Why Sloppy Accounting Is Destroying the US Fighter Inventory

[spazsinbad]

Take it or leave it - everyones a winner; I have no idea really - some here might comment on the estimations - for truth?

Why Sloppy Accounting Is Destroying the US Fighter Inventory
28 Aug 2016 Brett Odom

"...The F-35 unit cost of $110 million amortized over its 8,000 hour service life is $14,000 per hour. Reliable sources with knowledge of the official figures inform us that the marginal operating costs of the JSF run to $35,000 per flight hour, about $7,000 more than the published DOD rate. That implies a true operating cost of $49,000, not the DOD’s advertised rate of $28,455...."

"Brett Odom is a former F/A-18 Hornet pilot with combat experience in Operation Southern Watch and Operation Iraqi Freedom. A graduate of the US Naval Academy and the Harvard Business School, he is founder and Managing Director of Azimuth (http://www.azimuth.solutions), a boutique consultancy that provides advanced data analytics, business intelligence, and business transformation services to clients."

Source: https://fightersweep.com/6140/the-real- ... -aircraft/

[vanshilar]

I'm not a cost expert, but at first glance, it's stupid. The cost of buying the planes is already accounted for -- it's the procurement cost. It's a separate cost than the operating cost per hour. As a rough analogy, it's the "fixed cost", and the operating cost per hour is the "variable cost", in a "total cost = fixed cost + variable cost" cost model. Just that while these models are typically applied to how many widgets a factory should produce, for example, here I'm applying it to how often you use something.

AFAIK, nobody budgets a car by saying "hmm insurance, gas, maintenance, etc. each year costs X dollars, and I plan to use it for Y years, so I need X*Y dollars for the car". No, everybody knows to account for the cost of buying the car in the first place, and then add on other ownership costs based on how you think you'll use the car (how many miles you'll drive per year, how long you want to use it for, etc.). Everybody knows that the yearly cost of having a car is a separate cost from the cost of buying one. Why would fighter jets be different?

It seems like he's advocating that operating costs per hour should include the cost of buying the plane, amortized over its total hours. But most people know the difference between running costs and one-time costs. And what happens when planes go through service life extensions?

He then makes the statement that the DoD is ignoring the cost to buy planes because the purchase cost isn't included in its "operating cost per flight hour". But the DoD doesn't. AFAIK (and correct me if I'm way off base on this), the military doesn't actually budget on a "operating cost per flight hour" basis, i.e. "oh you flew 2973 hours this year, I'll give you 2973 * 32000 dollars then". Rather, the military gets a total amount of money per year, and spends a total amount of money per year, and flies a certain number of hours per year, and then accountants do the math and then figure out what that means in terms of cost per flight hour. So the cost per flight hour is the output variable (or dependent variable) in cost accounting, not the input variable (or independent variable). The DoD is accounting for it just fine, just some analyst would rather muck up the terms.

[hornetfinn]

Now that article is some seriously sloppy accounting by itself. They are using reimbursable rates which have nothing at all to do with aircraft flight hour costs. Take a look here about year 2009 values:

http://comptroller.defense.gov/Portals/ ... 2009_f.pdf

So, F-4E "flight hour" costs 22 dollars, really? Notice how F-22 cost is stated at 5,788 dollars and F-35 cost 2,526 dollars?

This is where he got his Super Hornet "flight hour cost": http://comptroller.defense.gov/Portals/ ... 16_f_h.pdf

Quote about reimbursable rates: http://comptroller.defense.gov/Financia ... t/Reports/

DoD Reimbursable Rates
Reimbursable rates provide guidance on the amounts that shall be recouped when DoD Components perform work or sell property within the Department of Defense, to other U.S. Government agencies and to private parties.

So, he is comparing apples to rocks because both are you know somewhat round (sometimes)? LOL, whining about "sloppy accounting" and not having faintest idea about the data he himself used for "accounting". Did this guy really graduate from Harvard Business School and now runs data analytics and business intelligence consultancy?

[quicksilver]

"So, he is comparing apples to rocks because both are you know somewhat round (sometimes)? LOL, whining about "sloppy accounting" and not having faintest idea about the data he himself used for "accounting". Did this guy really graduate from Harvard Business School and now runs data analytics and business intelligence consultancy?"

Amen.

Seems Odom spent his uniformed life at the pointy end of things that fly. Good on him.

Good that he brought up CPFH, but his research is incomplete. With a little more rummaging around he would have discovered there several different types of CPFH (cost per flight hour) aggregations used by DoD and the services. 'Reimbursable' is the smallest number because it uses the smallest number of cost elements (think 'list of cost items') -- NOT including some of the capital elements discussed. Other CPFH aggregations do include such things and are used by some DoD organizations to analyze long-term budget risk (for example DoD CAPE). However, these analytical aggregations are unconstrained by actual budgets; they assume everything is funded at 100% of the analytic requirement. Never works out that way but you'll see comparisons where someone with an agenda is comparing a reimbursable CPFH number with a CAPE number; wholly 'apples and watermelons.'

