An article in the Canadian newspaper today talking about how some much needed ships are over budget. It’s a common scenario. Ten years ago the estimate was, say, $15B. And now it is something like $70B. Of course, “these are the only ships needed”, are made to exact specifications, yada yada. In today’s paper, “but the price includes tax”.
Obviously there are a lot of politics in military spending, jobs in politicians ridings, support for domestic industry, maybe the ships are even somewhat close to what is useful. But given the laws against graft and kickbacks, why do these things routinely cost so many times the original estimate?
AIUI, it’s often “cost plus.” So you start out with a fighter jet design, or something, but then all sorts of add-ons are added. Of course, the contractors may be ripping off the government. But with some tech, it’s fairly cutting-edge or new and groundbreaking, and unexpected stuff comes up.
But also - military procurement is increasingly a duopoly, or just a few. Only Lockheed and Boeing make fighter jets in America, for instance, which really harms any economic competition and makes it harder to find a good low-bidder. No American company other than Boeing can make tankers. No company other than Ingalls Shipbuilding or Electric Boat can make nuke-powered submarines.
Definitely politics. For example - the Davie shipyard near Quebec City. I don’t know how many times it’s gone bankrupt, into receivership, and bought and sold. A thousand or so employees are hired, and laid off after the current contract is done. There’s not enough business for Canadian shipyards to keep going without juicy government contracts.
Cost overruns are so common in military spending that it’s more-or-less expected. The government’s program management software anticipates it will happen, and has utilities for “managing” risk, schedule delays, and cost overruns.
Why does it occur? Well, if a contractor estimates a realistic price tag for a new system, it will never be awarded the contract. Their competitor, who offers a rose-colored and unrealistic estimate, gets the contract.
The reason I ask is partly the government is under criticism for its vaccinations. It wants to vaccinate people and the electorate sees it as an urgent issue. Canada funded some research and bought more vaccine doses per capita than anyone. But drug companies needed to retool factories, there were delays, etc. Canada was clearly placed on a back burner compared to some places. Part of it was government reportedly being aggressive in trying to reduce drug costs - which did not help. Probably they signed contracts which did not lay out penalties for non-performance or other mitigation. The government has not released any details of the contracts.
Again, if the government knows some estimates will be optimistic, they could likely do a better job of estimating the appropriate cost, making few adjustments afterwards, putting in penalties for delays and overruns and so forth. It’s not like Canadian soldiers are two feet taller than anywhere else.
But they don’t. And one presumes this is the way things are for a reason. But I don’t see how this dance is ultimately helpful - the orders are often cancelled. This rant does not even mention some frigates now priced at over $200B during Covid. Canada deserves a good military with new and usable equipment. No doubt it has been underresourced for years. But these funding dances seem part of the reason why. A cost-overrun of 30% and 500% are different animals.
This sort of shenanigan could be stopped in a heartbeat by a contract system that says “You quote it, you stay under it.”
A fixed-ceiling contract whereby the competitor who offers a rose-colored and unrealistic estimate would then get…screwed by having done so. Having said they could deliver Weapons System XYZ for just 30 billion dollars instead of 60 billion, they are now obligated to deliver and perform under a hard-ceiling cap of 30 billion no matter what. Sure, it might lead to somewhat un-innovative designs being submitted, but that’s the tradeoff.
This could lead to a cartel approach, though, where the top few defense contractors might secretly mutually agree “We won’t submit any bids below $100 billion.”
In case anyone is wondering, the ships being referred to are almost certainly the Canadian Surface Combatant warships. And it’s not like the Canadian government is buying a commercially available product; these ships are still being designed, so there is no fixed cost.
IIRC, though, the B-21 Raider is being held up right now as a shining example of military procurement done right, under budget and on schedule. So clearly there are some good cases, and the industry just needs to imitate and repeat them.
Most of the time, though, the specs are not even completed at the time the contract is signed, so the government can’t even say exactly what they want delivered. (And even if they were, over the course of a multi-year project the technology is going to change. The “preferred design” for the Canadian Surface Combatant warship was selected in 2018; construction isn’t due to start until 2024 with the first ship delivered around 2031/32 and the last in the latter 2040s. What, exactly and precisely, is the Canadian Navy going to want in the way of technology in 25 years, and how do you price it?)
If the solution were that easy we would be doing it. Suffice to say, there are problems with firm-fixed price contracts for large, multibillion dollar programs.
I do not know enough about procurement to properly judge it (hence the OP). But if a similar country orders a similar product, except several years prior, presumably some of the inefficiencies and details have or shoulda been worked out.
How often is that the situation though? And for very large projects, surrounding factors may have changed since that, or might be changed by the project itself.
If you ask someone to bake you a cake, you can expect it will cost about the same as any other cake. If you ask someone to bake you a cake with unusual ingredients, even if you know the price of one baked some years ago, the price of those ingredients could have changed dramatically. And if you don’t need unusual ingredients, you just want a lot of cakes, your demand for flour and baking equipment could drive prices up.
