Major military hardware is produced in only limited quantities and involves a massive amount of research, development, and engineering before the first unit goes into service. Because of this, the companies that build it are rarely willing to take the risk of paying for the development themselves and recovering the cost from the units that they sell. What if the customer suddenly decides to cut their buy in half? To avoid this problem, development is paid for by the customer separately from procurement of each item. Well, more or less. The actual answer varies with each particular system, accounting method, and time of the month. But in general, costs break down that way.
So why does this cause so much confusion? Well, it all has to do with what gets reported. Someone who is trying to make the case that some program is outrageously expensive and should be cancelled is going to lump together development and procurement, divide by the number of systems involved, and then publish the resulting number. But, particularly when we’re discussing the cost of a system about to enter production, that’s very different from the actual numbers. To give a well-known example, the B-2 is generally reputed to have cost about $2 billion/plane in the 90s. However, this is the total program cost divided by the 21 airframes. If we’d decided to buy 22 B-2s instead of the 21 we did buy, the extra plane would have cost only $700 million or so. Admittedly, the B-2 is a rather extreme case, and usually the share of R&D cost is less than the procurement (flyaway) cost, but it’s illustrative of the power of this kind of framing.
“bean”, “Military Procurement – Pricing”, Naval Gazing, 2018-03-09.
June 27, 2020
QotD: The cost of military equipment
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