This article uses Transaction Cost Economics (TCE) to help characterize, explain, and ultimately reduce the cost growth that plagues many of today's major investments in military capabilities. There is mounting evidence of a systematic bias in initial cost estimates of new weapon systems purchased by the U.S. military. Unrealistically low cost estimates result in cost overruns. Fixing cost overruns can substantially impact public budgets and military readiness. Cost estimates serve a dual function: first, as an integral part of the decision-making process to evaluate military purchases=investments, and second, as a baseline for future defense budgets. In the first case, underestimating costs can result in too many new weapon program starts and excessive investments in those systems. In the second case, unrealistically low cost estimates result in overly optimistic budgets. Budgets planned on the basis of optimistic cost estimates create the illusion of more resources available than actually exist. Two factors are often blamed for unrealistically low cost estimates: bad incentives (psychological and political-economic explanations), and bad forecasts (methodological explanations). While briefly exploring the former, the focus of this study is on cost estimating methodology. Conventional public cost estimating techniques focus on the production costs of public purchases (input costs, learning curves, economies of scale and scope, etc.). The goal of this article is to improve cost estimates by expanding conventional cost estimating methodology to include TCE considerations. The primary insight of TCE is that correctly forecasting economic production costs of government purchases or acquisitions is necessary, but not sufficient. TCE emphasizes another set of costscoordination and motivation costs (search and information costs; decision, contracting, and incentive costs; measurement, monitoring, and enforcement costs, etc.). This study encourages public officials and cost analysts to capture these costs and to understand key characteristics of public-private transactions (uncertainty, complexity, frequency, asset specificity, and market contestability) to generate more complete and reliable cost estimates and improve public sector purchases.

Gap Analysis is widely regarded as a useful tool to facilitate commercial and defense system acquisitions. This paper is a rethinking of the theoretical foundations and systematics of Gap Analysis with practical extensions to illustrate its utility and limitations. It also provides a new perspective on those theoretical foundations from the perspectives of systems and value engineering.The growing sophistication and complexity of new systems or system of systems have resulted in a dramatic increase in time and money to reach operational capability. Gap Analysis, properly defined and enacted, clarifies goals, appropriate investment and the end-use.

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Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. The goal of this study is to offer senior decision-makers a useful framework to evaluate, articulate, and recommend modifications of the government???s bid protest policy to improve procurement outcomes. Most countries allow disappointed bidders to protest public procurement decisions as an oversight mechanism to minimize fraud and errors by procurement officials. The expectation is that allowing bid protests increases transparency and accountability and encourages competition reducing the cost of public purchases. A key contribution of this study is to add an economics dimension to a bid protest process that is mostly thought of in legal terms. The economics approach suggests firms are likely to use the protest process strategically to improve their competitive bargaining position and will be equally strategic in their decision to protest an award. The conclusion is that a firm???s responsibility to its shareholders can lead it to undertake protests for reasons substantially different from, and fundamentally opposed to, the government???s objectives. The economics approach suggests minimizing the risk of protests that result in cost overruns, schedule delays, and performance gaps, while preserving the benefits offered by protests to promote competition and ensure the integrity transparency, and accountability of the procurement process. Adopting an economics perspective reveals two other crucial insights: firms can exploit protests to extract concessions (Fed Mail), and risk-averse officials can overreact in attempts to achieve protest-proof procurements (Buy-offs). In recognizing costs as well as benefits of a protest system, the economics approach invites a review of alternative portfolios of governance mechanisms that complement bid protests (internal audits external audits, independent investigations, alternative dispute resolution, increased training and incentives, etc.), to improve procurement outcomes. REPORT DATE AUG 20102 SUBJECT TERMS AbstractThe goal of this study is to offer senior decision-makers a useful framework to evaluate, articulate, and recommend modifications of the government's bid protest policy to improve procurement outcomes. Most countries allow disappointed bidders to protest...

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