And that’s not even counting that large projects often involve a lot of interacting parties. Say you plan on having the particular steel you need produced by a certain plant and price your offer accordingly, and then that company goes bankrupt, or their capacity is promised to a different project, and all of a sudden you have not only potential cost changes, but timing issues as well.
So for any large and complicated project, even an exact project match in the past can’t fully inform you of the projected cost in the present.
I agree. I understand complex projects have cost overruns, changes of teams and plans, flaws and unforeseeable obstacles. It’s just that the magnitude always seems to be surprising. And it is not like the companies or government have not done this before.
And the problems aren’t just on the side of the contractors: shifting requirements, competition to underbid because of the lack of technical specificity or ability for government contracting to properly evaluate technical capability and past performance on comparable projects, and a lack of clear and prompt contract direction when problems are encountered are all problems that are beyond the scope of an individual contractor or subcontractor to fix. Contractors will certainly game the system for more profit when they can because they are, after all, in the business of making money (the production of an actual working product is secondary for many contractors, and they’ll celebrate a successful program that produced fuck-all as long as the profit margins are rich) but it is the contract/program manager’s responsibility to assure that the contractor is actually living up to their obligations and meeting milestones before awarding fees.
There has been the notion in the last couple of decades that of course contracts should go from cost-plus-award-fee or cost-plus-incentive-fee because of course the contractor will pad out the work (even though that doesn’t really get them a bigger award fee, and increasing costs due to contractor lack of performance can reduce or eliminate incentive fee if the incentive structure is properly formulated) to a firm-fixed-price contract, which practically guarantees two things: one is that when the contractor runs out of ceiling, they hold the government hostage to increase the ceiling or award a follow-on contract to complete the work lest the entire program die on the vine, or the contractor is savvy enough to take advantage of anything the contract documents (Statement Of Work (SOW) or Performance Work Statement (PWS) and the Technical Requirements Document (TRD) as well as interfaces and specifications) don’t explicitly specify as a deliverable.
I worked on a no-shit-for-real program where the government failed to specify that a guidance system was a requirement on a space launch vehicle and the <name redacted to protect the guilty> contractor gigged the government for millions of dollars more to add it onto the contract despite the fact that a rocket without a guidance system is basically just a really expensive propellant storage tank. Whose fault was that? It was the government contract group that didn’t bother to get anyone to independently review the TRD to assure that necessary requirements were in there, instead just copying a boilerplate from something else they had on hand, to which my response is “I can’t fucking help you stop the bleeding if you point a gun at your foot and repeatedly put the trigger.”
You would be shocked how often a captain or even first lieutenant is put in charge of a multimillion dollar program. These kids barely know how to go to the bathroom without peeing on their hands, and their job often consists of updating PowerPoint decks with slides provided to them by the contractors without any real management support or technical knowledge. I’m often surprised at how often things go right rather than how frequently they get tangled up.
The size of the overruns pretty much come down to the size and complexity of the project. I’m not so sure private enterprise do much better, but they generally don’t do projects of the same size and complexity, and they are not required to be open about it, or exposed to scrutiny, in the way governments are.
I’m sure there are times when costs are accurately predicted and no newspaper articles appear. Just as I’m sure there are companies and countries that do better or worse jobs when it comes to these decisions.
But I’ll bet big overruns are more frequent than updates which are “ahead of schedule and under budget”. During my first engineering degree, the phrase “good enough for government work” was a phrase popular enough to be used by several professors.
Sure, but how are you going to enforce that? Massive years-long civil lawsuits, that’s how. And since it’s civil court, there’s not a guilty/not guilty sort of idea; every time the government changed the goal posts on the contractor might lessen their liability.
Meanwhile, the contractor will have stopped work on the project as they’re not getting paid, and the government’s basically got a half-developed weapon system, and a very costly court fight on their hands.
I think the big difference is that most private companies aren’t constrained so much by the actual contract numbers, in that if a $1 million contract is issued for a private company, it’s totally up to the company whether they want to pay 1.2 million, or if they lose money.
Government agencies, on the other hand, don’t have that latitude- getting extra money involves some convoluted public process involving politicians, and losing money gets a lot of public scrutiny. Think about it this way; when GM hires a contractor, they can just hire who they want. And if they turn out to stink, GM has the option of getting out of the contract, paying more to finish the project, or filing suit. None of which are anyone’s business but GM’s, unless it’s so expensive that it actually affects the stock price.
But if say… the State of Nebraska wants to do something, there are almost certainly all sorts of convoluted purchasing regulations requiring solicitation of bids/proposals along with rules that they have to go with the lower bidder within certain parameters. And if things go sideways, then there
there are state legislators, citizens, Federal regulators, etc… who are scrutinizing everything that’s done. It’s often the path of least resistance to just pay more, rather than to file suit or get out of the contract.