Life-Cycle Cost/Capability Analysis for Defence Systems

Graham Clark, Paul Piperias and Richard Traill

AMRL, Defence Science and Technology Organisation
Department of Defence
506 Lorimer Street
PORT MELBOURNE VIC 3207

Keywords:
Life cyle cost, acquisition, upgrade, through-life support

ABSTRACT: The Australian Defence Forces (ADF) acquire and operate expensive and complex weapons systems that
have a service life of many decades. Recent changes proposed for the management of these systems will emphasise life-
cycle cost analysis (LCCA) of the systems themselves, and in a more fundamental change, will introduce cost-based
analysis of the capabilities which the systems provide. These changes offer the potential for major resource savings and
efficiency gains, particularly in the area of through-life maintenance and progressive upgrades, which, with operational
costs, represent the majority of the through-life cost of ownership. The introduction of LCCA to defence management
will be a difficult process, requiring major changes to logistics management approaches (to provide the required costs
database), and the introduction of new methods of monitoring performance. This paper presents a brief account of one
research program through which the Defence Science and Technology Organisation (DSTO) is assisting with the
introduction of appropriate life-cycle cost analysis (LCCA) and associated capability analysis. This DSTO/ADF research
will assess the feasibility of using LCCA to assess upgrade options for an ADF helicopter, and is expected to identify the
areas in which improved cost data or capability measurement is necessary. The research is intended to assist the ADF
with the introduction of a major change to capability-based management.

