An analysis of cost overruns on defense acquisition contracts

Cost overruns are not uncommon in defense contracts. Because of this, there is a need for more realistic cost projections. The United States Office of the Under Secretary of Defense for Acquisition (OUSD(A)) reviewed 500 defense contracts and observed that once a contract is 15 percent complete, it is unlikely to recover from a cost overrun. To test this observation by the OUSD(A), 64 completed defense contracts were examined with the purpose to review the cost overrun data. Based on the assertions by the OUSD(A) and other research, four hypotheses were tested. The results confirmed the hypotheses in 95 percent of the cases. This indicates that not only is recovery from cost overruns in defense contracts highly improbable, but the will likely increase during the project duration, regardless of the type of contract, the stage of the contract, or which branch of the armed services the contract served. Timely management attention to cost variances can turn these cost overruns around.