives to achieve this kind of contractor behavior have already been discussed 

briefly. Additionally, the corrective solutions should routinely be reviewed for both 

production and logistics cost impacts. Good contractor review processes should be the 

“first line of defense” against production or O&S cost growth. 

Lean Manufacturing - In 1993 the Lean Aerospace Initiative was launched, as a 

partnership between the United States Air Force, Massachusetts Institute of Technology 

(MIT), and aerospace businesses. Within the past two years, the Army Materiel 

Command has attempted to apply lean techniques in Army logistics depots, through 

cooperation with defense contractors. The Defense Acquisition University now offers an 

on-line continuous learning tutorial on lean concepts, “Introduction to Lean Enterprise 

 

81 Bogner, Michael, Chuck Wong, and Bernie Price. “Quantity Discounts/Economic Order Quantity: New 

Quantity Discount Analysis Tool Lets DoD Buyers Save on Total Cost and Receive More Goods.” 

Program Manager. September-October 2002. 

82 Fleming, Quentin W., and Joel M. Koppelman, Earned Value Project Management, 2nd Edition.

Program Management Institute, Inc. 2000. 

- 74 - 
Concepts.” 83 This movement toward use of lean techniques suggests possible 

reductions in TOC across development, production, and sustainment. 

Lessons Learned from Testing - Testing may provide important lessons learned 

that might be used to reduce O&S costs. Besides the discovery of subsystems or 

components that exhibit poor reliability, other lessons appear. For example, faulty 

diagnostic or repair activities may show up in testing. Lessons learned may reflect in 

recalculation of stockage levels, improved diagnostic routines that reduce findings of “no 

fault evident (NFE),” and reduced secondary damage attributable to maintenance work. 

Relentless Updating of Technical Manuals - During the period when a new 

warfighting system is introduced into the fleet or the field, the user community looks at 

that system with a fresh “set of eyes,” possibly awed by the system’s performance 

attributes. As the “newness” wears off, and users and maintenance personnel become 

more familiar with the equipment, they may inadvertently begin to overlook those 

aspects of the technical publications that are in need of correction. 

Implementation of Performance-Based Logistics - The logistics support planning 

accomplished during the developmental phases culminates in logistics structures that 

are set up during this production and deployment time frame. In some instances, 

creative contracting approaches must be used, particularly to launch public-private 

partnerships. The contractual arrangements must be fair, flexible, and innovative. 

Arriving at the best results depends on good dialogue between the uniformed user, the 

materiel developer who planned the support structure in the first place, and the 

organizations (DoD and contractor) that provide logistics support. The number of 

stakeholders is well recognized as an obstacle to Total Ownership Cost reduction. 

H. Risk Management 

A warfighting system risk management program continues to offer benefit during 

production and deployment. If it is conducted by sub-IPTs that are focused at the 

 

83 Defense Acquisition University Homepage, http://www.dau.mil/. n.d. 

- 75 - 
subsystem or component level, solutions can be balanced to address both logistics and 

production concerns. Risk management certainly can be made to include root cause 

analysis and corrective action programs for product defects that show up in production, 

in the training base, or in operational service. Although most of the risk management 

effort is likely to occur within contractor organizations, it is best managed centrally, with 

roll-up reports for higher-level program IPTs that include contractor, materiel developer 

and user. An integrating IPT should meet regularly and include Government PM and 

senior contractor personnel who can both energize the workforce and support efforts 

that take place at the sub-tier IPT levels. 

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PART 4: SUSTAINMENT PHASE 

A. Overview of the Phase 

This phase represents a major transition of responsibility from the acquiring 

organization to the sustaining organization. Depending on Service and type of 

warfighting system, the program management office may be terminated, or greatly 

reduced in size. Ordinarily, there is little funding for in-service engineering. There may 

not be a prime contractor in this phase, depending on how logistics support is 

structured. 

B. Leadership, Motivation, and Stakeholder Involvement 

Leadership emphasis comes from the user and the sustaining command. Active 

dialogue usually addresses supply and maintenance issues. Total Ownership Cost 

issues need to be placed in the spotlight by the users. 

Sustaining commanders need to continue to emphasize identification of costdrivers. Current best practices have achieved some of the largest cost savings through 

partnering. For example, Common Ship Systems has found major R-TOC initiatives in 

reducing crew labor (sailor man-year savings). H-60 Series Helicopters have identified 

RMS improvements that have led to combined models and simplified fleet management. 