The CPFH discussion is not unlike 'unit' costs. Very commonly, there is a unit recurring flyaway cost ((URF), an Average Procurement Unit Cost (APUC), and a Program Acquisition Unit Cost (PAUC). Each uses a larger number of cost elements in its total aggregation with URF being the smallest and PAUC being much larger. In addition to the value of each cost element in the aggregation, if one includes a larger number of cost elements, one will get a larger number. All are 'unit' costs, and hence the confusion and occasionally, intentional misuse in the public domain.

Parts of DoD and the services do, in fact, account for capital cost elements in CPFH. They just arent used at the operator level because the fleet operator isnt concerned with what are sunk costs; others at higher levels of command or oversight will be. Additionally, where there are high fixed costs but a relatively small number of a specific type of aircraft in the inventory (like early in any new aircraft introduction) the CPFH will be high because the smaller number of flight hours produced is being amortized into a relatively small population of aircraft. This is where some of the seemingly astronomical numbers come from. The CPFH typically gets lower over time as the population of that type aircraft grows until they near their nominal service lives or beyond (sound familiar?).

IIRC, there are 5 different CPFH numbers used to calculate actual or analyze (in unconstrained analysis) JSF CPFH. Me thinks Spaz or someone around this site has actually posted a slide reflecting same.

[smsgtmac]

Aside from failing to recognize (understand?) existing cost definitions, confounding total ownership costs with operating costs, misapplying the 'popular' CPFH $32k estimate for the F-35 and then using it to double count many cost factors, and implying the 'confusion' is a DoD problem it is a swell analysis. I may have to come off hiatus to slap this cr*ptastic PR puff piece.

[XanderCrews]

Aside from failing to recognize (understand?) existing cost definitions, confounding total ownership costs with operating costs, misapplying the 'popular' CPFH $32k estimate for the F-35 and then using it to double count many cost factors, and implying the 'confusion' is a DoD problem it is a swell analysis. I may have to come off hiatus to slap this cr*ptastic PR puff piece.

What do you mean? I thought it was great ad for his agency. It was an ad masquerading as a news story
Never mind that he doesn't have all the facts and is not an accountant. What counts is people will believe it

[neurotech]

Now that article is some seriously sloppy accounting by itself. They are using reimbursable rates which have nothing at all to do with aircraft flight hour costs. Take a look here about year 2009 values:

http://comptroller.defense.gov/Portals/ ... 2009_f.pdf

So, F-4E "flight hour" costs 22 dollars, really? Notice how F-22 cost is stated at 5,788 dollars and F-35 cost 2,526 dollars?

This is where he got his Super Hornet "flight hour cost": http://comptroller.defense.gov/Portals/ ... 16_f_h.pdf

Quote about reimbursable rates: http://comptroller.defense.gov/Financia ... t/Reports/

DoD Reimbursable Rates
Reimbursable rates provide guidance on the amounts that shall be recouped when DoD Components perform work or sell property within the Department of Defense, to other U.S. Government agencies and to private parties.

So, he is comparing apples to rocks because both are you know somewhat round (sometimes)? LOL, whining about "sloppy accounting" and not having faintest idea about the data he himself used for "accounting". Did this guy really graduate from Harvard Business School and now runs data analytics and business intelligence consultancy?

Where these kind of studies usually screw up, is the marginal cost for a service life extension.

One of the F/A-18Bs Boeing flew in back in 2001, cost about $4m to pull it out of AMARC and refurbish it. From memory, the jet had just under 4,000 hours when transferred to Boeing. The refurb costs came from Boeing allocated contract funds. At the end of the project contract (plus around 400 Hours) the jet was returned to the DoD inventory. Apparently, the jet has now flown another 2,500+ hours with the USMC.

Boeing basically paid around $10k/hr in depot costs to get a jet for 400 hours flight time. If we'd kept it another 400 hours, it wouldn't have cost $4m for depot maintenance.

What Lcdr. Odom seems to gloss over is that for a fraction of the replacement cost, an F/A-18B flew to over 7,000 hours. I doubt the cost of getting an F/A-18F to fly to 8,000 hours will be anywhere near the $70m it cost to acquire the jet.

[arian]

A graduate of...the Harvard Business School

Holy crap.

This guy fails basic accounting. Amortization/depreciation costs are certainly costs, but they only matter in business because of cash flow purposes (which is why there are about 10 earning figures which take these into account), not for actual operating costs. Plus the DoD is not a cash flow business, so it means nothing in such a case. DoD is not trying to calculate their earnings.

He fails on his very first paragraph:

The iron laws of economics dictate that any resource that is underpriced will inevitably be overutilized. In a functioning market, the price mechanism provides a signal that regulates demand and incentivizes suppliers to increase supply. In markets without a functioning price mechanism, limited resources will be exhausted to the point where shortages occur.

There is no price mechanism, or market, inside a firm or an organization.

