This article uses transaction costs to predict the probability of incurring a cost breach in a major defense acquisition program (MDAP). As transaction costs are not explicitly measured for MDAPs, the authors use estimates of systems engineering and program management (SE/PM) costs as a share of overall program costs as a proxy for transaction costs. Using survival analysis, a new approach to predicting cost breaches, they also found that an increased share of SE/PM costs in initial program estimates can help predict future cost breaches.
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Authors: Diana I. Angelis, David N. Ford, and COL John T. Dillard, USA (Ret.)
A Real Options Valuation Model is developed to recommend how to valuate technology when benefits cannot be measured in monetary value. Expected values of effectiveness are used to select the preferred alternative. The methodology is illustrated using three guidance system technologies in the Army’s Javelin program. The strategy created multiple real options that gave the Army the right (without the obligation) to select one guidance system technology based on the outcome of technology development tests. Results indicate the Army paid less than the total value of the options, but could have increased net savings by paying different amounts to test each alternative. The analysis method provides a logical and defendable approach to the analysis of alternatives under technology development uncertainty.