There continues to be a need for communications among the stakeholders and a 

forum for ongoing discussion that includes sponsor, user, and sustaining organization. 

C. Documents 

Generic documentation that the sustaining organization needs includes a 

prioritized plan and detailed supporting information, to include business case analyses. 

D. Tradeoff Analysis through Teams 

Even though standing teams probably do not exist in the same way as with 

programs that are being actively developed or produced, there is still value in putting 

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together ad hoc teams that include sponsor, user, sustaining organization, maintainer, 

and in-service engineering. 

Business case analysis (BCA) to support an R-TOC initiative competes against 

other R-TOC BCAs for limited funding. Competitive success is primarily based on the 

best return on investment (ROI), as presented in a BCA, which has been independently 

validated. 

E. Metrics 

The principal determinant that decides “winners and losers” is ROI. Obviously, 

the size of the investment is also a factor; an R-TOC initiative that has the flexibility to 

adjust the scope may be able to improve its chances for selection. Additionally, the 

shorter the payback, the more competitive is the initiative. 

Underlying the competitive selection of R-TOC initiatives are two factors: the 

reduction in ownership cost and the associated improvement in performance. Not 

surprisingly, lower cost usually brings better performance, such as higher availability, 

higher reliability, or improved maintainability. Sometimes there are other improvements 

in warfighting performance, as well. 

F. Database & Data Collection 

Funding to support systems in the sustainment phase is normally minimal; 

therefore, available data would come from existing Service databases. However, in 

some instances, logistics contractors may keep data as part of ongoing logistics 

contracts. Where commercial items or components are being used, the commercial 

contractor may maintain a database. 

Funding Software Support. The software annual change traffic (ACT) provides 

an indicator for the number of software professionals that will be needed to adequately 

support the system throughout its life cycle. This software support is a major O&S cost 

driver for software-intensive systems and must be accurately estimated to ensure that 

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the software does not cause the system to lose its effectiveness due to loss of software 

functionality or lack of upgrades. 

G. Activities and Tools that Support CAIV and R-TOC 

Available tools include the following: 

•

 

Commercial Operating and Support System Initiatives (COSSI).84 Brief discussion of 

this subject is located in Chapter IV, paragraph G, and may be found on pages 38-

39. 

• Reliability-Centered Maintenance. As stated previously, whether or not RCM was 

used in earlier phases, it provides an orderly approach to maximize readiness and 

avoid wasteful maintenance efforts. RCM could be used selectively to analyze 

potential cost-drivers. 

H. Risk Management 

Due to the reduced management during this phase, risk management might be 

expected to be performed as part of other activities, such as postproduction support, 

DMSMS, and RCM reviews. 

84 Holland, Charles J. and Donna Richbourg. “Commercial Operations and Support Savings Initiative 

Handbook.” Office of the Under Secretary of Defense. 14 December 2001. 

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CHAPTER VI: FINDINGS AND CONCLUSIONS 

As a system progresses from early concept, through prototyping, into production, 

and finally reaches the sustainment phase, the opportunities to significantly reduce 

Total Ownership Cost diminish. This clearly indicates that R-TOC efforts are most 

effective early in the developmental cycle where changes are least expensive and 

easiest to implement. The possible effect of a balance between capabilities and 

affordability is that more warfighting assets are available to the warfighter. To that end, 

the TOC stakeholders outlined earlier have a vested interest in influencing the system 

design and development, especially early in the process, to yield a suitable, effective, 

and affordable solution. The challenge is how to accomplish this goal. 

An answer to this challenge has been postulated earlier – make TOC goals part 

of the system key performance parameters (KPP). One of the only methods of keeping 

the TOC goals from being in the “trade-space” for CAIV or other tradeoff analyses is to 

designate those goals as KPP. As with other KPP, the TOC KPP would be considered 

as a mandatory threshold and the use of other tools and techniques would then serve to 

reinforce the importance of TOC. As KPP are also part of the Acquisition Program 

Baseline, TOC would receive attention from decision-makers at every level, throughout 

the developmental process. 

Tools, Techniques and Concepts Supporting Efficient TOC 

Solutions 

CAIV and Other Tradeoff Analyses - With a firm understanding of those 

performance characteristics (hopefully, including TOC) that the warfighter deems critical 

to the system effectiveness and suitability via the KPP, CAIV analysis techniques can 

be used to effect TOC reduction on subsystems, features, and capabilities in the “tradespace” – items not identified as KPP. These analyses serve the materiel developer in 

balancing system capabilities, technologies, schedules, and costs within the parameters 

set by the sponsor. Proper identification of performance parameters and closer 

- 80 - 
connectivity between materiel developer and sponsor will help ensure that the 

developed system is effective, suitable, and affordable. 