individual weapons system. Needless to say, major

1 Introduction
1.1 General
The Australian Defence Force (ADF) has a $2billion
annual investment in acquisition of equipment, and
LCC of the various capability options offered in a new
system plays a part in selecting that equipment. The
costs of acquisition are readily identifiable, and life
cycle costs incurred over the first few years of service
are easily assessed in a tendering process. However,
ADF systems, once acquired, require even more - about
$8billion annually - to operate and maintain. The
decisions supporting this $8bn expenditure have, in the
past, been made on the basis of options studies which,
like the acquisition phase, tend to focus on the next few
years of operation for which some cost and capability
projections can be made. The true whole-of-life costs,
however, cannot be assessed without more accurate cost
data, with those costs correctly attributed to system
activity and performance. The reality is that rigorous
Defence-wide cost-benefit analysis to support major
decision-making on in-service management has not
been possible.
Recent changes will result in the ADF managing its
major assets in terms of their contribution to Defence
capabilities. The cost of the capabilities will be derived
from individual system life cycle costs, projected for
each of the roles that system can play in meeting
defined capability requirements. This represents an
extreme change, since, for example, a capability
requirement could be met by a combination of
maritime, air and land forces, and the cost of that
capability would therefore extend well beyond an
management changes will be called for in identifying
both costs and capabilities for each system as well as
for the overall capability. The need for these changes is
reflected in a recent performance audit where Defence
agreed to all but one of the audit recommendations[1].
The Defence Science and Technology Organisation
(DSTO) provides advice to the ADF by identifying and
assessing technical requirements during acquisition of
major systems, and on upgrades or options throughout
the system's service life. In relation to the planned ADF
changes, there will be increased emphasis on how
technical performance options can be translated into an
improved Defence capability. This will place increased
demands on DSTO; it will be necessary, for example,
for DSTO to be fully aware of the capability
requirement in order to provide appropriate advice on
which technical options are the most appropriate and
effective for different roles.
DSTO will assist the ADF in identifying and trialling
appropriate tools for LCCA and associated cost/benefit
analyses. Selected ADF Project(s) will be used as a
basis for these trials.
1.2 Integrated Logistics Support and LCCA
ILS is a disciplined, unified and iterative approach to
the support of Defence systems, and consists of ten
elements (table 1.) which are all inter-related and
mutually dependent. Cost considerations are integral to
the application of ILS, and a particular source of
difficulty for Defence - one which will need to be
addressed as a matter of priority -has been the difficulty
of linking costs to specific operational capabilities.
Recent recommendations [2] suggest that Defence
adopt LCCA as the overarching methodology for during early planning. (Figure 2.) A typical model
logistics cost effectiveness analysis and financial consists of the following stages, where each stage can
modelling and that LCCA activities should be be expanded into sub-stages [5]:
coordinated across all Defence agencies.
(a) Determine/revise scope of model. The model may
be constructed at several different levels, varying in
the scope of the costing data required to enable
Engineering Support Maintenance Support
comparisons to be made. It may, for example be
Computing Support Supply Support aimed primarily at comparing costs of minor
options in a weapons system, in which case the
Technical Data Personnel majority of through-life costs will be common to
Support and Test Training and training all of the options, and can usefully be omitted,
Equipment support improving the accuracy of the result. Alternatively,
if an estimate of the real through-life cost of a
Packaging, Storage, Facilites system , or of a capability, is required, it will be
Transportation, and necessary to attribute a much wider range of costs,
Handling usually at the expense of accuracy. Where the
true cost of a capability is required, all costs,
however peripheral, should be attibuted; in
Table 1. The ten elements of ILS. practice, loading of the model with many standing
costs may reduce its usefuleness, and it may be
preferable to allocate the common standing cost
1.3 Life Cycle Cost Analysis attributions in a separate exercise.
(b) Determine/data to collect for LCCA. The crucial
point here is to maximise accuracy by focussing on
known high-cost items rather than unnecessary
low-impact details. Various tools may be used to
accomplish this (e.g. focus on identifying
assemblies, rather then individual parts, which have
attracted major costs, or identify known high-cost
replacments, or identify the major maintenance
activities using staff-years of effort). The
experience of other operators may be useful.
Identification of sources of cost and usage data for
Figure 1. Relative proportions of cost of ownership
the various scenarios required will probably
represent the major difficulty in the whole LCCA
process. Where data are unavailable, the model
Life cycle cost analysis (LCCA) can provide a
must flag that absence, the significance of the
valuable input to major decisions such as those involved
omission, and any assumptions made to rectify it.
in acquiring new systems. A thorough analysis of the
cost-of ownership, made up of acquisition costs, (c) Select LCC model(s). Essentially, the choice of
through-life costs such as maintenance and operational model should not be significant, since its role is
costs, potential system upgrades or refits, and the costs simply to sum costs. In practice, however, the data
of system retirement and disposal, is clearly essential if input and output features of the computer model
we are to assess the cost-effectiveness of new or will greatly influence its usefulness. In particular,
existing systems. the model will need to be constructed for a range of
scenarios (even the simplest weapons system may
be used with different mission mixes), and its
ability to be reconfigured to represent those
scenarios
(d) Collect data. It is essential that the data sources and
the assumptions which are made concerning
scenarios are identified and logged.
(e) Analyse data and prepare LCCA report. The
reporting capabilities of the model are particularly
important; it may be necessary to extract a wide
variety of scenarios for comparison (“what if...”) or
Figure 2. Commited and actual expenditure throughout to conduct sensitivity analyses related to various
life cycle of asset. management options.
There are many texts on this topic [3,4] emphasising
