The high cost of government weapons and aerospace programs has been a problem for decades. The most outrageous examples often make headlines. In 1985, one read “Pentagon pays $640.09 per toilet seat cover, gives new meaning to ‘throne.'” Adjusting for inflation, in 2018 this would have been two to three times this cost, somewhere in the range of $1,300 to $1,900. However, the Air Force paid much more than that in 2018 for a toilet seat cover – a whopping $10,000! This is not an isolated example. In 2011, the Army paid $644.75 for a gear smaller than a dime that cost only $12.51 to manufacture; and in 2014, the Department of Defense paid $492.17 for a straight-headed pin that cost $36.08 to make. A recent eye-popping headline is that a $5 part planned for nuclear modernization may result in an $850 million cost increase! The parts themselves do not meet the standards required for nuclear weapons, so the cost of the part will increase from $5 to $75, but the bigger contributor to the cost increase is the delay in schedule required to integrate and test the new capacitors, which is expected to delay the program by as much as two years. Defense contractors have large infrastructure that charge to these projects, and any delay, once a contract is in place, is very costly.
There are two key reasons why these costs are so high. One is the Defense contractor marketplace. As the U.S. is a capitalist economy, the government does not own the means of production. There are some government agencies that are able to design and build satellites and weapons on a limited scale, but by and large, the U.S. government depends on private firms to develop, manufacture, and maintain its weapon systems and aerospace programs. In the 1970s, there were several dozen defense and aerospace contractors in the marketplace. Between 1980 and 2000, through a series of mergers and acquisitions, this dwindled to what is known as the “Big 5” today – Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon. And in some particular commodities, there are fewer than five companies able to do design and build systems. For example, one company is the primary provider of solid rocket motors that are used in most missiles. This lack of competition and large size of these companies provide the contractors with pricing power. Much like the oil cartel OPEC, these large firms have a great deal of pricing power. Unlike OPEC, contractors like Boeing and Raytheon are not allowed to explicitly collude on their bids. However, they can learn to tacitly collude through multiple interactions, as the political scientist Robert Axelrod found to is likely to occur through his experiments in non-cooperative game theory. Also, with their large revenues and high profits, the “Big 5” contractors have the resources to buy political influence through lobbying and through political donations. This gives them additional leverage in achieving favorable terms when negotiating with the government. Th
The other big driver of high costs is government bureaucracy. Since the government has to depend on a contractor to do the real work of designing, building, and maintaining its systems, it has to oversee the work to make sure the contractor is doing its job well. In a competitive bidding environment, the low price could come from a contractor that is going to be cheap at the expense of quality. This idea is embodied in a statement attributed to John Glenn, the first astronaut to orbit the Earth on Friendship 7 in 1962: “As I hurtled through space, one thought kept crossing my mind – every part of this rocket was supplied by the lowest bidder.” However, the government does not have a profit objective, so there is no incentive to make this oversight optimal. This oversight is provided by program management and systems engineering. Systems engineering is a type of engineering activity that ensures all the parts of a system work together. On average, for a development program, the type of oversight provided by these activities is 40% on top of the cost of designing the system hardware. However, it can be much higher. I was involved in a program once where for every person who was working directly on the hardware, there were 10 people who were overseeing that work. This was the result of a bureaucratic mentality that is warped. When a problem occurs, the right thing to do is figure out what went wrong and then correct the root cause. The government does not do this. When a problem occurs, it adds another layer of oversight. Additional oversight does not fix the root cause. And it slows down the real work, as the additional oversight interrupts the real work getting done by doing reviews. In my own career as a civil servant, I saw this occur repeatedly. I had just taken a job as the head of cost estimating for a government agency when a government report was issued critiquing the work being done by my group. In response, my boss added another check by establishing a separate group to review project cost estimates, a function which I also fulfilled. This was in addition the reviews provided on a regular basis by two other external organizations.
This type of growth of bureaucratic oversight is captured well by Dr. Seuss in his 1973 book Did I Ever Tell You How Lucky You Are?:
Oh, the jobs people work at! Out west near Hawtch-Hawtch there’s a Hawtch-Hawtcher bee watcher, his job is to watch. Is to keep both his eyes on the lazy town bee, a bee that is watched will work harder you see. So he watched and he watched, but in spite of his watch that bee didn’t work any harder not mawtch. So then somebody said “Our old bee-watching man just isn’t bee watching as hard as he can, he ought to be watched by another Hawtch-Hawtcher! The thing that we need is a bee-watcher-watcher!”. Well, the bee-watcher-watcher watched the bee-watcher. He didn’t watch well so another Hawtch-Hawtcher had to come in as a watch-watcher-watcher! And now all the Hawtchers who live in Hawtch-Hawtch are watching on watch watcher watchering watch, watch watching the watcher who’s watching that bee. You’re not a Hawtch-Watcher you’re lucky you see! (ref?)
This oversight is very expensive. You can see just how much more expensive it is by looking at systems that are built both for government and commercial customers. Communication satellites is a prime example, as both commercial and military organizations rely on them. These are designed and built by the same companies, using the same personnel, and the same equipment. In this market, the government product cost two to three times as much. This is driven by additional testing, and the abundance of reporting requirements and direct oversight by the government for their programs.
What can be done to solve these two problems? The best way to fix a lack of competition in the long run is to use antitrust legislation to break up the large firms into smaller companies that will compete against one another. In the shorter term, the government needs to do some strategic thinking. Game theory is an area in economics that deals with interactions, both competitive and collaborative. It provides a systematic, structured way of thinking about the problem of strategy in negotiating that the government can use in negotiating better deals.
Bureaucracy is a tougher nut to crack. I once heard an acting head of NASA say that no one cares about cost. Once a spacecraft is launched, all anyone remembers is whether it worked. This mindset must change. A greater emphasis on controlling cost with an emphasis on understanding the tradeoffs between cost, schedule, and performance must occur to cut back on unnecessary oversight. Limiting the size of the civil service workforce would help with this as well.
While the government has little appetite for creating a more competitive marketplace by using anti-trust to break up the large oligopolies into leaner, meaner competitors, and the government is slow to change its bureaucratic ways, commercial firms are breaking into this market that may help solve both problems. Companies like Elon Musk’s SpaceX have revolutionized the launch vehicle market for gaining access to space at much lower prices that those offered by traditional “Big 5” firms. The head of a government agency where I used to work was shocked to report that Elon Musk told him that he did not need systems engineering, and that system engineering was for dummies. While there must be some oversight and coordination of activities at the top level, Musk’s comments show his willingness to consider too much oversight as an obstacle to accomplishing his company’s mission. As an entrepreneur, Musk has skin in the game. The real hope for lower prices of government systems is the reliance on commercial companies like SpaceX and its competitors. They have entered the market for space and should be encouraged to compete for other government contracts as well.