In addition to cost tradeoffs, other tradeoff analyses may reduce system TOC. A 

high maintenance, low availability, cutting-edge system that is not a KPP requirement 

might be traded-off or deferred to a future block upgrade, allowing the technology to 

mature, reliability to improve, and life cycle cost to decline. Schedule tradeoffs, while 

always undesirable, may allow software engineers to more fully test and integrate a 

critical software function, eliminating frustrating downtime and costly diagnostics. Both 

of these tradeoffs would reflect reduced TOC. 

Integrated Product Teams - Cost-Performance IPTs play a key role in tradeoff 

analyses that impact TOC and other IPTs can, and should, participate in reducing costs, 

as well. By their nature, IPTs solve problems and make recommendations based on 

their research of a particular program aspect in accordance with their charter. If each 

IPT charter includes the goal for reducing TOC within their area of concentration, 

significant opportunities for TOC reduction could be captured. 

Ownership Cost Databases - We currently are limited in our understanding of life 

cycle costs for the systems we support now, due to the lack of reliable information 

databases. Without that knowledge, we are limited in estimating the impact of TOC 

reduction efforts on those life cycle costs. Asking a program how much they will save 

by a R-TOC effort is rather like asking a person the distance of the path he didn’t take 

and comparing it to the one he did. Someone else certainly has traveled the other path, 

but there is simply no record of it. Establishing RMS cost databases may seem an 

expensive initiative, but the knowledge gained from capturing sustainment costs would 

help focus R-TOC efforts and influence the design of future systems, bringing about a 

better balance of capabilities and affordability. 

Contractor and Government R-TOC Incentives - The profit incentive present in 

the commercial marketplace provides DoD with a powerful tool for reducing TOC. 

Contract incentives (e.g., reliability improvements, increase in MTBF, and reduced 

maintenance cycle time.), Value Engineering Change Proposals (VECPs), shared 

- 81 - 
savings from cost reduction initiatives, and other incentives motivate the contractor to 

perform in a manner that enhances their profit and reduces TOC of the weapon system 

– a true “win-win” situation. 

Source selection criteria shape how contractors compete for development, 

production and Contractor Logistics Support (CLS) contracts and, therefore, TOC 

elements in the Source Selection Plan impact in a positive way the proposals that 

contractors submit. In the case of Public-Private competition or partnerships for 

Logistics Support contracts, the same concept applies – the winning bidder must 

present the most advantageous proposal and the source selection criteria define those 

parameters. Selecting key TOC elements as source selection criteria ensures that the 

competing entities focus on methods of achieving TOC efficiencies to gain advantage 

over other bidders. 

TOC incentives for Government sponsors85 and materiel developers have been

less effective than desired. While TOC is obviously important to the Combat Developer 

and user community, more emphasis has been placed on emerging warfighting 

capabilities and modernization efforts than on TOC performance in the early stages of 

development – stakeholders are more interested in “what the weapon system will do” 

than “what it will cost to do it.” After introduction to the field or fleet, typically, TOC has 

become an issue and R-TOC efforts initiated in response – precisely at the point in 

development where such efforts are most costly and least effective. 

Following suit, the materiel developer communities focus on those APB 

elements, including KPP specified by the sponsor in the capability documents. With 

little TOC emphasis passed from the sponsor in the defining capability documents, 

materiel developers have the incentive to manage to the acquisition cost, program 

schedule, and specified performance. The reason materiel developers are focused on 

the acquisition costs is that, typically, the program and budget elements they manage 

 

85 The term, “sponsor,” is consistent with CJCSI 3170.01C. Sponsor supercedes the term, “combat 

developer,” which may still be used in some DoD communities. 

- 82 - 
are RDT&E and Procurement funding, which relate primarily to the acquisition cycle, but 

only represent about 20 percent of TOC. Except for TOC-related KPP, TOC elements 

inevitably drop into the “trade-space” for managing to the acquisition cost, program 

schedule, and performance identified by the Combat Developer. This often suboptimizes TOC by trading-off features / functions (resulting in higher O&S costs) in favor 

of lower acquisition cost, even though O&S costs consume about 80 percent of TOC. 

