DAU Acquisition Training Symposium April 3, 2018 Operating and Support (O&S) Cost Management over the Life Cycle - some Practical Concepts O&S Cost Management warrants dedicated attention, both during the acquisition and sustainment phases, especially in the challenging resource environment the DoD will likely face for the foreseeable future. This session discusses how successful O&S Cost Management is a collaborative effort between all relevant stakeholders, including program management, requirements, financial management, engineering, contracts, cost estimating, and logistics personnel. This collaborative effort will more effectively assess and effect trades among cost, schedule, and performance to better meet the Warfighter's needs. DAU Acquisition Training Symposium April 3, 2018 Ms. Betsy Lederer DAU Elizabeth.Lederer@dau.mil 703.805.3091 Ms. Molly Mertz ODASD(MR) mary.m.mertz.civ@mail.mil 703.614.6137

Operating & Support Costs R&D Cost Procurement Cost Disposal Cost Life Cycle Cost Acquisition Cost O&S Cost Figure not to scale Total Ownership Cost Cost of DoD doing business O&S Cost consists of sustainment costs incurred from the initial system deployment through the end of system operations. Includes all costs of operating, maintaining, and supporting a fielded system. Specifically, this consists of the costs (organic and contractor) of personnel, equipment, supplies, software, and services associated with operating, modifying, maintaining, supplying, and otherwise supporting a system in the DoD inventory. WHAT are O&S costs? 2

O&S Cost Management is a team sport! O&S Cost Stakeholders Program Office PM PSM BFM Cost Estimator Design Team/Engineers Testers DoD Level Comptroller Planners and Programmers USD(A&S) Warfighter CAPE $$ O&S Costs Service Level PEOs Planners and Programmers Resource Sponsors Warfighter Cost Estimators External to DoD Congress Taxpayer Industry WHO needs to consider O&S Costs? O&S Cost Management is a team sport! 3

Life Cycle Costs WHY do we need to care about O&S costs? They are typically the largest portion of the lifecycle and the hardest phase to make meaningful changes during. Optimizing the system for O&S Costs during the RDT&E phase allows the greatest ROI. 4

Sustainment Planning includes efforts and decisions to develop support elements and reduce risk Milestone Materiel Development Developmental RFP Release Full-Rate Production Increasing Plan Detail A B C Solution Analysis Technology Maturation & Risk Reduction Engineering Manufacturing & Development Production & Deployment Operations & Support Sustainment Requirements Product Support Strategy* Maintenance Supply Intellectual Property(IP) Manpower Arrangements Schedule O&S Affordability Cost Funding Should Cost Management Analysis Define > Decompose > Allocate Test Data > Performance Validation Performance Metrics Reliability Growth Progress Core Applicability Workload Source of Repair Standup Options for Repair Data, Manufacturing Specs Data Delivery O/I/D Maintenance and Supply Estimate Support options (AoA) Supportability Analysis & Design Specs, IP Options Interim Support Performance-Based Design/Support Trades (Reviews) Sustainment integrated with Test & Eval Events Contracting Actions Commercial/Organic Transitions Goal Cap O&S Contribution to Life Cycle Cost Estimate > Sustainment Implications of ICE/SCP Variances Pareto Cost Drivers > Identify Should Cost Initiatives > Schedule/Execute Initiatives PSM Designated Product Support Organization Staffed Product Support IPT Established > Integrated with External Stakeholders WHEN do we need to consider O&S Costs? Throughout the lifecycle. The discussion of and consideration for O&S costs cannot wait until we reach the O&S phase. *other product support elements may include: Training, Support Equipment, Sustaining Engineering, Facilities, Design Interface, Packaging, Handling, Storage, Transportation Product Support Planning and O&S Cost Management occur across the life cycle.

O&S Cost and Readiness Drivers WHERE do we manage O&S costs? In the cost driving elements and the levers that can affect those drivers.

AT&L Product Support Guidance DoDI 5000.02, Change 2 February 2017 Overarching acquisition direction What needs to be done for planning product support? How do I plan for product support? What do I need to consider? Defense Acquisition Guidebook February 2017 Acquisition guidance Chapter 4, specific to Life Cycle Logistics Where do I document my planning efforts? Life Cycle Sustainment Plan Outline January 2017 Documentation of sustainment planning Additional Guidance documents to supplement Product Support Planning: HOW do we plan for sustainment and manage O&S costs? PPP Guidebook Partnership development (October 2016) BCA Guidebook COA analysis process (February 2014) O&S Cost Mgt. Guidebook Cost guidance (February 2016) PBL Guidebook Performance Based Strategy & Arrangements (April 2016) PSM Guidebook Product Support mgmt and reference (April 2016) (I)LA Guidebook Logistics Readiness Assessment (July 2011) RAM-C Guidebook Design for Supportability (June 2009) MIL- HDBK-502A Supportability Analysis Process (March 2013)