that the major portion of the life-cycle cost for a given
system stems from the consequences of decisions made
1.4 Activity-Based Management
Activity-Based Management analyses can be
extremely useful in that they identify the primary
capabilities which each activity supports. In essence,
this provides the range of activities which will need to
be costed in order to produce a true whole-of-life cost.
The method by which the ABM data are obtained,
however, may influence the result, in that self-
assessment of activity may be an unreliable measure of
a contribution to true system operating costs. Such data
will however, tend towards an upper bound estimate of
the true cost.
1.5 Capability
The LCCA approach will identify dollar-based costs.
Decision-making on options for future Defence fleet
management will need to relate these dollar costs to the
non-dollar value capabilities which are associated with
each option; each decision is a cost/benefit decision,
and this will focus attention on the development of
improved decision-making aids. Most Defence systems
need to be configured for a range of capabilities, and it
is essential that the configurations selected represent the
optimum configuration for that range. As part of its
research, DSTO will examine a range of decision-
making tools (software), with particular attention to
those which allow selection of optimum system
configuration. It would be useful, for example, to
identify the extent to which it is permissible to
compromise one capability to promote another, and
then to use these choices to assess different
configurations. (Alternatively, the optimum may be
simply the configuration which detracts minimally from
certain key capabilities). In the light of the ADF
proposed changes to fleet capability management, it is
clearly important that our ability to assess non-dollar
benefits and costs be given appropriate weight
alongside the (perhaps easier) dollar costing process.
2 Case Study
A proposed acquisition/upgrade project has been
chosen as a vehicle for trialling a detailed LCCA.
Project SEA 1405 is a project which will define and
explore options for a mid-life upgrade for NAVY S-
70B-2 Seahawk helicopters, and will implement the
upgrade. DSTO is already involved in the project,
exploring and providing advice on upgrade options. In
Life-Cycle Costing, DSTO will assist the newly formed
Joint Logistics Sytems Agency by trialling LCCA
software which represents a potential advance on the
models in current use. The trial will offer several
benefits:
(a) The potential for further development or
customisation of the model to better suit Defence
purposes.
(b) It is likely that one of the principal benefits of the
trial will be to identify the extent to which cost and
activity data currently avaialable in Defence can be
used to build a suitable model, and to identify and
prioritise ways of improving any deficiencies.
(c) The trial will involve acquiring new equipment
amd provide an opportunity to evaluate
manufacturers’ ability to provide accurate LCCA
data. It will assist in formulating new procedures
for ensuring that such data is both realistic and
compatible with Defence LCCA requirements.
(d) It will provide LCC comparisons between upgrade
options which will be identified in the course of the
Project.
(e) The baseline LCC data for the existing helicopter
will provide a base for further development of a
through-life cost model.
(f) The trial will identify the extent to which
attribution of standing costs is useful for the
options study, and for the LCC model.
(g) The helicopter in service usually operates from the
deck of a Navy FFG frigate. The interaction
between the ship and the helicopter makes the
system being analysed much more complex than
the helicopter alone. The trial will explore the
extent to which ship operations and requirements
impinge on the model build.
DSTO will also identify the capability implications of
the various upgrade options, and explore methods of
evaluating the cost/capability trade-offs which will be
associated with the various options.
It is likely that lack of data will force the initial
analysis to be fairly rudimentary. The trial however is
intended to provide baseline models and scenarios
which will be useful for further development even after
the upgrade recommendations are made.
3 Other Potential Projects and Resources
Several current and recent acquisition and options
studies will be valuable resources in developing the
capability discussed above. These projects include
acquisition of new helicopters, a new Lead-in Fighter,
Airborne Early Warning and Control aircraft and the
proposal for a Caribou replacement (Light Tactical
Aicraft, LTAC). These projects will also require
substantial LCCA, and will provide useful guidance for
the DSTO LCCA trial.
DSTO does not intend to develop LCCA models in
competition with industry; accordingly, the trial will
have industry involvement, and will seek to identify
requirements for improving existing commercial
software options for Defence purposes. DSTO links
with academic institutions will be explored to assist
with the trial.
4 Conclusions
DSTO is conducting a trial of LCCA software with
potential for Defence application. The trial is intended
to provide Life Cycle Cost comparisons between
upgrade options for a NAVY helicopter, but will
provide a vehicle for exploring the availability of 6 Author Biographies
Defence and manufacturers’ data, and the activity-based
analysis required to construct useful model scenarios Dr Graham Clark obtained a BA in Natural Sciences
representing the various system capability requirements. and a PhD in Materials from the University of
The trial represents one way in which Defence is Cambridge, and manages research in DSTO into the
upgrading its management practices to provide more analysis of cracks and other critical defects in aircraft.
effective use of resources, and will rely heavily on links
and collaboration between DSTO and industry, Mr Paul Piperias graduated in 1985 from the
academia and Defence units. University of Sydney with a Bachelor of Engineering
(Aeronautical) and completed a MEngSc in 1991 also at
5 References the University of Sydney. At AMRL Paul has worked in
structural testing, vibration and stress analysis. In 1996
1. Life-cycle Costing in the Department of Defence, Paul completed an MBA through Deakin University
Australian National Audit Office, report No. 43 and APESMA.
(1998). Mr Richard Traill has obtained a B.Sc.(Hons) and
B.E.(Hons) from Monash University. He worked at
2. Wright, S.M. Integrated Logistics Support and Life BHP’s Melbourne Research Labs prior to joining
Cycle Costing Analysis, Letter report JLSA AMRL in 1998.
Department of Defence, PSL/4011/1/1 Pt1 (37)
(1998).
3. Fabrycky, W.J., and Blanchard, B.S. Life-Cycle Cost
and Economic Analysis, Prentice Hall, New Jersey
(1991).
4. Dhillon, B.S. Life Cycle Costing, Gordon and
Breach, New York (1989).
5. Defence Industry Study Course: Syndicate Reports,
Life Cycle Costing – NSW syndicate 3,
Commonwealth of Australia (1996).