Reduction in Total Ownership Cost (R-TOC) - Although R- TOC initiatives are 

more effective and less costly when performed early in the development cycle, TOC 

reduction can be effective throughout the system’s life cycle. Confirming, through costbenefit analyses, that R- TOC initiatives will reduce cost, these initiatives will likely result 

in increasing capability for the warfighter. More funding available in the acquisition 

phase or in the O&S phase, either provides more assets directly (acquisition phase) or 

frees funding to improve readiness rates (O&S phase). Therefore, R- TOC initiatives 

are effective when evaluated on their own merits and not coupled to other interests such 

as increased system capability. 

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APPENDIX 1: ACRONYM LIST 

3-D Three-dimensional 

AAAV Advanced Amphibious Assault Vehicle 

ABC Activity-Based Costing 

ACAT I Acquisition Category I 

ACAT II Acquisition Category II 

AFTOC Air Force Total Ownership Cost 

AH-64 Apache Attack Helicopter 

AO Operational Availability 

AoA Analysis of Alternatives 

APB Acquisition Program Baseline 

AT&L Acquisition, Technology and Logistics 

APUC Average Procurement Unit Cost 

BCA Business Case Analysis 

CAIG Cost Analysis Improvement Group 

CAIV Cost as an Independent Variable 

CBO Congressional Budget Office 

CDD Capability Development Document 

CFA Crossed-Field Amplifier 

CG-47 Aegis Class Cruiser 

CH-47 Chinook Cargo Helicopter 

CI Commercial Item 

CJCSI Chairman, Joint Chiefs of Staff Instruction 

CLS Contractor Logistics Support 

COEA Cost and Operational Effectiveness Analysis

COSSI Commercial Operations and Support Savings Initiative 

CPD Capability Production Document 

CPI Communications and Power Industries 

CPIPT Cost-Performance Integrated Product Team 

CVN Aircraft Carrier 

DAU Defense Acquisition University 

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DMSMS Diminishing Manufacturing Sources and Material Shortages 

DoD Department of Defense 

DoDD Department of Defense Directive 

DoDI Department of Defense Instruction 

DR Decision Review 

DRMO Defense Reutilization Management Office 

DRR Design Readiness Review 

DTUPC Design to Unit Production Cost 

DVD Direct Vendor Delivery 

EA-6B Prowler Electronic Warfare Aircraft 

EDM Engineering Development Model 

EUL Economic Useful Life 

EVM Earned Value Management 

EVMS Earned Value Management System 

FAR Federal Acquisition Regulation 

FED-EX Federal Express 

FMC Fully Mission Capable 

FMEA Failure Modes and Effects Analysis 

FMECA Failure Modes, Effects, and Criticality Analysis 

FMS Foreign Military Sales 

FY Fiscal Year 

GAO General Accounting Office 

ICD Initial Capabilities Document 

ICE Independent Cost Estimate 

IDA Institute for Defense Analysis 

IPPD Integrated Product and Process Development 

IPT Integrated Product Team 

ITAS TOW [Missile] Improved Target Acquisition System 

J&A Justification and Approval 

JCAPS JSTARS Cost and Performance System 

JROC Joint Requirements Oversight Council 

JSF Joint Strike Fighter 

JSTARS Joint Surveillance Target Acquisition Radar System [Aircraft] 

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KPP Key Performance Parameter 

LCC Life Cycle Cost 

LPD-17 Amphibious Transport Dock Ship 

LRIP Low Rate Initial Production 

HAZMAT Hazardous Material 

HEMTT Heavy Expanded Mobility Tactical Truck 

MA Mission Area 

MAP Military Assistance Program 

MBO Management By Objectives 

MC Mission Capable 

MDA Milestone Decision Authority 

MFP Military Force Program 

MIL Military 

MIT Massachusetts Institute of Technology 

MRSP Mobility Readiness Spares Package 

MTBF Mean Time Between Failure 

MTBHMF Mean Time Between Hardware Mission Failure 

MTTR Mean Time To Repair

MTVR Medium Tactical Vehicle Replacement 

NFE No Fault Evident 

NMC Not Mission Capable 

O&M Operations and Maintenance 

O&S Operating and Support 

OPTEMPO Operational Tempo 

OSCAM Operating and Support Cost Analysis Model [Trade Name] 

OSD Office of the Secretary of Defense 

OTA Other Transaction Authority 

OTC Oshkosh Truck Corporation 

PA&E Program Analysis and Evaluation 

PBL Performance-Based Logistics 

PDRR Program Definition and Risk Reduction 

PL Public Law 

PEO Program Executive Officer 

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PM Program Manager, Project Manager, or Product Manager 