LCSP Outline v2.0 The LCSP Section 7 provides a foundation to plan ASD(L&MR) Memo to the Components signed on January 19, 2017 Revisions to the LCSP Outline v1.0: Reflect new statute/policy Clarify guidance; incorporate lessons learned Expand the Funding section Stress the tailorability of the document Introduce “Critical Thinking Questions” Reference appropriate DAG sections (future) Review and Approval process unchanged from DoDI 5000.02 Plan is to make the LCSP outline stable (ie, update infrequently), while the DAG will evolve to capture new content, best practices, lessons learned, etc. (12-18 month content review). The LCSP Section 7 provides a foundation to plan for managing O&S Costs of a system

LCSP Section 7 Sub-Sections LCSP Section 7 – Cost and Funding LCSP Section 7 Sub-Sections O&S Cost Estimates O&S Cost Drivers O&S Should Cost Initiatives Affordability Constraint O&S Budgets Understand these… …to develop these… …to achieve this… …to fund adequately Understanding the O&S cost estimate ensures all necessary requirements are included. The tracking of the cost estimate over time allows understanding of technical and programmatic data and assumption changes. Once the cost estimate is understood, then it can be broken down into parts to understand what elements affect the cost the most. Knowing what is driving the cost estimate allows you to invest in the areas that will provide the "biggest bang for the buck". No sense in spending $ in an area that won't provide a good return on investment. Cost estimates and should cost initiative expected savings can be compared against established affordability constraints to determine program affordability. All of this culminates in creating reasonable budget requests that will meet the necessary requirements. 9

Understanding the O&S Cost Estimate Understanding what is included in the O&S cost estimate and how it has changed over time is critical to managing and controlling O&S costs. Notional Example

O&S Cost Driver Analysis 2.0 Unit Level Operations -element O&S Cost Element or sub External Factors Non Design Factors (Program Controlled) LEGEND Design Factors 2.0 Unit Operations O&S Cost KSA 1.0 Unit Level Manpower 3.0 Maintenance 4.0 Sustaining Support 5.0 Continuing Sys Improve 6.0 Indirect Support 1.2 Unit Level Maintenance 1.1 Operations … Annual Mx Manpower Demand Maintenance Ratio (MMH/OH) OPTEMPO (Op Hrs/Yr) System Reliability Mean Time to Repair Maintenance Plan/Strategy System service life Mx Manpower Labor Rate The most important part of controlling costs is to understand the system’s cost drivers. The methods shown here are ways to determine the system’s cost drivers: Decomposition of the system Tornado plots (sensitivity) Pareto analysis Any analysis must discriminate between drivers that are controlled by the program office/Service and those that are not Notional Example Notional Example Notional Example 11

O&S Affordability Notional Example Cost estimating and affordability are not synonymous The cost estimate indicates how much funding the system being sustained needs to perform the mission Affordability looks at how much funding is available in the budget to support the mission If the budget available is less than the budget required: Funds may be re-prioritized from another system/portfolio Readiness may degrade Should Cost initiatives may improve cost requirements Resource Sponsors and Service leadership must prioritize Notional Example 12

O&S Should Cost Should Cost Initiatives are one way to meet affordability constraints If a program is meeting affordability constraints that doesn’t mean that Should Cost principles don’t apply Should Cost Initiatives can be difficult in for O&S since it may be many years before the ROI is seen Developing meaningful should cost initiatives for O&S cost relies on understanding the O&S cost estimate and the drivers of that estimate Should Cost Initiatives = doing smart things to reduce the cost of a program/system 13

Cost and Software Data Reporting DoDI 5000.02, Enclosure 1, Table 7 CSDRs provide details on contract costs, which provides insight for future negotiations and cost estimates CSDR required on all Sustainment contracts over $50M (TY$), and for all Programs over $100M Per 2017 NDAA, ACAT I restrictions no longer apply FFP waives EVM reporting, but does not waive CSDR reporting Only a waiver signed by Deputy Director, OSD CAPE releases contract from reporting Reports should capture total contract value, with no CLINS or Delivery Orders omitted Sustainment-specific special instructions appear in Remarks section of the CSDR Plan 14

O&S Budgeting Notional Example The O&S Phase is comprised of multiple appropriations Programs should understanding what type of money is required and who controls that money Programs must be able to articulate impacts of reduced funding What work will not be completed? What are the impacts to readiness/availability? Notional Example 15

Summary Understanding the components of the cost estimate and the elements that are driving the cost is important to managing the cost Readiness and availability of the system to do its mission suffer when O&S costs are not managed Should Cost Initiatives for O&S may be difficult to approve because of the long ROI, but that doesn’t mean they aren’t worthwhile O&S Cost management is a team sport and not just the responsibility of the PSM and cost estimator 16

Questions?