Cost Growth in Weapons Systems: Re-Examining Rubber Baselines and Economic Factors

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This paper will evaluate cost overruns from a microeconomic perspective to determine their root causes. The specific variables that will be evaluated are: contract budget fluctuations, contract length, inflation, procurement budget fluctuation, research and development budget fluctuation, the technology readiness of the commodity, and industry concentration. These variables will be evaluated twice. The first evaluation will consist of a binary choice model to determine whether or not the dependent variables influence the likelihood of a cost overrun. The specific form of the evaluation will take the form of a probit regression in which an independent variable value of zero indicates the contract did not overrun its initial contract budget baseline and one indicates the contract cost more than its initial baseline. The second evaluation will regress the dependent variables against the natural logarithm of the magnitude of a cost overrun to determine whether or not they influence the amount a contract overruns its initial baseline. This study will show that budget variability, inflation, industry consolidation and immature technologies increase the likelihood that a contract will overrun its budget.