[neurotech]

He fails on his very first paragraph:

The iron laws of economics dictate that any resource that is underpriced will inevitably be overutilized. In a functioning market, the price mechanism provides a signal that regulates demand and incentivizes suppliers to increase supply. In markets without a functioning price mechanism, limited resources will be exhausted to the point where shortages occur.

There is no price mechanism, or market, inside a firm or an organization.

Individual squadrons have budgets.

A squadron has a Operations & Maintenance fund, and if that budget gets used up, they ain't going to be flying. This is what happened in 2013 during sequestration. Some squadrons didn't fly at all, and other squadrons only flew the absolute minimum hours.

[arian]

He fails on his very first paragraph:

The iron laws of economics dictate that any resource that is underpriced will inevitably be overutilized. In a functioning market, the price mechanism provides a signal that regulates demand and incentivizes suppliers to increase supply. In markets without a functioning price mechanism, limited resources will be exhausted to the point where shortages occur.

There is no price mechanism, or market, inside a firm or an organization.

Individual squadrons have budgets.

A squadron has a Operations & Maintenance fund, and if that budget gets used up, they ain't going to be flying. This is what happened in 2013 during sequestration. Some squadrons didn't fly at all, and other squadrons only flew the absolute minimum hours.

Budgets aren't the same thing as market prices, which is where he is deriving his argument from. Its like when you use a piece of machinery in a firm. There's costs associated with operating it, of course, but there is no market price which responds to supply and demand. His argument about shortages comes about because there is a real cost incurred, but the cost is incurred by the firm which then stops production once price (or rather marginal revenue) falls below marginal cost, leaving unmet demand at the artificially low price point. The customer sees the price not the costs. No such thing can happen inside a firm/organization since the budget corresponds to an actual physical cost, not a market price. There can be artificially low price inside a firm since it's all internalized. In short, price is not cost.

His point about amortization is valid only if we cared about calculating earnings, which of course doesn't apply in this case.

[hornetfinn]

I think the basic idea of his method might have some value when calculating lifetime costs of fighter fleet like what Danes did in their evaluation. Comparing costs of single fighter of different generations and capabilties is not smart at all however. That kind of comparison would require knowing how many of said aircraft are needed to fulfill requirements and what kind of equipment they need to do that. Like Danes found out, F-35A is actually somewhat cheaper than Super Hornet when those things are calculated. On top of that it's far more likely to be successful and surviveable against advanced threats. F-35C is more expensive than A-model and thus lifetime costs are probably pretty close to SH or even slightly higher. Much better survivability and effectiveness more than make up for that though.

[XanderCrews]

A graduate of...the Harvard Business School

Holy crap.

This guy fails basic accounting. Amortization/depreciation costs are certainly costs, but they only matter in business because of cash flow purposes (which is why there are about 10 earning figures which take these into account), not for actual operating costs. Plus the DoD is not a cash flow business, so it means nothing in such a case. DoD is not trying to calculate their earnings.

He fails on his very first paragraph:

The iron laws of economics dictate that any resource that is underpriced will inevitably be overutilized. In a functioning market, the price mechanism provides a signal that regulates demand and incentivizes suppliers to increase supply. In markets without a functioning price mechanism, limited resources will be exhausted to the point where shortages occur.

There is no price mechanism, or market, inside a firm or an organization.

I know...

I have accountants (actual CPAs in big 4 firms) in the family and to business people actual accounting is black magic, and to accountants business majors are like those guys that do a tough work out and think they are Navy SEALs.



Complains about sloppy accounting




uses sloppy accounting

[vilters]

Unless you get them for free?

The procurement cost is a cost.
You want to fly?
You have to buy, or lease, or rent, an airplane and an engine.

Even when buying, or renting, or leasing, by the flight hr, the procurement cost is calculated as "cost".

Somebody, somewhere had to buy and pay for them.
And they will not do it for free, or solely for your beautiful eyes.

Some companies lease airplanes, and you can bet your granny on it, but the procurement cost is calculated and paid for.
Some engines are on lease by the flight hr.
Same thing, sooner or later they have to be maintained, or replaced, and they"ll not do it for free either.

if you "forget" procurement cost in your household, you are gonna see black snow very-very soon. (Flemish expression, for going bankrupt)

[arian]

Unless you get them for free?

The procurement cost is a cost.
You want to fly?
You have to buy, or lease, or rent, an airplane and an engine.

Even when buying, or renting, or leasing, by the flight hr, the procurement cost is calculated as "cost".

Somebody, somewhere had to buy and pay for them.
And they will not do it for free, or solely for your beautiful eyes.

Some companies lease airplanes, and you can bet your granny on it, but the procurement cost is calculated and paid for.
Some engines are on lease by the flight hr.
Same thing, sooner or later they have to be maintained, or replaced, and they"ll not do it for free either.

if you "forget" procurement cost in your household, you are gonna see black snow very-very soon. (Flemish expression, for going bankrupt)

Nobody forgot procurement costs. They are simply a different line from operating costs.