OVERRUNS AND CHANGE OF SCOPE IN R&D CONTRACTS

• Document Type: CREST
• Collection: NGA Records (Formerly NIMA)
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78B05703A000100070018-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 10
• Document Creation Date: December 28, 2016
• Document Release Date: January 20, 2004
• Sequence Number: 18
• Publication Date: February 1, 1970
• Content Type: REPORT

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OVERRUNS AND CHANGE OF SCOPE
February 1970
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Overruns and Change of Scope
in R&D Contracts
Introduction
Overruns and changes of scope in R&D contracts tend to
be regarded as "dirty words," and reflect upon the technical
and administrative skills and general performance of Project
Officers, Contracting Officers, and contractors. This paper
will show that some of the characteristics of R&D work inherently
give rise to overruns and changes of scope irrespective of
the capabilities of the participants.'
Overruns
Uncertainty is characteristic of most R&D work. If there
were no uncertainty associated with the development of a particular
piece of equipment, or in the implementation of a technique,
there would be no need for R&D effort. The uncertainty in
an R&D project tends to be greatest in those efforts which
are basically exploratory in nature, since this.work is oriented
to determining whether certain design details are feasible
,,of achievement. Programs which are concerned with the building
of prototype equipment--especially equipment which may be suitable
for operational use--tend to be less uncertain in fundamental
areas and more concerned with equipment integration problems.
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The uncertainty which is fundamental to R&D work is recognized
in the formulation of the contracts--CPFF, EPIF, etc.--and
certainly the "fair-game" expectation should be that half
the contracts would overrun and half underrun.
For illustrative purposes, consider an R&D program for
the development of a radar. The Project Officer and Contracting
Officer develop the best estimate they can of the costs.
They do this through an analysis of the proposals which may
be submitted by several different companies, through comparison
with similar development programs, and through the actual
,negotiation of the contract in which the final agreement with
the contractor with respect to costs is stated. If this estima-
ting process is performed in an ideal'.manner, the error, or
the variation of the actual cost from the estimated cost,
will sometimes be on the high side and equally likely on the
low side. Theoretically, then, underruns and overruns should
occur with equal frequency. Furthermore, the magnitude of
overruns and underruns should balance.
Exploratory work with its greater degree of uncertainty
should have a wider spread in terms of deviation from the
estimated cost, but exploratory studies which produce only
reports are anamalous in that the costs of these exploratory
efforts are usually very close to the estimate. This occurs,
because of. the way contracts for studies are usually written,
i.e.,.that the contractor shall perform studies in certain
areas to the extent limited by the cost, price, total man-
hours, etc., stated in the contract.
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In practice underruns turn out to be rather rare for
a number of reasons. An informal agreement may be reached
in which the contractor performs additional work to the limit
of the estimated cost. This, of course, should theoretically
constitute a change of scope. These kinds of informal arrange-
ments and certain practices such as deliberately low bids
in order to "buy in" are not considered here since the objective
of this paper is to establish that overruns and changes of
scope are inherent in R&D contracts even if all participants
perform in a 'completely ethical manner.
Failure to make an allowance for inflation, increases
in overhead rates, and similar factors also tend to shift
the ultimate costs associated with an R&D project to the overrun
side. It seems illogical to estimate R&D costs in which technical
uncertainty is inherent to a.high degree of precision, and
fail to make a sensible allowance for inflation and other
factors which may be relatively more predictable. Nevertheless,
this is the practice, and it obviously contributes significantly
to the bias toward overruns rather than underruns.
In summary, nearly all cost type R&D contracts should
overrun or underrun. Making an appropriate allowance for
other factors, if only few underruns occur cost estimates
may be high; if there are many overruns the cost estimates
may be low. The extent of percent deviation from the estimate
should decrease as work moves from an exploratory to an engineer-
ing development phase,, but in terms of dollars the deviation
may incr PEPv~i1 i@~Rg~r~s~~ / 161-s c7i8 9F PR10P2~i2a0118e%uipment
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development are generally much larger than those associated
with exploratory work.
Change of Scope
The actions that constitute change of scope are numerous
and many are subtle. This discussion will treat only the
effects of advances in the state-of-the-art of technology,
i.e., changes of scope which are intended to improve the ultimate
product of the contract through the incorporation of technical
concepts or techniques which have become available after the
initiation of the project.
The reason for developing a piece of equipment of a technique
is usually to secure the advantages of certain improvements
over existing equipment, or to develop something new. Both
of these reasons reflect a judgment that the technical state-
of-the-art promises improvement in performance which is worth
the R&D and other costs necessary to obtain the equipment.
A trade-off which becomes critical as the program moves
to prototype development is between the degree of obsolescence
which the equipment will represent at the time it is available
for operation versus the costs and delays which must be accepted
in order to incorporate recent advances in technology. A
competent and effective Project Officer can never "make up"
his mind" but must continually evaluate potential improvements
as they surface. Nevertheless, he becomes increasingly restricted
as the development proce ds and incorporation of recent state-
of-the-art advances becomes more difficult and costly.
O
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Fortunately, good data exists to illustrate this situation.
X1
5X1
Project
has been conducted for some time by the
Department of Defense to identify the time at which critical
items of technology which were essential to the performance
of military equipment became available. These critical events
which were considered basic to equipment performance included
such things as the development of transistors, better fuels,
etc. From an analysis of a number of different types of programs,
if predecessor equipment existed, i.e.,. an existing radio
set, radar, or other equipment which was to be replaced, only
ten percent?of the items critical to the performance of the
new equipment were available prior to and incorporated into
the development of the old equipment.' Only ten percent of
state-of-the-art technology in the old equipment was critical
to the performance of the new equipment. Fifty seven percent
of the critical technical items were developed in the period
between the development of the old equipment and the initiation
of final development of the new, and 33 percent of the items
critical to the performance of the equipment ultimately produced
became available after the development contract for the new
equipment had been placed.
Obviously, in very simple cases a short development program
may be conducted with no changes. However, in view of the
trend to the development of more complex systems through which
greater capabilities are achieved, changes of scope to achieve
a better end product will be come more numerous. The programs
analyzed in Project I I range from the development of
e
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the Starlight Scope to provide night vision for infantry riflemen
to rather simple computers, to the C-141 aircraft.
In summary, changes of scope will be required if new
equipment is to be as effective as reasonably possible--and
the decision as to what constitutes "reasonably possible"
must reflect a continuing judgment on the part of all concerned
with the development program._
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