Financial Management

Should Cost Management

Should Cost Management is a technique implemented by the DoD on their acquisition programs to understand the true cost of a program once all the unnecessary costs are eliminated.  It helps Program Managers (PM) identify and eliminate inefficient and non-productive tasks from their program. It’s designed to proactively target cost reduction and drive productivity improvement.

Should Cost Management applies to programs in all Acquisition Categories (ACAT), in all phases of the product’s life cycle, and to all elements of the program cost. [1]

10 Ingredients of Should Cost Management: [2]

  1. Scrutinize each contributing ingredient of program cost and justify it. Why is it as reported or negotiated? What reasonable measures might reduce it?”
  2. Particularly challenge the basis for indirect costs in contractor proposals.”
  3. Track recent program cost, schedule, and performance trends and identify ways to revers negative trend(s).
  4. Benchmark against similar DoD programs and commercial analogues (where possible), and against other programs performed by the same contractor or in the same facilities.”
  5. Promote Supply Chain Management to encourage competition and incentivize cost performance at lower tiers.”
  6. Reconstruct the program (government and contractor) teams to be more streamlined and efficient.
  7. Identify opportunities to breakout Government-Furnished Equipment versus prime-contractor provided items.
  8. Identify items or services contracted through a second or third party vehicle.
  9. Eliminate unnecessary pass-through costs by considering other contracting options In the area of test:
    1. Take full advantage of integrated Developmental and Operational Testing to reduce the overall cost of testing;
    2. Integrate modeling and simulation into the test construct to reduce overall cost and ensure optimal use of National test facilities and ranges
  10. Identify an alternative technology/material that can potentially reduce the development of life-cycle cost (LLC) of a program.  Ensure the prime product contract included the development of this technology/material at the right time.

Should Cost Target

A Program Manager’s cost goal for an acquisition program, or particular activity or product within an acquisition program, developed by analyzing all elements of the program’s Independent Cost Estimate (Will-Cost Estimate) and planning reasonable measures to reduce them. These specific, discrete “Should-Cost” initiatives are developed with prudent, cost-benefit-based considerations of associated risks, but without unacceptable reductions in the value received. A program’s “Should-Cost” Target represents what the Program Manager believes the program ought to cost if identified cost-saving initiatives are achieved.

Program Management will develop, own, track, and report against Should Cost targets. Estimates and results will be provided at milestone reviews and at specified decision points. For Major Defense Acquisition Program (MDAP)s and Major Automative Information System (MAIS) programs, program managers will report progress against Should Cost goals at Defense Acquisition Executive Summary reviews. [1]

Should Cost Estimate

Part of this management technique is a should-cost estimate.  The estimate is an in-depth review of a contractor’s plan to identify and eliminate inefficiencies and diseconomies and quantifies their effect on the total cost of the project. The resulting cost figure is the should-cost estimate.

Will-Cost,” which is an effort to better budget and plan for weapons programs using more realistic independent cost estimates rather than rosy, mostly contractor-derived estimates.

AcqLinks and References:

Updated: 7/24/2021

Rank: G1

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