Financial Management

Affordability Analysis

Affordability Analysis is a tool that DoD Components use to determine their priorities and what they can and what they can’t afford on their program(s). It’s based upon the Life-Cycle Cost (LCC) for current or future program(s).  The purpose of the analysis is to avoid starting or continuing programs that cannot be produced and supported within reasonable expectations for future budgets. The Milestone Decision Authority (MDA) approves the Affordability Analysis at the milestones below.  (See Affordability)

Regulatory: The Affordability Analysis is due: [2]

Affordability Analysis is the cornerstone process for the Component leadership to set priorities and determine what it can afford for each acquisition. Each DoD Component develops life-cycle affordability constraints for all its Acquisition Category (ACAT) programs for procurement unit cost and sustainment costs by conducting portfolio affordability analyses that contain a product life-cycle funding projection and supporting analysis, all presented in base year (constant) dollars. The basic procurement unit cost calculation is the annual estimated procurement budget divided by the number of items that should be procured each year to sustain the desired inventory. [1]

Component leadership—not the acquisition community or program management—conducts affordability analysis with support and inputs from their programming, resource planning, requirements, intelligence, and acquisition communities. Each Component determines the processes and analytic techniques they use for affordability analysis within the basic parameters described in the following paragraphs. As noted above, affordability analysis is a top-down process that starts with all fiscal demands on the Component. [1]

A future total budget projection for each Component for affordability analysis provides the first-order economic reality and for allocation of estimated future resources to each portfolio. This projection establishes a nominal rather than optimistic foundation for the future and covers all fiscal demands that compete for resources in the Component, including those outside acquisition and sustainment. [1]

The affordability analysis examines all programs and portfolios together, extending over enough years to reveal the life-cycle cost and inventory implications of the longest program for the Component. The same analysis is used as individual programs come up for review. Nominally, affordability analysis covers at least 30 to 40 years into the future (especially for the Military Departments) but maybe approximately 15 years for Components whose acquisitions all have planned life cycles of, and reach steady-state inventory in, 15 years or less (e.g., Components with only MAIS programs whose life cycles are estimated to be acquisition time plus 10 years after Full Deployment declaration). [1]

The aggregation of portfolio cost estimates for each year, when combined with all other fiscal demands on the Component, may not exceed the Component’s reasonably anticipated future budget levels. Absent specific Component-level guidance by Director, Cost Assessment and Program Evaluation (DCAPE) or USD(AT&L), each Component projects its topline budget beyond the FYDP using the average of the last two years of the current FYDP and the OSD inflator provided by Under Secretary of Defense (Comptroller) (USD(C)), resulting in zero real growth. [1]

AcqLinks and References:

Updated: 7/23/2021

Rank: G1

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