Fiscal constraint is a reality that all participants in the defense acquisition process must recognize. Cost must be viewed as an independent variable. Accordingly, acquisition managers shall establish aggressive but realistic objectives for all programs and follow through by trading off performance and schedule, beginning early in the program (when the majority of costs are determined), to achieve a balanced set of goals, based on guidance from the MDA.

The purpose of the Milestone I decision point is to determine if the results of Phase 0 warrant establishing a new acquisition program and to approve entry into Phase I, Program Definition and Risk Reduction.

At Milestone I, the MDA shall approve the following:

1. Acquisition strategy;

3. Phase I exit criteria.

The DOT&E and DTSE&E shall approve the Test and Evaluation Master Plan (TEMP) (including alternate LFT&E plan, if applicable) for all OSD test and evaluation oversight programs. If full-up, system-level LFT&E is unreasonably expensive and impractical, a waiver and alternative LFT&E plan must have been submitted and approved by Milestone II.

The purpose of the Milestone II decision point is to determine if the results of Phase I warrant continuation of the program and to approve entry into Engineering and Manufacturing Development (applies to both hardware and software). The LRIP strategy and decision authority shall be considered at this milestone.

At this milestone, the MDA shall approve the following:

1. Acquisition strategy;

3. Phase II and LRIP exit criteria;

4. LRIP quantities*; and

5. Waiver from full-up, system-level LFT&E, if applicable.

* Not applicable to ACAT IA programs.

The DOT&E and DTSE&E shall approve the TEMP for all OSD test and evaluation oversight programs.

The purpose of the Milestone III decision point is to authorize entrance into production for an ACAT I or into deployment for an ACAT IA program.

At this milestone, the MDA shall approve the following:

1. Acquisition strategy,

3. Phase III exit criteria, if appropriate, and

4. Provisions for evaluation of post-deployment performance.

CAIV is a process that helps arrive at cost objectives (including life-cycle costs) and helps the requirements community set performance objectives. The CAIV process shall be used to develop an acquisition strategy for acquiring and operating affordable DoD systems by setting aggressive, achievable cost objectives and managing achievement of these objectives. Cost objectives shall also be set to balance mission needs with projected out-year resources, taking into account anticipated process improvements in both DoD and defense industries.

Reducing the cost to acquire and operate the Department's equipment while maintaining a high level of performance for the user is my highest priority. Consequently, though the Defense Manufacturing Council (DMC), I established a Department-wide working group to address approaches and measures to reduce life cycle costs. The group's work is now concluded, and their final report is attached.

I approve the report's recommendations. This memorandum establishes my policy and strategy to develop and field affordable weapon systems that are responsive to the users' needs. This strategy uses the best approach which requires that we thoroughly scrub program goals, not only for unnecessary mil specs, regulations, and data, but also -- and more importantly -- for marginal performance improvements that have little to do with actual combat effectiveness, but can drive up cost and schedule through unnecessary program risk.

To achieve this goal we have to set in motion a number of measures, including:

• Performing timely cost-performance trades, as outlined in my July 19, 1995, memo, in order to set program cost objectives at an affordable and efficient level. User participation in all cost-performance trade decisions is essential to ensure that we meet warfighting requirements.
• Aggressively managing programs to meet those objectives, thus making cost a major driver while meeting the true needs of the warfighter. This concept is called "cost as an independent variable" (CAIV). CAIV is the DoD equivalent of best commercial business practices.
• Incentivizing the entire Defense community to meet program goals by expanded use of existing techniques, for example, competition, as well as innovative vehicles such as new awards programs, plus a mechanism to finance high-leverage ways to reduce costs.
• Realizing there are risks to be taken and risks to be avoided. When risks are taken, we will put in place appropriate risk management and contingency plans.

The above measures, taken together with other acquisition reform initiatives, should help us maximize the return on our investments -- not only in individual programs, but also as a whole, given that the savings will allow us to pursue more programs, or increase our procurement quantities to better meet our modernization needs. Additionally, by adopting the CAIV philosophy outlined here, we should -- through reduction of unnecessary complexity in both programs and products -- be able to compress and maintain schedules.

While this policy will apply to all programs, I want to monitor very closely its implementation with a very few key programs, designated in the attachment as "Flagship." These programs will be used to pave the way for widespread us e by setting example of good cost -- savings practices, and will be used for feedback on this policy as it evolves. Implementation guidance for this policy is attached.

//signed//

Paul Kaminski

Implementation Guidance

Reducing Life Cycle Cost of New and Fielded Systems

Systems in Development

OIPT Leaders:

Ensure that each Major Defense Acquisition Program in Concept Development or Demonstration/Validation phases has established (by the next milestone review or within one year, whichever is sooner) aggressive and realistic cost objectives for both production and O&S costs and have well-defined steps and events that will lead to achieving the objectives. For programs already beyond Milestone II, the OIPT will determine the degree to which it is feasible and advisable to re-vi sit program cost objectives in light of the attached policies and report to USD (A&T) by October 10, 1996.

Component Acquisition Executives:

1. Require each program manager for a Major Defense Acquisition Program not beyond Milestone II to develop a strategy to implement CAIV concepts as outlined in the attached paper and to submit it to me by July 1, 1996.
2. Ensure that non-major defense acquisition programs, where appropriate, have established (within one year) aggressive cost objectives for both production and O&S costs and have defined steps and events that will lead to achieving the objectives.
3. Ensure that RFPs and contracts require contractors to develop and implement a management approach for achieving cost objectives.
4. Ensure that tools are available for supporting program managers in setting aggressive cost objectives (with supporting cost models) and in managing risk.

Director, Cost Analysis Improvement Group (CAIG):

1. Ensure that independent cost estimating practices consider new industry business and manufacturing processes proposed by program managers.
2. Continue refinement of O&S cost estimation models and develop enhancements to those models to better support analysis of cost-performance tradeoffs.
3. By February 1996, provide estimates of funding requirements to accomplish the above.

Director, Test, Systems Engineering & Evaluation:

Review risk management practices and techniques and determine whether new approaches are needed to improve risk management. Report to USD (A&T) by June 1996.

Director, Acquisition Program Integration:

Ensure that policies in the attached paper are reflected in the re-write of DoDD 5000.1 and DoDI 5000.2.

Fielded Systems

Deputy Under Secretary of Defense, Logistics:

• Implement an awards program to incentivize individuals and organizations to reduce life-cycle costs, and report the results to USD (A&T) by January 30, 1996.
• Working with the comptroller and Component Acquisition Executives develop a mechanism to reduce life cycle costs by making investments that result in high payback. provide the plan to USD (A&T) within one month.
• Implement a CAIV-based program of modernization through Form, Fit, and Function spares upgrades. Provide within six months a list of candidate programs within each service, along with a plan for speedy implementation. The objective is to launch this as a major initiative across the Department within one year.

Flagship Programs:

The programs below are designated "Flagship Programs" for the implementation of CAIV concepts.