PMO Program Management Office 

PROSE Partnership to Reduce Operating & Support Cost Engine 

PV Prime Vendor 

PPSP Postproduction Support Plan 

RAM Reliability, Availability, Maintainability 

RCM Reliability-Centered Maintenance 

RDT&E Research, Development, Test & Evaluation 

RFP Request For Proposal 

RMA Reliability, Maintainability, Availability 

RMS Reliability, Maintainability, Supportability (or Sustainability) 

ROI Return On Investment 

R-TOC Reduction in Total Ownership Cost 

SA Supportability Analysis (or Analyses) 

SAR Selected Acquisition Report 

SDD System Development and Demonstration 

SH-60 Multi-Mission Helicopter 

SI System Integration 

SLAM-ER Standoff Land Attack Missile Expanded Response 

Sub-IPT Subordinate Integrated Product Team 

TEMP Test and Evaluation Master Plan 

TOC Total Ownership Cost 

TOW Tube-Launched, Optically-tracked, Wire-guided Missile 

US United States 

USD(A&T) Under Secretary of Defense (Acquisition & Technology) 

 (now USD(AT&L) 

USD(AT&L) Under Secretary of Defense (Acquisition, Technology & Logistics) 

 (formerly USD(A&T)) 

VAMOSC Visibility and Management of Operations and Support Costs 

VE Value Engineering 

VECP Value Engineering Change Proposal 

WBS Work Breakdown Structure 

- 87 - 
APPENDIX 2: CROSSWALK BETWEEN CJCSI 

3170.01C AND CJCSI 3170.01B 

Much of the activity that takes place during Concept Refinement (formerly 

Concept Exploration) is described in CJCS Instruction 3170.01C, “Joint Capabilities 

Integration and Development System,” published 24 June 2003. Here is a short review 

to assist the reader to crosswalk between this new policy and previously published 

guidance. CJCSI 3170.01C supercedes CJCSI 3170.01B, “Requirements Generation 

System,” 15 April 2001. The earlier document referred to Mission Need Statements 

(MNS), Operational Requirements Documents (ORD), and the requirements generation 

process. The new terminology describes Initial Capabilities Document (ICD), which 

replaces the MNS; Capability Development Document (CDD) replaces the ORD; 

Capability Production Document (CPD) is a reissue of the CDD to support the Milestone 

C Decision Review, which leads to the Production and Deployment phase. The new 

process is called the Joint Capabilities Integration and Development System (JCIDS) 

and replaces Requirements Generation.86

It would be value-added if the ICD for a weapon system was required to include a 

ceiling cost that the Service could afford to pay for the specified capabilities over the life 

cycle: that is, the weapon system TOC. However, Service sponsors are not required to 

include TOC constraints in the Initial Capability Document. The CJCSI 3170.01C 

guidance regarding preparation of the ICD is that relative cost and sustainability are 

considered for the approaches under consideration and, additionally, that the D, PA&E 

may provide specific guidance, as approved by the MDA. The intent of the instruction 

appears to leave the door open for inclusion of a TOC constraint but does not mandate 

its inclusion. 

CJCSI 3170.01C directs increasing focus on supportability and affordability at 

such time as the Service prepares the Capability Development Document (CDD). The 

 

86 Office of the Joint Chiefs of Staff. “Joint Capabilities Integration and Development System.” Chairman 

of the Joint Chiefs of Staff Instruction 3170.01C. 24 June 2003. 

- 88 - 
instruction states that the CDD “provides operational performance attributes, including 

supportability, necessary for the acquisition community to design the proposed system, 

including key performance parameters that will guide the development, demonstration 

and testing of the current increment....” The Instruction further states that the sponsor is 

“...expected...to make affordability determinations in the evaluation of various 

approaches to delivering capabilities to the warfighter.” 

- 89 - 
APPENDIX 3: DODI 5000.2 SPECIFIC GUIDANCE 

RELATED TO OWNERSHIP COST 

DoDI 5000.2 describes the exit criteria for Technology Development as follows: 

“...when an affordable increment of militarily-useful capability has been identified, the 

technology for that increment has been demonstrated in a relevant environment, and a 

system can be developed for production within a short timeframe (normally less than 

five years)....” Affordability must be described in an “affordability assessment.” 

Affordability Determination - DoDI 5000.2 provides the following description: 

“3.7.2.6. An affordability determination results from the process of addressing cost 

during the requirements process and is included in each CDD using life-cycle cost or, if 

available, total ownership cost.” 

- 90 - 
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- 94 - 
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