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...well-crafted, risk-appropriate can temper the sensitivity between technical risk and the probability of cost and schedule overruns, while a poorly crafted contract can actually increase the probability of cost and schedule overruns. By better linking sound risk management practices with sound contract administration practices, the DoD stands to continue being the bellwether federal agency for pushing the state-of-the-art in effective risk management.
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Risk management in the Department of Defense (DoD) has evolved from a fairly esoteric concept to a key component of DoD's management of major system acquisitions. Risk management is directed by DoD Directive 5000.1, Defense Acquisition, DoD Directive 5000.2-R, Mandatory Procedures for Major Defense Acquisitions Programs and Major Automated Information System Acquisition Programs, and is best described in the Defense Acquisition University's (DAU) Risk Management Guide for DoD Acquisition. Within the DoD, the Under Secretary of Defense, Acquisition, Technology, and Logistics (USD[A&T]) is the "process owner" for risk management. The Department of Defense, Defense Acquisition University, Defense Systems Management College is the USD(AT&L)'s "Center of Excellence" for risk management. Although each of the Services has its own risk management process owners at the Secretariat level, the Service's risk management programs are derivatives of the Office of the Secretary of Defense program and are closely aligned wit h the DAU's Risk Management Guide.
Although DoD's current risk management direction presents a comprehensive and robust approach to identifying, assessing and managing risk, it does not adequately emphasize the interface between risk management and contract administration. This shortcoming may be an artifact of the history of risk management in the DoD. Specifically, the watershed event for risk management in the DoD was a 1982 Defense Science Board (DSB) Task Force that examined why the DoD continued to experience significant cost overruns and schedule delays on major weapon system acquisitions. The resulting DSB report identified the lack of a systematic approach to managing technical risk (particularly during a weapon system's design phase) as the primary cause of weapon systems cost overruns and deployment delays.
The DSB noted that although cost overruns and schedule delays often manifested themselves during full-scale production, the origin of most production problems stemmed from design risks. As a result, the DSB recommended that the DoD develop a systematic approach for identifying, understanding, and managing technical risk throughout a weapon system's life cycle, with specific emphasis on managing design risk. The outcome of the DSB study was the issuance of DoD 4245.7 -M, Transition from Development to Production, in September 1985. DoD 4245.7-M decomposes each phase of a weapon system's developmental life cycle into discrete steps, and, in template form, identifies potential risks and provides recommendations for reducing those risks.
Accordingly, the approach taken by DoD Directive 5000.1, Defense Acquisition, DoD Directive 5000.2-R, Mandatory Procedures for Major Defense Acquisitions Programs and Major Automated Information System Acquisition Programs, and the Defense Acquisition University's Risk Management Guide for DoD Acquisition focuses on following a weapon system from its initial Mission Element Need Statement, through system development, production, and deployment. In documenting the need for a new weapon system, DoD places great emphasis on establishing a program's technical critical success factors up-front (e.g., critical performance/war fighting capabilities, deployment schedules, acquisition and life cycle costs, etc.). Accordingly, DoD's approach to risk assessment focuses on identifying the uncertainties and risks to achieving a program's critical success factors.
Figure 1 illustrates the DoD's focus on the relationship between technical risk and cost and schedule overruns.
Relatedly, Figure 2 illustrates DoD's overall approach to risk management (i.e., that technical risk be managed through a systematic process of risk identification, assessment, and handling).
There is no dispute that there is a strong relationship between technical risk and cost and schedule overruns, nor is there any dispute that DoD Project Offices must assess and mitigate technical risk if they are to be successful. However, what must be kept in mind is that technical risk in-and-of-itself does not directly result in cost and schedule overruns. The moderating variable is the manner in which...
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