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Department of Defense INSTRUCTION

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DoDI 5000.02, January 7,

DoDI 5000.02, January 7, 2015 ENCLOSURE 8 AFFORDABILITY ANALYSIS AND INVESTMENT CONSTRAINTS 1. PURPOSE. This enclosure establishes the fundamental concepts and approaches for developing and applying affordability constraints to acquisition programs as part of life-cycle investment analysis, decision making, and management. 2. OVERVIEW a. Affordability analysis is a DoD Component leadership responsibility that should involve the Component’s programming, resource planning, requirements, intelligence, and acquisition communities. The Department has a long history of starting programs that proved to be unaffordable. The result of this practice has been costly program cancelations and dramatic reductions in inventory objectives. Thus, the purpose of Affordability Analysis is to avoid starting or continuing programs that cannot be produced and supported within reasonable expectations for future budgets. Affordability constraints for procurement and sustainment will be derived early in program planning processes. These constraints will be used to ensure capability requirements prioritization and cost tradeoffs occur as early as possible and throughout the program’s life cycle. b. The intent of this policy is to require affordability analysis that addresses the total life cycle of the planned program, including beyond the Future Years Defense Program (FYDP). Program life-cycle affordability is a cornerstone of DoD acquisition planning as indicated in DoD Directive 5000.01 (Reference (a)). Affordability within the FYDP is part of the Milestone Decision Authority (MDA) certification and monitoring required by 10 U.S.C. 2366b (Reference (g) (h)) for Major Defense Acquisition Programs (MDAPs) at and beyond Milestone B. Assessing life-cycle affordability of new and upgraded systems is also crucial for establishing fiscal feasibility of the program, informing Analyses of Alternatives (AoAs), guiding capability requirements and engineering tradeoffs, and setting realistic program baselines to control lifecycle costs and help instill more cost-conscious management in the DoD. Affordability analysis and management necessitates effective and ongoing communication with the requirements community on the cost and risk implications of capability requirements. c. Affordability analysis and constraints are not intended to produce rigid, long-term plans. Rather, they are tools to promote responsible and sustainable investment decisions by examining the likely long-range implications of today’s capability requirements choices and investment decisions based on reasonable projections of future force structure equipment needs—before substantial resources are committed to a program. d. Affordability analysis and affordability constraints are not synonymous with cost estimation and approaches for reducing costs. Constraints are determined in a top-down manner by the resources a DoD Component can allocate for a system, given inventory objectives and all other fiscal demands on the Component. Constraints then provide a threshold for procurement Change 2, 02/02/2017 134 ENCLOSURE 8

DoDI 5000.02, January 7, 2015 and sustainment costs that cannot be exceeded by the Program Manager. On the other hand, cost estimates are generated in a bottom-up or parametric manner and provide a forecast of what a product will cost for budgeting purposes. The difference between the affordability constraints and the cost estimates indicates whether actions must be taken to further reduce cost in order to remain within affordability constraints. Independent of affordability constraints or cost estimates, program managers should always be looking for ways to control or reduce cost. Proactive cost control is central to maximizing the buying power of the Department and should be an integral part of all phases and aspects of program management. Cost estimating approaches are discussed in Enclosure 10 of this instruction. e. When approved affordability constraints cannot be met—even with aggressive cost control and reduction approaches—then technical requirements, schedule, and required quantities must be revisited; this will be accomplished with support from the DoD Component’s Configuration Steering Board CSB, and with any requirements reductions proposed to the validation authority. If constraints still cannot be met, and the Component cannot afford to raise the program’s affordability cap(s) by lowering constraints elsewhere and obtaining MDA approval, then the program will be cancelled. 3. LIFE- CYCLE AFFORDABILITY ANALYSIS. DoD Components are responsible for developing life-cycle affordability constraints for Acquisition Category (ACAT) I and IA acquisition programs for procurement unit cost and sustainment costs by conducting portfolio affordability analyses that contain a product life-cycle funding projection and supporting analysis. The basic procurement unit cost calculation is the annual estimated procurement budget divided by the number of items that should be procured each year to sustain the desired inventory. (As a simple example, if a Component plans to maintain an inventory of 200,000 trucks, and the trucks have an expected service life of 20 years, then an average of 10,000 trucks must be procured each year. If the Component can afford to spend an average of $1 billion per year on trucks, then the affordability constraint for procurement is $1 billion divided by 10,000, or $100,000 per truck. The Component’s requirements for a new truck must be restricted to those that can fit into a $100,000 package. Similar calculations will be made to derive sustainment affordability constraints.) If they are provided, Components will use office of the Under Secretary of Defense for Acquisition, Technology and Logistics standardized portfolios for their analysis. Portfolios can be based on mission areas or commodity types, and will define a collection of products or capabilities that can be managed together for investment analysis and oversight purposes. Components will normally make tradeoffs within portfolios, but if necessary, can and should make tradeoffs across portfolios to provide adequate resources for high-priority programs. a. A Product Life Cycle, Component Portfolio Analysis (30 to 40 Years Nominal). Component leadership—not the acquisition community or program management—conducts affordability analysis with support and inputs from their programming, resource planning, requirements, intelligence, and acquisition communities. Each Component determines the processes and analytic techniques they use for affordability analysis within the following basic constructs: Change 2, 02/02/2017 135 ENCLOSURE 8