Understanding the price of military equipment
Confusion reigns in discussions about the cost of the Department of Defence’s equipment projects. Whether we’re talking about media articles, parliamentary committee hearings, letters to the editor, duelling internet commentators or any other forms of discourse that address Defence acquisitions, the only thing that’s clear is that we’re almost always talking past each other when it comes to the cost of military equipment. Defence doesn’t help when it releases only a bare minimum of information. This sorry state of affairs reached its peak several years ago, when it turned out that when Defence said that the cost of the Attack-class submarine was $50 billion it really meant that the cost was somewhere around $90 billion.
The situation gets even murkier when commentators compare the cost of military acquisition projects here in Australia with ones overseas. It’s very rare that we can make a direct, apples-to-apples comparison between local and overseas projects, and very often it’s more like apples-to-orangutans. Being completely unaware of the basis of the costs they’re comparing doesn’t stop some commentators from making strong claims about the rapacity of foreign arms companies or the competence of the Australian Defence Department.
This report attempts to be a guide for the perplexed. It’s not a technical manual, but a plain-English discussion that unpacks the cost of Australian defence equipment projects. While it would be useful for those working in the field of defence and strategic studies to read the whole report, it can also be used a reference tool explaining key terms such as ‘constant’ and ‘out-turned’ dollars or different cost-estimation methodologies.
It’s important up front to acknowledge that the cost of modern military equipment can be eye-wateringly high, and there’s always a ‘sticker shock’ when we compare the costs of military systems with the costs of their civilian counterparts. Those costs are driven by the constant quest for better capability that provides an advantage in a life-and-death business. That striving in turn drives rates of cost escalation that greatly outstrip inflation in the broader economy. No Western country has yet found a way out of that endless cost spiral, and Australia is certainly not an exception.
Anyone discussing cost has to understand what’s included in the price. It’s here that comparisons of Australian and overseas projects are difficult. Australian defence project costs include all the elements needed to get a capability into service, which are known as the fundamental inputs to capability. They comprise much more than the military equipment itself and can include facilities, training systems, documentation, intellectual property, integration of the new equipment (such as a missile) onto existing systems (such as the aircraft that will launch it), science and technology programs, and so on.
Elements other than the equipment aren’t trivial and can sometimes make up half of the total acquisition cost. Australian projects also include significant risk provisions, known as contingency. In contrast, most overseas programs don’t include all of those elements, so their cost can appear significantly smaller.
In this report, I provide a hypothetical example that illustrates how the cost grows as we include these factors. If we start with available off-the-shelf equipment costing $1 billion and adjust for price escalation (including inflation and capability enhancements) and factor in all fundamental inputs to capability and contingency, we quickly get to a total acquisition cost of $3.5 billion. That’s before we include operating costs.
The report also briefly examines a current, real-world example by comparing the cost of Australia’s Hunter-class frigate project with analogous international projects. While we attempt to make some assessments, the exercise confirms that comparisons are difficult when we don’t have visibility of what’s included in the price tag.
We also attempt to debunk the popular and deeply held view that Defence projects frequently go over budget. Based on the public evidence, the opposite is in fact the case. Once the government considers a business case and gives Defence approval to enter into contracts to acquire a particular system with a set budget, the department rarely goes over budget. However, it must be said that, before that point, Defence’s estimates of the funding needed to acquire a capability can grow significantly as its understanding of its requirements and the possible solutions develops. It’s here that the infamous ‘blowouts’ generally occur, not after actual acquisition commences.
Some commentators have suggested that focusing on the cost ignores the value those systems provide—why quibble over a few billion here or there when the security of the country is at stake? I’d argue that it’s difficult to assess value for money if you don’t understand how much money you’re paying. This study aims to help Australians understand how much they’re paying. It’s only then that we can make informed decisions about military spending.
Chapter 1: Introduction
One of the greatest areas of confusion in public discussions of the cost of defence is the price of military equipment. It’s hard to know what Australia is paying for its weapons, which makes it hard to know whether we’re paying the right price or getting value for money.
The Defence Department doesn’t release information on the price it’s paying for particular items, but only high-level project costs—and then only for some projects. Those numbers include a wide range of elements beyond the equipment itself. Public discussion is confused and confusing when commentators take the project-level numbers and crudely reverse-engineer the cost of individual items from them.
To address that shortcoming, commentators look for relevant cost information overseas. But often the issue gets even murkier when Australian costs are compared with overseas numbers. Some national defence agencies, particularly the US Defense Department, publish very detailed information, yet their numbers are generally not amenable to a direct apples-to-apples comparison with Australian data.
The following is an example that illustrates why we need to be cautious even when using numbers from a reliable source. The Defense Security Cooperation Agency (DSCA) manages the US’s Foreign Military Sales program which allows partner countries to acquire US-made military equipment at the same price as the US military. The DSCA has to notify the US Congress of potential sales that have been approved by the US State Department. Those notifications are public and are a useful source of information, but they can be misleading when misused.
In April 2020, the DSCA notified Congress of the potential sales of 10 AGM-84L Harpoon Block II air launched anti-ship missiles (Figure 1) to India for US$92 million and of 10 of them to Morocco for US$62 million.1 It would be wrong to assume that India was being gouged US$9.2 million per missile while Morocco was getting them at a bargain price of US$6.2 million. Both sales also included ‘containers, spare and repair parts, support and test equipment, publications and technical documentation, personnel training and training equipment, US Government and contractor representatives’ technical assistance, engineering and logistics support services, and other related elements of logistics support’.
In fact, the cost of a Harpoon missile itself is nowhere near US$9.2 million, or even US$6.2 million. At almost the same time as those DSCA announcements, the US Navy awarded a contract to Boeing in May 2020 worth nearly US$657 million for 467 Harpoon Block II missiles and support equipment for various foreign military sales customers.2 So the price of an individual missile was less than US$1.4 million.
This example shows that we need to be careful even when comparing numbers taken from the same source that seem to have similar scope. But it also shows that the cost of a weapon itself is only one part of the total cost of a project or program and that the weapon is only one part of an effective military capability. Depending on whether you’re developing a cost for the weapon or for the capability, you’ll come up with dramatically different numbers.
Figure 1: Harpoon anti-ship missile: US$1.4 million, US$6.2 million or US$9.2 million?
Source: Defence image library, online.
Unfortunately, many commentators aren’t careful when using cost figures whether from here or overseas. This results in murky numbers being used to justify strong claims such as that the US’s latest nuclear-powered submarine would cost substantially less than the Attack-class conventional submarine, or that Australia is being taken for a ride by unscrupulous company X or country Y, and so on.
In this report, I start by looking at why the ‘sticker shock’ for modern weapons is so high to start with. I then look at how different definitions of cost sit along the spectrum from weapon to complete capability resulting in very different scope. I explain key concepts in cost estimation. The report then provides a hypothetical example illustrating how these definitions and concepts increase the cost as we move from weapon to capability. We’ll reinforce that with a real-world example drawn from the Navy’s Hunter-class frigate program. The report ends with a chapter that examines the validity of the popular view that Defence’s projects often go over budget.
To continue reading, please download the full report here.
04 May 2022